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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, 1997 2-99959, 33-29851, 33-31711,
33-41858, 33-43008, 33-58853
AND 333-11699
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SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
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(Exact name of registrant as specified in its charter)
DELAWARE 04-2461439
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE SUN LIFE EXECUTIVE PARK,
WELLESLEY HILLS, MASSACHUSETTS 02181
----------------------------- ---------------
(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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(TITLE OF CLASS)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Registrant has no voting stock outstanding held by non-affiliates.
Registrant has 5,900 shares of common stock outstanding on March 23, 1998,
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 02181, 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;
Massachusetts Casualty Insurance Company, which currently issues only individual
disability insurance contracts; Sun Life of Canada (U.S.) Distributors, Inc.
(formerly Sun Investment Services Company), a registered broker-dealer and
investment adviser; New London Trust, F.S.B., a federally chartered savings
bank; and 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. On October 30, 1997, the Company established a
wholly-owned special purpose corporation, Sun Life of Canada (U.S.) SPE 97-1 for
the purpose of engaging in activities incidental to securitizing mortgage loans.
Other wholly-owned subsidiaries which are currently inactive include Sun Capital
Advisers, Inc., Sun Benefit Services Company Inc., and Sun Life Finance
Corporation.
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 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, 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 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 the Company's ultimate parent, SLOC announced that its
Board of Directors requested management to develop a plan to convert from a
mutual life insurance company into a publicly traded stock company through
demutualization. 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.
The following table sets forth premiums and deposits by major product
categories for each of the last three years.
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
(IN 000'S)
Individual insurance products $ 204,539 $ 207,740 $ 213,258
Retirement products 2,221,458 1,849,956 1,611,691
------------ ------------ ------------
$ 2,425,997 $ 2,057,696 $ 1,824,949
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
1
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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 1997 had the
effect of decreasing net income from operations by $1,381,000.
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. These agreements had the effect of increasing income from operations
by approximately $37,050,000 for the year ended December 31, 1997.
The life reinsurance assumed agreement requires the reinsurer to withhold
funds in an amount equal to the reserves assumed.
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 $15.9 billion at December 31, 1997, 71.7%
consisted of unitized and non-unitized separate account assets, 12.0% were
invested in bonds and similar securities, 4.3% in mortgages, 0.7% in
subsidiaries, 0.6% in real estate, and the remaining 10.7% 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 the most recent Best's Review,
Life-Health Edition, as of December 31, 1996 the Company ranked 38th among all
life insurance companies in the United States based upon total assets. Its
ultimate parent company, SLOC, ranked 19th. Best's Insurance Reports,
Life-Health Edition, 1997, assigned the Company and SLOC its highest
classification, A++, as of December 31, 1996. This rating was affirmed by A.M.
Best on November 24, 1997. Standard & Poor's and Duff & Phelps have assigned the
Company and SLOC their highest ratings for claims paying ability, AAA. Moody's
Investor Service, Inc. has assigned the Company an unsolicited rating of Aa1 for
financial strength.
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, 1997 the Company had 317 direct employees who are employed at its Principal
Executive Office in Wellesley Hills, Massachusetts and its Retirement Products &
Services Division in Boston, Massachusetts.
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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.
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, 1997.
PART II
ITEM 5. MARKET FOR COMPANYS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc. and as such there is no market for its common stock.
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 1995 or 1996.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
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1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(IN 000'S)
Revenues
Premiums, annuity deposits and
other revenue................. $ 2,513,741 $ 2,131,939 $ 1,883,901 $ 1,997,525 $ 2,443,310
Net investment income and
realized gains................ 301,524 312,870 315,966 312,583 311,322
-------------- -------------- -------------- -------------- --------------
2,815,265 2,444,809 2,199,867 2,310,108 2,754,632
-------------- -------------- -------------- -------------- --------------
Benefits and expenses
Policyholder benefits 2,469,215 2,149,145 1,995,208 2,102,290 2,515,320
Other expenses 206,066 175,342 150,937 186,892 232,365
-------------- -------------- -------------- -------------- --------------
2,675,281 2,324,487 2,146,145 2,289,182 2,747,685
-------------- -------------- -------------- -------------- --------------
Operating gain 139,984 120,322 53,722 20,926 6,947
Federal income tax expense
(benefit) 10,742 (2,702) 17,807 19,469 3,691
-------------- -------------- -------------- -------------- --------------
Net income $ 129,242 $ 123,024 $ 35,915 $ 1,457 $ 3,256
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Assets $ 15,927,045 $ 13,621,952 $ 12,359,683 $ 10,117,822 $ 9,179,090
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Surplus notes $ 565,000 $ 315,000 $ 650,000 $ 335,000 $ 335,000
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
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 under Recent Reorganization, below.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FINANCIAL CONDITION
ASSETS
For management purposes, it is the Company's practice to segment its general
account to facilitate the matching of assets and liabilities; nonetheless, all
general account assets stand behind all general account liabilities. A majority
of the Company's assets are income producing investments. Particular attention
is paid to the quality of these assets.
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. Private placements are rated internally with reference to the
National Association of Insurance Commissioners ("NAIC") designation issued by
the NAIC Securities Valuation Office. The overall quality of the Company's bond
portfolio remains high. At December 31, 1997, 4.6% of the Company's holdings of
bonds were rated below investment grade (i.e. below NAIC rating "1" or "2").
The Company holds real estate primarily because such investments
historically have offered better yields over the long-term than fixed income
investments. Real estate investments are used to enhance the yield and due to
their long term nature are matched with products with long-term liability
durations. Properties for which market value is lower than cost adjusted for
depreciation (book value) are reported at market value. During 1997, the change
in the difference between the market value and book value for properties
reported at market value was $3,377,000.
4
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Significant attention has been given to insurance companies' exposure to
mortgage loans secured by real estate. The Company had a mortgage portfolio of
$684,035,000 at December 31, 1997, representing 19.8% of cash and invested
assets. At December 31, 1996, mortgage loans represented 26.9% of cash and
invested assets. The Company underwrites commercial mortgages with a maximum
loan to value ratio of 75%. The Company, as a rule, invests only in properties
that are almost fully leased. The portfolio is diversified by region and by
property type. The level of arrears in the portfolio is substantially below the
industry average. At December 31, 1997, the Company's portfolio did not contain
any mortgage loans which were 60 days or more in arrears, which compares
favorably to the most recent industry delinquency ratio published by the
American Council of Life Insurance of 1.35%. The expense in the year for the
provision for losses and for losses on foreclosures was $711,000.
In the normal course of business, the Company makes commitments to purchase
investments at a future date. As of December 31, 1997 the Company had
outstanding mortgage commitments of $12,300,000 which will be funded during
1998.
On December 24, 1997, the Company transferred all of its outstanding shares
of MFS to its parent, Life Holdco, in the form of a dividend, valued at
$159,722,000. This dividend included an intercompany tax receivable of
$91,000,000. As a result of this transaction, the Company also realized a
$21,195,000 capital gain of undistributed earnings. See "Recent Reorganization,"
below, for a discussion of the effect of this transaction on ongoing operations.
LIABILITIES
The majority of the Company's liabilities consist of reserves for life
insurance and annuity contracts and deposit funds.
CAPITAL AND SURPLUS
Total capital stock and surplus of the Company was $832,695,000 at December
31, 1997. The Company issued surplus notes during 1997 totaling $250,000,000 to
its parent, Life Holdco. The Company's management considers its surplus position
to be adequate.
ASSET/LIABILITY MANAGEMENT AND INFORMATION 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 an 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 and Asset
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.
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
5
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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
December 31, 1997 of $3,276,174,000. Certain of the Company's general account
liabilities of $3,682,582,000 are categorized as financial instruments. The
portion of the liabilities so categorized had a carrying value of $1,958,229,000
and a fair value of $1,985,106,000 at December 31, 1997. Using its modeling and
analytical software the Company performed sensitivity analysis of its financial
instruments at December 31, 1997. 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 $108,000,000. A corresponding decrease in
the fair value of the liabilities categorized as financial instruments is
estimated to be $56,000,000 at December 31, 1997.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Net income from operations after dividends to policyholders and before
federal income taxes decreased by $2.9 million for the year ending December 31,
1997 as compared to December 31, 1996. Net income associated with the
reinsurance agreements with the ultimate parent increased $2.1 million in 1997.
The net income improvement in the reinsured business results primarily from
improved investment performance. Prior to reinsurance, earnings from the life
line of business remained relatively flat. The earnings of the Company's
retirement products and services line, which markets combination fixed/variable
annuities, decreased $5.0 million. During 1997, the Company focused its
marketing efforts on its fixed/variable annuity sales and discontinued sales of
its group pension contracts.
Total income increased by $347.9 million for the year ended December 31,
1997 as compared to December 31, 1996. Sales of combination fixed/variable
annuities (net of annuitizations) increased by $527.4 million primarily due to
the introduction in late 1996, of a dollar cost averaging (DCA) sales program.
This program credits a bonus rate of interest on the fixed annuity deposit
during the first year. Purchase payments allocated to the DCA program are
deposited into the fixed account and systematically transferred to the variable
sub-accounts during the following year. Reinsurance had the effect of increasing
income by approximately $8.9 million. Premiums and annuity considerations
decreased by $6.6 million reflecting decreased annuitizations. Sales of group
pension guaranteed interest contracts decreased by $133 million. Net investment
income decreased by $33.5 million reflecting both the decrease in the general
account invested assets and $9.2 million decrease in dividends from
subsidiaries.
6
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Benefits and expenses increased by $346.6 million for the year ended
December 31, 1997 as compared to December 31, 1996. Reinsurance had the effect
of increasing benefits and expenses by $2.7 million. Death benefits, annuity
payments and surrender benefits and other fund withdrawals increased by $338.4
million primarily as a result of increased surrenders and withdrawals from
separate account contracts for which the surrender charge had expired. Policy
reserves decreased by $23 million, reflecting decreased annuitizations and lower
increases in reserves for minimum death benefit guarantees. The decrease in
liability for premium and other deposit funds of $55.3 million reflects higher
surrenders of contracts described above. Commissions increased by $22.8 million,
reflecting the increase in total sales of combination fixed/variable annuities.
General expenses increased by $9.9 million reflecting an increase in salaries
due to staff increases associated with increased sales and non-recurring costs
associated with moving the retirement products and services facility to a new
location. Transfers to separate accounts increased by $53.9 million, reflecting
increased exchange activity out of the fixed account into the separate account,
associated with the DCA activity.
See "Recent Reorganization," below, for a discussion of the effect on
ongoing operations of the Company's transfer of its shares of MFS.
1996 COMPARED TO 1995
Net income from operations after dividends to policyholders and before
federal income taxes increased by $61.1 million for the year ending December 31,
1996 as compared to December 31, 1995. Net income associated with the
reinsurance agreements with the SLOC increased by $23.9 million in 1996. The net
income improvement in the reinsured business results from improved mortality
experience, improved investment performance and fewer significant death claims
in 1996 as compared to 1995. Prior to reinsurance, earnings from the life line
of business remained relatively flat. The remaining $37.2 million increase is
attributable to the Company's retirement products and services line of business,
which markets combination fixed/variable annuities and group pension guaranteed
investment contracts. The decline in interest rates during 1995 resulted in the
split of these combination fixed/variable annuity sales to change from 45% fixed
and 55% variable in 1995 to 25% fixed and 75% variable in 1996. In addition,
total gross sales increased by $235.9 million in 1996 as compared to 1995. The
declining interest rate environment and strong market performance in 1995
resulted in unrealized gains on assets held in the separate accounts, which
generated a substantial increase in fees calculated as a percentage of the
separate account net assets, which are then transferred to the general account.
The declining interest rates also resulted in increases in reserves due to the
increase in the market value adjustment provision of certain fixed annuities.
The resultant reserve increases were in excess of the unrealized gains causing
strain on the 1995 earnings. In 1996, interest rates increased, resulting in a
reduction in the unrealized gains on assets held in the separate accounts and a
corresponding reduction in reserves and a release of some of the reserve strain
incurred in 1995. The earnings on these market value adjusted products fluctuate
as the change in the market value of the assets do not move precisely in tandem
with the change in the market value of the liabilities.
Total income increased by $239.4 million for the year ended December 31,
1996 as compared to December 31, 1995. Sales of combination fixed/variable
annuities (net of annuitizations) increased by $282.7 million primarily due to
an increase in variable sales held in the separate accounts. This increase in
variable sales was driven by strong performance in the stock market. Reinsurance
had the effect of increasing income by approximately $9.4 million. Premiums and
annuity considerations increased by $8.2 million reflecting increased
annuitizations. Considerations from supplementary contracts increased by $1.2
million. Sales of group pension guaranteed investment contracts decreased by $53
million as this market remained highly competitive and sensitive to small
changes in guaranteed interest rates. Net investment income decreased by $9.1
million, reflecting a decrease in the general account invested assets.
Benefits and expenses increased by $178.3 million for the year ended
December 31, 1996 as compared to December 31, 1995. Reinsurance had the effect
of decreasing benefits and expenses by $14.5 million. Deaths, annuity payments
and surrender benefits and other fund withdrawals increased by $438.9 million as
a result of increased surrenders of fixed annuities for which interest rate
guarantee periods have expired as well as withdrawals from the separate
accounts. Policy reserves increased by $9.4 million,
7
<PAGE>
reflecting increased annuitizations and increased reserves for minimum death
benefit guarantees. The decrease in liability for premium and other deposit
funds of $405.9 reflects lower interest rates and higher surrenders of contracts
described above. Commissions increased by $21.8 million, reflecting the increase
in total sales of combination fixed/variable annuities. General expenses
increased by $2.6 million reflecting an increase in salaries due to staff
increases and retainer fees. Transfers to separate accounts increased by $126.8
million, reflecting increased exchange activity out of the general account into
the separate accounts.
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 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 the
necessary funds. Government and publicly traded corporate bonds comprise 58% 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.
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.
RECENT REORGANIZATION
Effective December 24, 1997, the Company and its ultimate parent, Sun Life
Assurance Company of Canada ("SLOC"), reorganized the corporate structure of a
part of their United States business operations, by completing, with the
approval of the Delaware Insurance Department, the establishment of a two-tier
holding company structure. In connection with this reorganization, Massachusetts
Financial Services Company ("MFS"), the registered investment adviser that
serves as adviser to the MFS Family of Funds, including the MFS/Sun Life Series
Trust and the Compass Variable Accounts, is no longer a subsidiary of the
Company, but remains under the control of Sun Life of Canada through two other
wholly-owned holding company subsidiaries. On December 24, 1997, the Company's
stock in MFS was transferred via a dividend to the Company's immediate parent,
Sun Life of Canada (U.S.) Holdings, Inc. There is no change in directors,
officers, or day-to-day management of any of the companies within this holding
company system and, in the case of MFS, its executive officers continue to
report to the Chairman of Sun Life of Canada.
MFS, which was acquired by the Company in 1982, has approximately
$70,200,000,000 under management as of December 31, 1997. For the years ended
December 31, 1997, 1996 and 1995, the Company's Statutory Statements of
Operations reflected earnings attributable to the operations of MFS of
$80,114,000 (which includes dividends from MFS of $33,110,000, an income tax
benefit of $25,809,000, and a realized gain of $21,195,000), $79,263,000, and
$58,599,000, respectively. The reorganization is not expected to have any
significant effect on the ongoing operations of MFS or the Company. However,
future net income of the Company will not include the results of operations of
MFS.
8
<PAGE>
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.
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, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 1,910,699 $ 2,170,103
Common stocks 117,229 144,043
Mortgage loans on real estate 684,035 938,932
Properties acquired in satisfaction of debt 22,475 23,391
Investment real estate 78,426 76,995
Policy loans 40,348 40,554
Cash and short-term investments 544,418 148,059
Other invested assets 55,716 51,378
Premiums and annuity considerations due and uncollected 9,203 11,282
Investment income due and accrued 39,279 68,191
Receivable from parent, subsidiaries and affiliates 28,825 40,829
Funds withheld on reinsurance assumed 982,653 878,798
Other assets 1,841 1,343
-------------- --------------
General account assets 4,515,147 4,593,898
Separate account assets
Unitized 9,068,021 6,919,219
Non-unitized 2,343,877 2,108,835
-------------- --------------
Total Admitted Assets $ 15,927,045 $ 13,621,952
-------------- --------------
-------------- --------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 2,188,243 $ 2,099,980
Supplementary contracts 2,247 2,205
Policy and contract claims 2,460 2,108
Policyholders' dividends and coupons payable 32,500 27,500
Liability for premium and other deposit funds 1,450,705 1,898,309
Surrender values on cancelled policies 215 72
Interest maintenance reserve 33,830 28,675
Commissions to agents due or accrued 2,826 3,245
General expenses due or accrued 7,202 4,654
Transfers from Separate Accounts due or accrued (284,078) (232,743)
Taxes, licenses and fees accrued, excluding federal income taxes 105 342
Federal income taxes due or accrued 58,073 49,479
Unearned investment income 34 19
Amounts withheld or retained by company as agent or trustee 47 27
Remittances and items not allocated 1,363 1,359
Borrowed money 110,142 58,000
Asset valuation reserve 47,605 53,911
Payable for securities 27,104 22,177
Other liabilities 1,959 7,561
-------------- --------------
General account liabilities 3,682,582 4,026,880
Separate account liabilities
Unitized 9,067,891 6,919,094
Non-unitized 2,343,877 2,108,835
-------------- --------------
Total liabilities 15,094,350 13,054,809
-------------- --------------
CAPITAL STOCK AND SURPLUS
Capital stock par value $1,000; Authorized, 10,000 shares;
issued and outstanding, 5,900 shares 5,900 5,900
-------------- --------------
Surplus notes 565,000 315,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 62,440 46,888
-------------- --------------
Surplus 826,795 561,243
-------------- --------------
Total capital stock and surplus 832,695 567,143
-------------- --------------
Total Liabilities, Capital Stock and Surplus $ 15,927,045 $ 13,621,952
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
9
<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
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Premiums and annuity considerations $ 270,700 $ 282,466 $ 279,407
Deposit-type funds 2,155,298 1,775,230 1,545,542
Considerations for supplementary
contracts without life
contingencies and dividend
accumulations 1,615 2,340 1,088
Net investment income 270,249 303,753 312,872
Amortization of interest maintenance
reserve 1,166 1,557 1,025
Net gain from operations from
Separate Accounts 5 -- --
Other income 86,123 71,903 57,864
---------- ---------- ----------
Total 2,785,156 2,437,249 2,197,798
---------- ---------- ----------
BENEFITS AND EXPENSES:
Death benefits 17,284 12,394 15,317
Annuity benefits 148,135 146,654 140,497
Surrender benefits and other fund
withdrawals 1,854,004 1,507,263 1,074,396
Interest on policy or contract funds 699 2,205 739
Payments on supplementary contracts
without life contingencies and of
dividend accumulations 1,687 2,120 1,888
Increase in aggregate reserves for
life and accident and health
policies and contracts 127,278 162,678 171,975
Increase (decrease) in liability for
premium and other deposit funds (447,603) (392,348) 13,553
Increase (decrease) in reserve for
supplementary contracts without
life contingencies and for dividend
and coupon accumulations 42 327 (663)
---------- ---------- ----------
Total 1,701,526 1,441,293 1,417,702
Commissions on premiums and annuity
considerations (direct business
only) 132,700 109,894 88,037
Commissions and expense allowances
on reinsurance assumed 17,951 18,910 22,012
General insurance expenses 47,102 37,206 34,580
Insurance taxes, licenses and fees,
excluding federal income taxes 7,790 8,431 7,685
Increase (decrease) in loading on
and cost of collection in excess of
loading on deferred and uncollected
premiums 523 901 (1,377)
Net transfers to separate accounts 734,373 678,663 551,784
---------- ---------- ----------
Total 2,641,965 2,295,298 2,120,423
---------- ---------- ----------
Net gain from operations before
dividends to policyholders and
federal income taxes 143,191 141,951 77,375
Dividends to policyholders 33,316 29,189 25,722
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
before federal income taxes 109,875 112,762 51,653
Federal income tax expense (benefit)
(excluding tax on capital gains) 10,742 (2,702) 17,807
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
federal income taxes and before
realized capital gains 99,133 115,464 33,846
Net realized capital gains less
capital gains tax and transfers to
the interest maintenance reserve 30,109 7,560 2,069
---------- ---------- ----------
NET INCOME $ 129,242 $ 123,024 $ 35,915
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
10
<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
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Capital and surplus, beginning of year $ 567,143 $ 792,452 $ 455,489
---------- ---------- ----------
Net income 129,242 123,024 35,915
Change in net unrealized capital gains 1,153 (1,715) 2,009
Change in non-admitted assets and related items (463) 67 (2,270)
Change in reserve on account of change in valuation basis 39,016 -- --
Change in asset valuation reserve 6,306 (11,812) (13,690)
Other changes in surplus in Separate Accounts Statement -- 100 (4,038)
Change in surplus notes 250,000 (335,000) 315,000
Dividends to stockholder (159,722) -- --
Miscellaneous gains in surplus 20 27 4,037
---------- ---------- ----------
Net change in capital and surplus for the year 265,552 (225,309) 336,963
---------- ---------- ----------
Capital and surplus, end of year $ 832,695 $ 567,143 $ 792,452
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
11
<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
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash Provided
Premiums, annuity considerations and
deposit funds received $ 2,427,554 $ 2,059,577 $ 1,826,456
Considerations for supplementary
contracts and dividend accumulations
received 1,615 2,340 1,088
Net investment income received 323,199 324,914 374,398
Other income received 81,701 88,295 25,348
----------- ----------- -----------
Total receipts 2,834,069 2,475,126 2,227,290
----------- ----------- -----------
Benefits paid (other than dividends) 2,020,615 1,671,483 1,231,936
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 203,650 172,015 150,463
Net cash transferred to Separate
Accounts 785,708 755,605 568,188
Dividends paid to policyholders 28,316 22,689 17,722
Federal income tax (recoveries)
payments (excluding tax on capital
gains) 1,397 (15,363) (20,655)
Other--net 699 2,205 739
----------- ----------- -----------
Total payments 3,040,385 2,608,634 1,948,393
----------- ----------- -----------
Net cash from operations (206,316) (133,508) 278,897
----------- ----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$750,449, $1,554,873 and $8,610,951) 1,343,803 1,768,147 1,658,655
Issuance of surplus notes 250,000 (335,000) 315,000
Other cash provided 117,297 147,956 419,446
----------- ----------- -----------
Total cash provided 1,711,100 1,581,103 2,393,101
----------- ----------- -----------
Cash Applied
Cost of long-term investments acquired 773,721 1,318,880 1,749,714
Other cash applied 334,704 177,982 796,207
----------- ----------- -----------
Total cash applied 1,108,425 1,496,862 2,545,921
----------- ----------- -----------
Net change in cash and short-term
investments 396,359 (49,267) 126,077
Cash and short term investments
Beginning of year 148,059 197,326 71,249
----------- ----------- -----------
End of year $ 544,418 $ 148,059 $ 197,326
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
12
<PAGE>
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, 1997, 1996 AND 1995
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 engaged in the sale of individual variable life
insurance, individual fixed and variable annuities, group fixed and variable
annuities and group pension contracts. The Company also underwrites a block of
individual life insurance business through a reinsurance contract with the
Company's ultimate parent, Sun Life Assurance Company of Canada ("SLOC"). SLOC
is a mutual life insurance company.
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 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
19 for further discussion relative to the Company's basis of financial statement
presentation.) The effects on the financial statements of the variances between
the statutory basis of accounting and GAAP, although not reasonably
determinable, are presumed to be material.
INVESTED ASSETS AND RELATED RESERVES
Bonds are carried at cost adjusted for amortization of premium or accrual of
discount. Investments in non-insurance subsidiaries are carried on the equity
basis. Investments in insurance subsidiaries are carried at their statutory
surplus values. Mortgage loans acquired at a premium or discount are carried at
amortized values and other mortgage loans 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.
13
<PAGE>
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, 1997, 1996 AND 1995
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.
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 $284,078,000 in 1997 and
$232,743,000 in 1996.
CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING
Prior to 1996, dividends paid to the Company by its subsidiaries and the
undistributed gains (losses) of those subsidiaries were included in net income
of the Company. For Annual Statement reporting, dividends were (and continue to
be) reported in net income while undistributed gains (losses) are reported
directly to surplus (as a separate component of unassigned surplus). As a
result, net income as reported in these financial statements is $2.5 million
less than net income reported in the Annual Statement in 1995. Effective for
1996, the Company changed its method of accounting for investments in
subsidiaries to conform with a preferable prescribed statutory accounting
practices used in the preparation of its Annual Statement. As a result of the
change, $5.7 million in undistributed losses of subsidiaries are reported
directly as a separate component of unassigned surplus rather than being
included in net income for the year ended December 31, 1996. The amounts as
reported in prior years have not been restated.
As described more fully in Note 10, during 1997 the Company changed certain
assumptions used in determining actuarial reserves.
14
<PAGE>
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, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
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.
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"), and Sun Life Finance
Corporation ("Sunfinco").
On October 30, 1997, the Company established a wholly-owned special purpose
corporation, Sun Life of Canada (U.S.) SPE 97-1, Inc. (SPE 97-1). SPE 97-1 was
organized for the purpose of engaging in activities incidental to securitizing
mortgage loans.
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 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.
On December 31, 1997, the Company purchased all of the outstanding shares of
Clarendon Insurance Agency, Inc. ("Clarendon") from MFS.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity
contracts and group life and disability insurance contracts in the State of New
York. MCIC issues only individual disability income policies. 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 SLOC, an affiliate. Sun Capital is a registered
investment adviser. Sunfinco and Sunbesco are currently inactive. Clarendon is a
registered broker-dealer that acts as the general distributor of certain annuity
and life insurance contracts issued by the Company and its affiliates.
On December 23, 1997, the Company issued a $110,000,000 note to US Holdco at an
interest rate of 5.80%, which is scheduled for repayment on March 1, 1998, and
is included in borrowed money. A $110,000,000 note was also issued by MFS on
December 23, 1997 to the Company at an interest rate of 5.85% due on March 1,
1998 and is included in cash and short-term investments.
On December 31, 1996, the Company issued a $58,000,000 note to SLOC which was
repaid on February 10, 1997 at an interest rate of 5.70%. Also on December 31,
1996, the Company was issued a $58,000,000 note by MFS at an interest rate of
5.76%. This note was repaid to the Company on February 10, 1997. On December 31,
1997 and 1996 the Company had an additional $20,000,000 in notes issued by MFS,
scheduled to mature in 2000.
15
<PAGE>
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, 1997, 1996 AND 1995
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED):
During 1997, 1996, and 1995, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- ------------
<S> <C> <C> <C>
MCIC $ 2,000,000 $ 10,000,000 $ 6,000,000
SLFSL 1,000,000 1,500,000 --
SPE 97-1 20,377,000 -- --
</TABLE>
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1997, 1996 and 1995 and for the years then ended, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
(IN 000'S)
<S> <C> <C> <C>
Intangible assets $ 0 $ 9,646 $ 12,174
Other assets 1,190,951 1,376,014 1,233,372
Liabilities (1,073,966) (1,241,617) (1,107,264)
------------- ------------- -------------
Total net assets $ 116,985 $ 144,043 $ 138,282
------------- ------------- -------------
------------- ------------- -------------
Total revenues $ 750,364 $ 717,280 $ 570,794
Operating expenses (646,896) (624,199) (504,070)
Income tax expense (43,987) (42,820) (31,193)
------------- ------------- -------------
Net income $ 59,481 $ 50,261 $ 35,531
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
3. BONDS:
Investments in debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
(IN 000'S)
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
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
16
<PAGE>
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, 1997, 1996 AND 1995
3. BONDS (CONTINUED):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
(IN 000'S)
Long-term bonds:
United States government and government agencies and
authorities $ 267,756 $ 12,272 $ (8,927) $ 271,101
States, provinces and political subdivisions 2,253 20 -- 2,273
Foreign governments 18,812 1,351 -- 20,163
Public utilities 415,641 24,728 (1,223) 439,146
Transportation 167,937 14,107 (2,243) 179,801
Finance 290,024 7,914 (472) 297,466
All other corporate bonds 1,007,680 42,338 (14,496) 1,035,522
------------ ----------- ----------- ------------
Total long-term bonds 2,170,103 102,730 (27,361) 2,245,472
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 88,754 -- -- 88,754
Affiliates 58,000 -- -- 58,000
------------ ----------- ----------- ------------
Total short-term bonds 146,754 -- -- 146,754
------------ ----------- ----------- ------------
Total bonds $ 2,316,857 $ 102,730 $ (27,361) $ 2,392,226
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The amortized cost and estimated fair value of bonds at December 31, 1997 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.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
(IN 000'S)
Maturities:
Due in one year or less $ 699,548 $ 700,280
Due after one year through five years 533,901 541,382
Due after five years through ten years 270,607 286,651
Due after ten years 735,624 821,002
------------ ------------
2,239,680 2,349,315
Mortgage-backed securities 212,051 219,884
------------ ------------
Total bonds $ 2,451,731 $ 2,569,199
------------ ------------
------------ ------------
</TABLE>
Proceeds from sales and maturities of investments in debt securities during
1997, 1996, and 1995 were $980,264,000, $1,554,016,000, and $1,510,553,000,
gross gains were $10,732,000, $16,975,000, and $24,757,000 and gross losses were
$2,446,000, $10,885,000, and $5,742,000, respectively.
Bonds included above with an amortized cost of approximately $2,578,000 and
$2,060,000 at December 31, 1997 and 1996, respectively, were on deposit with
governmental authorities as required by law.
4. SECURITIES LENDING:
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chase Manhattan of New York. The custodian has
indemnified the Company against losses arising from this
17
<PAGE>
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, 1997, 1996 AND 1995
4. SECURITIES LENDING (CONTINUED):
program. The total par value of securities out on loan was $0 and $51,537,000 at
December 31, 1997 and 1996 respectively. Income resulting from this program was
$200,000, $137,000 and $2,000 for the years ended December 31, 1997, 1996 and
1995, 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.
The following table shows the geographical distribution of the mortgage loan
portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN 000'S)
<S> <C> <C>
California $ 119,122 $ 154,272
Massachusetts 58,981 79,929
Michigan 42,912 57,119
New York 45,696 67,742
Ohio 51,862 75,405
Pennsylvania 97,949 115,584
Washington 54,948 75,819
All other 212,565 313,062
---------- ----------
$ 684,035 $ 938,932
---------- ----------
---------- ----------
</TABLE>
The Company has restructured mortgage loans totaling $26,284,000 and $29,261,000
at December 31, 1997 and 1996, respectively, against which there are allowances
for losses of $3,026,000 and $5,893,000, respectively.
Mortgage loans from Sun Life (U.S.)'s portfolio with an approximate book value
of $53,188,000 were included in a transaction also involving loans from the
portfolios of other SLOC entities with an aggregate book value of $256 million,
whereby such loans were securitized for sale to the public markets.
The Company has made commitments of mortgage loans on real estate into the
future. The outstanding commitments for these mortgages amount to $12,300,000
and $9,800,000 at December 31, 1997 and 1996, respectively.
18
<PAGE>
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, 1997, 1996 AND 1995
6. INVESTMENT GAINS AND LOSSES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN 000'S)
<S> <C> <C> <C>
Net realized gains (losses)
Bonds $ 2,882 $ 5,631 $ 3,935
Common stock of affiliates 21,195 -- --
Mortgage loans 3,837 763 292
Real estate 2,912 599 391
Other invested assets (717) 567 (2,549)
--------- --------- ---------
$ 30,109 $ 7,560 $ 2,069
--------- --------- ---------
--------- --------- ---------
Changes in unrealized gains (losses):
Common stock of affiliates $ (2,894) $ (5,739) $ --
Mortgage loans 1,524 (600) (1,574)
Real estate 3,377 4,624 3,583
Other invested assets (854) -- --
--------- --------- ---------
$ 1,153 $ (1,715) $ 2,009
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 net realized capital gains credited to the interest
maintenance reserve were $6,321,000 in 1997, $7,710,000 in 1996, and $12,714,000
in 1995. All gains and losses are transferred net of applicable income taxes.
7. NET INVESTMENT INCOME:
Net investment income consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN 000'S)
<S> <C> <C> <C>
Interest income from bonds $ 188,924 $ 178,695 $ 205,445
Income from investment in common stock of affiliates 41,181 50,408 35,403
Interest income from mortgage loans 76,073 92,591 99,766
Real estate investment income 17,161 16,249 14,979
Interest income from policy loans 3,582 2,790 2,777
Other (193) 1,710 2,672
---------- ---------- ----------
Gross investment income 326,728 342,443 361,042
---------- ---------- ----------
Interest on surplus notes and notes payable (42,481) (23,061) (31,813)
Investment expenses (13,998) (15,629) (16,357)
---------- ---------- ----------
Net investment income $ 270,249 $ 303,753 $ 312,872
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
19
<PAGE>
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, 1997, 1996 AND 1995
8. DERIVATIVES:
The Company uses derivative instruments for interest risk management purposes,
including hedges against specific interest rate risk and to minimize the
Company's exposure to fluctuations in interest rates. The Company's use of
derivatives has included U.S. Treasury futures, conventional interest rate
swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that qualify
as hedges are deferred until the earliest of the completion of the hedging
transaction, determination that the transaction will no longer take place, or
determination that the hedge is no longer effective. Upon completion of the
hedge, where it is impractical to allocate gains (losses) to specific hedged
assets or liabilities, gains (losses) are deferred in IMR and amortized over the
remaining life of the hedged assets. At December 31, 1997 and 1996 there were no
futures contracts outstanding.
In the case of interest rate and foreign currency swap agreements and forward
spread lock interest rate swap agreements, gains or losses on terminated swaps
are deferred in IMR and amortized over the shorter of the remaining life of the
hedged asset or the remaining term of the swap contract. The net differential to
be paid or received on interest rate swaps is recorded monthly as interest rates
change.
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:
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1997
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
<S> <C> <C>
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 70,000 693
</TABLE>
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1996
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
<S> <C> <C>
Conventional interest rate swaps $ 429,000 $ (2,443)
Foreign currency swap 2,100 70
Forward spread lock swaps 50,000 (50)
</TABLE>
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 non-performance by counterparties. The
counterparties are major financial institutions and management believes that the
risk of incurring losses related to credit risk is remote.
9. LEVERAGED LEASES:
The Company is a lessor in a leveraged lease agreement entered into on October
21, 1994, under which equipment having an estimated economic life of 25-40 years
was leased for a term of 9.75 years. The Company's equity investment represented
22.9% of the purchase price of the equipment. The balance of
20
<PAGE>
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, 1997, 1996 AND 1995
9. LEVERAGED LEASES (CONTINUED):
the purchase price was furnished by third-party long-term debt financing,
collateralized by the equipment and non-recourse to the Company. At the end of
the lease term, the Master Lessee may exercise a fixed price purchase option to
purchase the equipment.
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1997 1996
---------- ----------
(IN 000'S)
<S> <C> <C>
Lease contracts receivable $ 92,605 $ 101,244
Less non-recourse debt (92,589) (101,227)
---------- ----------
16 17
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (10,324) (11,501)
---------- ----------
Investment in leveraged leases 30,842 29,666
Less fees (163) (188)
---------- ----------
Net investment in leveraged leases $ 30,679 $ 29,478
---------- ----------
---------- ----------
</TABLE>
The net investment is included as an other invested asset.
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 $1,381,000, $1,603,000 and $2,184,000
for the years ended December 31, 1997, 1996 and 1995, 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, 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. Such death benefits are reinsured on a yearly renewable term
basis. These agreements had the effect of increasing income from operations by
approximately $37,050,000, $35,161,000 and $11,821,000 for the years ended
December 31, 1997,1996 and 1995, respectively. The life reinsurance assumed
agreement requires the reinsurer to withhold funds in amounts equal to the
reserves assumed.
21
<PAGE>
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, 1997, 1996 AND 1995
10. REINSURANCE (CONTINUED):
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1997, 1996 and 1995 before the effect of
reinsurance transactions with SLOC.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(IN 000'S)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $ 2,230,980 $ 1,858,145 $ 1,619,337
Net investment income and realized gains 300,669 312,870 315,967
------------ ------------ ------------
Subtotal 2,531,649 2,171,015 1,935,304
------------ ------------ ------------
Benefits and Expenses:
Policyholder benefits 2,240,597 1,928,720 1,760,917
Other expenses 187,591 155,531 130,302
------------ ------------ ------------
Subtotal 2,428,188 2,084,251 1,891,219
------------ ------------ ------------
Income from operations $ 103,461 $ 86,764 $ 44,085
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured. Reinsurance transactions under this agreement had the
effect of decreasing income from operations by $2,658,000 in 1997, $46,000 in
1996, and by $1,599,000 in 1995.
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN 000'S)
<S> <C> <C>
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%
-------------- ---
-------------- ---
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 3,547,683 31%
At book value less surrender charges (surrender charge >5%) 5,626,117 48
At book value (minimal or no charge or adjustment) 1,264,586 11
Not subject to discretionary withdrawal provision 1,218,157 10
-------------- ---
Total annuity actuarial reserves and deposit liabilities $ 11,656,543 100%
-------------- ---
-------------- ---
</TABLE>
22
<PAGE>
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, 1997, 1996 AND 1995
12. RETIREMENT PLANS:
The Company participates with SLOC in a non-contributory defined benefit pension
plan covering essentially all employees. The benefits are based on years of
service and compensation.
The funding policy for the pension plan is to contribute an amount which at
least satisfies the minimum amount required by ERISA; 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 at December 31, 1997,
1996 and 1995 was $593,000, $446,000 and $420,000, respectively. The Company's
share of net periodic pension cost was $146,000, $27,000 and $3,000, for 1997,
1996 and 1995, 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 $259,000, $233,000 and $185,000 for the years ended December
31, 1997, 1996 and 1995, 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.
23
<PAGE>
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, 1997, 1996 AND 1995
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
<S> <C> <C>
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)
<CAPTION>
DECEMBER 31, 1996
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
<S> <C> <C>
ASSETS:
Bonds $ 2,316,857 $ 2,392,226
Mortgages 938,932 958,909
LIABILITIES:
Insurance reserves $ 122,606 $ 122,606
Individual annuities 373,488 367,878
Pension products 1,911,284 1,922,602
Derivatives -- (2,423)
</TABLE>
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.
24
<PAGE>
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, 1997, 1996 AND 1995
14. STATUTORY INVESTMENT VALUATION RESERVES:
The asset valuation reserve ("AVR") provides a reserve for losses from
investments in bonds, stocks, mortgage loans, real estate and other invested
assets with related increases or decreases being recorded directly to surplus.
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve ("IMR") and amortized into income over the remaining contractual life of
the security sold.
The tables shown below present changes in the major elements of the AVR and IMR.
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
AVR IMR AVR IMR
--------- --------- --------- ---------
(IN 000'S) (IN 000'S)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 53,911 $ 28,675 $ 42,099 $ 25,218
Net realized investment gains, net of tax 17,400 6,321 3,160 5,011
Amortization of net investment gains -- (1,166) -- (1,557)
Unrealized investment gains (losses) (2,340) -- 1,502 --
Required by formula (21,366) -- 7,150 3
--------- --------- --------- ---------
Balance, end of year $ 47,605 $ 33,830 $ 53,911 $ 28,675
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
15. FEDERAL INCOME TAXES:
The Company and its subsidiaries file a consolidated federal income tax return.
Federal income taxes are calculated for the consolidated group based upon
amounts determined to be payable as a result of operations within the current
year. No provision is recognized for timing differences which may exist between
financial statement and taxable income. Such timing differences include
reserves, depreciation and accrual of market discount on bonds. Cash payments
for federal income taxes were approximately $31,000,000, $19,264,000 and
$12,429,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
16. 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.
The Company had issued and outstanding surplus notes to SLOC with an aggregate
carrying value of $335,000,000, during the period 1982 through January 16, 1996
at interest rates between 7.25% and 10%. The Company repaid all principal and
interest associated with these surplus notes on January 16, 1996.
On December 19, 1995 the Company issued surplus notes 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
semi-annually.
Principal and interest on surplus notes are payable only to the extent that the
Company meets specified requirements regarding free surplus exclusive of the
principal amount and accrued interest, if any, on these notes and with the
consent of the Delaware Insurance Commissioner. In addition, with regard to
surplus notes outstanding through January 16, 1996, subsequent to December 31,
1994 interest payments required
25
<PAGE>
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, 1997, 1996 AND 1995
16. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE) (CONTINUED):
the consent of the Delaware Insurance Commissioner. Payment of principal and
interest on the notes issued in 1995 and in 1997 also requires the consents of
the Delaware Insurance Commissioner and Canadian Office of the Superintendent of
Financial Institutions.
The Company obtained the required consents and expensed $42,481,000, $23,061,000
and $31,813,000 for interest on surplus notes and notes payable for the years
ended December 31, 1997, 1996 and 1995, respectively.
17. MANAGEMENT AND SERVICE CONTRACTS:
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 $15,997,000 in 1997, $20,192,000 in 1996, and $20,293,000 in 1995.
18. RISK-BASED CAPITAL:
Effective December 31, 1993 the NAIC adopted risk-based capital requirements for
life insurance companies. The risk-based capital requirements provide a method
for measuring the minimum acceptable amount of adjusted capital that a life
insurer should have, as determined under statutory accounting practices, taking
into account the risk characteristics of its investments and products. The
Company has met the minimum risk-based capital requirements at December 31, 1997
and 1996.
19. ACCOUNTING POLICIES AND PRINCIPLES:
The financial statements of the Company have been prepared on the basis of
statutory accounting practices which, prior to 1996, were considered by the
insurance industry and the accounting profession to be in accordance with GAAP
for mutual life insurance companies. The primary differences between statutory
accounting practices and GAAP are described as follows. Under statutory
accounting practices, financial statements are not consolidated and investments
in subsidiaries are shown at net equity value. Accordingly, the assets,
liabilities and results of operations of the Company's subsidiaries are not
consolidated with the assets, liabilities and results of operations,
respectively, of the Company. Changes in net equity value of the common stock of
the Company's United States life insurance subsidiaries are directly reflected
in the 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 non-admitted assets. Asset
Valuation Reserves and Interest Maintenance Reserves are established under
statutory accounting practices but not under GAAP. Methods for calculating real
estate depreciation and investment valuation allowances differ under statutory
accounting practices 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.
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
26
<PAGE>
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, 1997, 1996 AND 1995
19. ACCOUNTING POLICIES AND PRINCIPLES (CONTINUED):
Duration Participating Contracts" 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.
27
<PAGE>
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.) as of December 31, 1997 and 1996, 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, 1997. 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 19 to the financial statements, the
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
which practices differ from generally accepted accounting principles. The
effects on the financial statements of the variances between the statutory basis
of accounting and generally accepted accounting principles, although not
reasonably determinable, are presumed to be material.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the admitted assets, liabilities, and capital stock and
surplus of Sun Life Assurance Company of Canada (U.S.) as of December 31, 1997
and 1996, and the results of its operations and its cash flow for each of the
three years in the period ended December 31, 1997 on the basis of accounting
described in Notes 1 and 19.
However, because of the effects of the matter discussed in the second preceding
paragraph, in our opinion, the financial statements referred to above do not
present fairly, in conformity with generally accepted accounting principles, the
financial position of Sun Life Assurance Company of Canada (U.S.) as of December
31, 1997 and 1996 or the results of its operations or its cash flow for each of
the three years in the period ended December 31, 1997.
As management has stated in Note 19, because the Company's management uses
financial information prepared in accordance with accounting principles
generally accepted in Canada in the normal course of business, the management of
Sun Life Assurance Company of Canada (U.S.) has determined that the cost of
complying with Statement No. 120 would exceed the benefits that the Company, or
the users of its financial statements, would experience. Consequently, the
Company has elected not to apply such standards in the preparation of these
financial statements.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 5, 1998
28
<PAGE>
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, 64, Chairman and Director (1982*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is Chairman and a Director of Sun Life Assurance Company of Canada and
Sun Life Insurance and Annuity Company of New York; a Director of Massachusetts
Financial Services Company; 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, 51, President and Director (1996*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is President and a Director of Sun Life Assurance Company of Canada and
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, 56, Director (1985*)
56 Pinckney Street
Boston, Massachusetts 02114
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, 66, Director (1985*)
Metro Tower, Suite 1170,
950 Tower Lane
Foster City, California 94404
He is president of Genstar Investment Corporation and a Director of Sun Life
Assurance Company of Canada, Sun Life Insurance and Annuity Company of New York,
Canadian Pacific, Ltd., Varian Associates, Inc., Diversified Collection
Services, Inc., San Francisco Opera, and Barrick Gold Corporation.
JOHN S. LANE, 63, Director (1991*)
150 King St.
Toronto, Ontario, Canada M5H 1J9
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.
- ------------------------
* Year Elected Director
29
<PAGE>
RICHARD B. BAILEY, 71, Director (1983*)
500 Boylston Street
Boston, Massachusetts 02116
He is a Director of Sun Life Insurance and Annuity Company of New York and a
Director/Trustee of certain Funds in the MFS Family of Funds.
A. KEITH BRODKIN, 62, Director (1990*)
He is former Chairman and Director of Massachusetts Financial Services
Company; a former Director of Sun Life Insurance and Annuity Company of New
York; and a Director/Trustee and/or Officer of certain Funds in the MFS Family
of Funds. Mr. Brodkin passed away on February 2, 1998.
M. COLYER CRUM, 65, Director (1986*)
104 West Cliff Street
Weston, MA 02193
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, Cambridge Trust, Merrill Lynch Ready Assets Trust,
Merrill Lynch Global Resources Trust, 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 Lynch U.S. Treasury Money
Fund, MuniVest Florida Fund, MuniYield Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniYield Florida Insured Fund, MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield Pennsylvania Fund
and Phaeton International N.V. Prior to July, 1996, he was a Professor at the
Harvard Business School.
S. CAESAR RABOY, 61, Senior Vice President and Deputy General Manager and
Director (1996*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Senior Vice President and Deputy General Manager for the United States
of Sun Life Assurance Company of Canada; Senior Vice President and a Director of
Sun Life Insurance and Annuity Company of New York; 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.
ROBERT A. BONNER, 53, Vice President, Individual Insurance (1986)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Individual Insurance for the United States of Sun Life
Assurance Company of Canada.
C. JAMES PRIEUR, 46, Senior Vice President, General Manager and Director (1998*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Senior Vice President and General Manager for the United States of Sun
Life Assurance Company of Canada; Senior Vice President and Director of Sun Life
Insurance and Annuity Company of New York; Chairman and Director of Sun Life of
Canada (U.S.) Distributors, Inc. and Sun Capital Advisers, Inc.; President and
Director of Sun Life of Canada (U.S.) Holdings, Inc., Sun Life Assurance Company
of Canada-U.S. Operations Holdings, Inc., Sun Life of Canada (U.S.) 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. and Massachusetts Casualty Insurance Company.
- ------------------------
* Year Elected Director
30
<PAGE>
L. BROCK THOMSON, 56, Vice President and Treasurer (1974)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Portfolio Management for the United States of Sun Life
Assurance Company of Canada; Vice President and Treasurer of Sun 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, 44, Vice President and Actuary (1986)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Finance for the United States of Sun Life Assurance
Company of Canada; Vice President, Controller and Actuary of Sun Life Insurance
and Annuity Company of New York; Vice President and Director of Sun Life of
Canada (U.S.) Holdings, Inc.; Sun Canada Financial Co., Sun Life of Canada
(U.S.) Distributors, Inc., Sun Life of Canada (U.S.) Financial Services Holdings
Inc., Sun Life Assurance Company of Canada-U.S. Operations Holdings, Inc., Sun
Capital Advisers, Inc., Sun Life of Canada (U.S.) SPE 97-1, Inc., and a Director
of Massachusetts Casualty Insurance Company, Clarendon Insurance Agency, Inc.
and Sun Benefit Services Company, Inc.
MARGARET SEARS MEAD, 47, Assistant Vice President and Secretary (1996)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
She is Assistant Vice President and Counsel for the United States of Sun
Life Assurance Company of Canada; and Assistant Vice President and Secretary of
Sun Life Insurance and Annuity Company of New York and Secretary of Sun Life of
Canada (U.S.) Holdings, Inc., Sun Life of Canada (U.S.) Distributors, 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 Capital Advisers, Inc.
The directors, officers and employees of the Company are covered under a
commercial blanket bond and a liability policy. The directors, officers and
employees of Massachusetts Financial Services Company and Clarendon Insurance
Agency, Inc. are covered under a fidelity bond and errors and omissions policy.
31
<PAGE>
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 1997
totalled $824,000.
<TABLE>
<CAPTION>
ALLOCATED COMPENSATION
--------------------------------- OTHER ALLOCATED
NAME/POSITION YEAR SALARY BONUS COMPENSATION
- -------------------------------------------------------------- --------- ---------- ---------- ----------------
<S> <C> <C> <C> <C>
*John D. McNeil 1997 $ 53,465 $ 40,030
Chairman 1996 $ 55,205 $ 49,859
1995 $ 76,854 $ 29,344
*David D. Horn 1997 $ 123,802 $ 45,405 $ 2,944(1)
Director 1996 $ 172,243 $ 59,630
1995 $ 176,800 $ 52,728
*C. James Prieur 1997 $ 154,784 $ 34,633 $ 2,798(2)
Senior Vice President and General Manager 1996 $ 96,609 $ 26,889
1995 $ 95,416 $ 36,650
Robert Leach 1997 $ 160,000 $ 40,800 $ 5,138(3)
Vice President, Finance and Product 1996 $ 146,500 $ 35,825
1995 $ 138,500 $ 25,371
David Egel 1997 $ 131,000 $ 26,200 $ 3,000(4)
Assistant Vice President, Pension Sales 1996 $ 114,991 $ 26,936
1995 $ 96,369 $ 12,311
Jane Mancini 1997 $ 200,000 $ 200,000 $ 860(5)
President, Sun Life (U.S.) Distributors, Inc. 1996 -- -- --
1995 -- -- --
</TABLE>
- ------------------------
* Allocated compensation.
1. All other compensation for Mr. Horn for the year ended 1997 includes Group
Term Life insurance payments and 401K company contributions of $1,355 and
$1,589, respectively. Mr. Horn served as Senior Vice President and General
Manager for the United States until his retirement in November 1997.
2. All other compensation for Mr. Prieur for the year ended 1997 includes Group
Term Life insurance payments and 401K company contributions of $500 and
$2,298, respectively.
3. All other compensation for Mr. Leach for the year ended 1997 includes Group
Term Life insurance payments and 401K company contributions of $388 and
$4,750, respectively.
4. All other compensation for Mr. Egel for the year ended 1997 includes Group
Term Life insurance payments and 401K company contributions of $843 and
$2,157, respectively.
5. All other compensation for Ms. Mancini for the year ended 1997 includes
Group Term Life insurance payments and 401K company contributions of $178
and $682, 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 and MacNaughton received compensation in the
amount of $5,000 per year, plus $800 for each meeting attended, plus expenses
for the year ended December 31, 1997.
32
<PAGE>
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 02181, 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.
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 $15,997,000 in 1997.
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 1997 amounted to approximately $7,581,000.
33
<PAGE>
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, 1997 and December 31, 1996.
-- Statutory Statements of Operations for each of the three years ended
December 31, 1997, December 31, 1996 and December 31, 1995.
-- Statutory Statements of Capital Stock and Surplus for each of the
three years ended December 31, 1997, December 31, 1996 and December 31,
1995.
-- Statutory Statements of Cash Flows for each of the three years ended
December 31, 1997, December 31, 1996 and December 31, 1995.
-- Notes to Financial Statements.
-- Independent Auditors' Report.
(a) (2) Financial statement schedules (set forth below):
-- Schedule I--Summary of Investments, Other than Investments in Related
Parties.
-- Schedule VI--Reinsurance.
34
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
SCHEDULE I
SUMMARY OF INVESTMENTS, OTHER THAN INVESTMENTS IN RELATED PARTIES
<TABLE>
<CAPTION>
AMOUNT AT WHICH SHOWN IN
TYPE OF INVESTMENT COST VALUE THE BALANCE SHEET*
- -------------------------------------------------------- ------------ ------------ --------------------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States government and government agencies and
authorities $ 126,923 $ 132,452 $ 126,923
States, municipalities and political subdivisions 22,361 24,456 22,361
Public utilities 398,939 434,186 398,939
Transportation 214,130 235,740 214,130
Finance 157,891 163,656 157,891
All other corporate bonds 990,455 1,037,677 990,455
------------ ------------ -----------
Total fixed maturities 1,910,699 2,028,167 1,910,699
------------ ------------ -----------
Mortgage loans on real estate 684,035 -- 684,035
Real estate 81,634 -- 78,426*
Real estate acquired in satisfaction of debt 22,884 -- 22,475*
Other invested assets 55,716 -- 55,716
Policy loans 40,348 -- 40,348
Short-term investments 431,032 -- 431,032
------------ ------------ -----------
Total investments $ 3,226,348 $ 2,028,167 $ 3,222,731
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
- ------------------------
*Net of provision for unrealized losses of $3,617
35
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
SCHEDULE VI
REINSURANCE
<TABLE>
<CAPTION>
% AMOUNT
ASSUMED
CEDED TO OTHER ASSUMED FROM TO NET
DIRECT COMPANIES OTHER COMPANIES NET AMOUNT AMOUNT
------------ --------------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
LIFE INSURANCE IN-FORCE (IN 000'S)
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%
------------ --------------- ----------------- ------------ -----
December 31, 1995 $ 1,290,739 $ 6,593,699 $ 12,011,507 $ 6,708,547 179.0%
------------ --------------- ----------------- ------------ -----
LIFE INSURANCE PREMIUMS (IN 000'S)
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%
------------ --------------- ----------------- ------------ -----
December 31, 1995 $ 6,051 $ 10,258 $ 217,449 $ 213,242 102.0%
------------ --------------- ----------------- ------------ -----
</TABLE>
36
<PAGE>
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, 1997 and 1996, 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, 1997, and have issued our report thereon dated
February 5, 1998 (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, 1998
37
<PAGE>
(A) 3 AND (C). EXHIBITS:
The following Exhibits are incorporated herein by reference unless otherwise
indicated:
<TABLE>
<CAPTION>
EXHIBIT NO.
- -------------
<C> <S>
3 Certificate of incorporation and by-laws (filed as Exhibit 6 to the Registration Statement on Form
N-4 (Reg. No. 333-37907, filed October 14, 1997).
4 Combination Fixed/Variable Group Annuity Contracts and Certificates (filed as Exhibit 4 to the
Registration Statement on Form N-4 (Reg. No. 333-37907); as Exhibit 4 to Amendment No. 2 to
Registration Statement on Form S-1 (Reg. No. 2-99959); as Exhibit 4 to Pre-Effective Amendment No. 2
to the Registration Statement on Form S-2 (Reg. No. 33-29851); as Exhibit 4 to the Registration
Statement on Form S-2 (Reg. No. 33-43008); as Exhibit 4 to Post-Effective Amendment No. 3 to the
Registration Statement on Form S-2 (Reg. No. 33-43008); and as Exhibit 4 to Pre-Effective Amendment
No. 1 to the Registration Statement on Form N-4 (Reg. No. 333-05227).)
21 Subsidiaries of the Company (filed herewith).
24 Powers of attorney (filed herewith).
27 Financial Data Schedule (filed herewith).
</TABLE>
(B) REPORTS OF FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1997.
The Company filed a report on Form 8-K on January 8, 1998 describing in Item
2 (Acquisition or Disposition of Assets) the transfer in the form of a dividend
of its subsidiary, Massachusetts Financial Services Company to its parent Life
Holdco. The report included pro forma financial information.
(D) NO ADDITIONAL FINANCIAL STATEMENTS ARE REQUIRED TO BE FILED.
<PAGE>
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 Asssurance Company of Canada (U.S.)
(Registrant)
By:* /s/ John D. McNeil
-----------------------------------
John D. McNeil
CHAIRMAN
Date: March 27, 1998
-----------------------------------
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/ John D. McNeil Chairman and Director
- --------------------------------- (Principal Executive March 27, 1998
John D. McNeil Officer)
*/s/ Robert P Vrolyk Vice President and Actuary
- --------------------------------- (Principal Financial &
Robert P Vrolyk Accounting Officer)
*/s/ Richard B. Bailey
- --------------------------------- Director March 27, 1998
Richard B. Bailey
- --------------------------------- Director
A. Keith Brodkin
- --------------------------------- Director
David D. Horn
*/s/ C. James Prieur Senior Vice President and
- --------------------------------- General Manager and March 27, 1998
C. James Prieur Director
- ---------
* By Margaret Sears Mead pursuant to Power of Attorney filed herewith.
<PAGE>
*/s/ John S. Lane
- --------------------------------- Director March 27, 1998
John S. Lane
*/s/ Angus A. MacNaughton
- --------------------------------- Director March 27, 1998
Angus A. MacNaughton
*/s/ Donald A. Stewart
- --------------------------------- President and Director March 27, 1998
Donald A. Stewart
*/s/ M. Colyer Crum
- --------------------------------- Director March 27, 1998
M. Colyer Crum
*/s/ S. Caesar Raboy Senior Vice President and
- --------------------------------- Deputy General Manager March 27, 1998
S. Caesar Raboy and Director
- ---------
* By Margaret Sears Mead pursuant to Power of Attorney filed herewith.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
Sun Life Insurance and Annuity Company of New York, New York
Sun Life of Canada (U.S.) Distributors, Inc., Delaware
Sun Benefit Services Company, Inc., Delaware
New London Trust F.S.B.*, New Hampshire
Massachusetts Casualty Insurance Company, Massachusetts
Sun Life Finance Corporation, Delaware
Sun Capital Advisers, Inc. Delaware
Sun Life Financial Services Limited, Bermuda
Clarendon Insurance Agency, Inc., Massachusetts
Sun Life of Canada (U.S.) SPE 97-1, Inc., Delaware
- ------------------
* a federally chartered savings bank.
<PAGE>
Exhibit 24
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that Richard B. Bailey, whose signature
appears below, constitutes and appoints Margaret Sears Mead, C. James Prieur and
David N. Brown, and each of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign the Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 of Sun Life Assurance
Company of Canada (U.S.) and any amendments thereto and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or his substitute or substitutes, may do or cause
to be done by virtue hereof.
/s/ Richard B. Bailey
----------------------------------------
Richard B. Bailey
March 11, 1998
<PAGE>
Exhibit 24
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that M. Colyer Crum, whose signature appears
below, constitutes and appoints Margaret Sears Mead, C. James Prieur and David
N. Brown, and each of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign the Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 of Sun Life Assurance
Company of Canada (U.S.) and any amendments thereto and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or his substitute or substitutes, may do or cause
to be done by virtue hereof.
/s/ M. Colyer Crum
----------------------------------------
M. Colyer Crum
March 9, 1998
<PAGE>
Exhibit 24
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that David D. Horn, whose signature appears
below, constitutes and appoints Margaret Sears Mead, C. James Prieur and David
N. Brown, and each of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign the Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 of Sun Life Assurance
Company of Canada (U.S.) and any amendments thereto and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or his substitute or substitutes, may do or cause
to be done by virtue hereof.
----------------------------------------
David D. Horn
March , 1998
<PAGE>
Exhibit 24
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that John S. Lane, whose signature appears
below, constitutes and appoints Margaret Sears Mead, C. James Prieur and David
N. Brown, and each of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign the Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 of Sun Life Assurance
Company of Canada (U.S.) and any amendments thereto and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or his substitute or substitutes, may do or cause
to be done by virtue hereof.
/s/ John S. Lane
----------------------------------------
John S. Lane
March 9 , 1998
<PAGE>
Exhibit 24
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that Angus A. MacNaughton, whose signature
appears below, constitutes and appoints Margaret Sears Mead, C. James Prieur and
David N. Brown, and each of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign the Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 of Sun Life Assurance
Company of Canada (U.S.) and any amendments thereto and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or his substitute or substitutes, may do or cause
to be done by virtue hereof.
/s/ Angus A. MacNaughton
----------------------------------------
Angus A. MacNaughton
March 9, 1998
<PAGE>
Exhibit 24
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that John D. McNeil, whose signature appears
below, constitutes and appoints Margaret Sears Mead, C. James Prieur and David
N. Brown, and each of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign the Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 of Sun Life Assurance
Company of Canada (U.S.) and any amendments thereto and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or his substitute or substitutes, may do or cause
to be done by virtue hereof.
/s/ John D. McNeil
----------------------------------------
John D. McNeil
March 10, 1998
<PAGE>
Exhibit 24
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that C. James Prieur, whose signature
appears below, constitutes and appoints Margaret Sears Mead and David N. Brown,
and each of them, his attorneys-in-fact, each with the power of substitution,
for him in any and all capacities, to sign the Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 of Sun Life Assurance Company of Canada
(U.S.) and any amendments thereto and to file the same, with exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-
fact or his substitute or substitutes, may do or cause to be done by virtue
hereof.
/s/ C. James Prieur
----------------------------------------
C. James Prieur
March 10, 1998
<PAGE>
Exhibit 24
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that S. Caesar Raboy, whose signature
appears below, constitutes and appoints Margaret Sears Mead, C. James Prieur and
David N. Brown, and each of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign the Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 of Sun Life Assurance
Company of Canada (U.S.) and any amendments thereto and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or his substitute or substitutes, may do or cause
to be done by virtue hereof.
/s/ S. Caesar Raboy
----------------------------------------
S. Caesar Raboy
March 10, 1998
<PAGE>
Exhibit 24
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that Donald A. Stewart, whose signature
appears below, constitutes and appoints Margaret Sears Mead, C. James Prieur and
David N. Brown, and each of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign the Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 of Sun Life Assurance
Company of Canada (U.S.) and any amendments thereto and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or his substitute or substitutes, may do or cause
to be done by virtue hereof.
/s/ Donald A. Stewart
----------------------------------------
Donald A. Stewart
March 10, 1998
<PAGE>
Exhibit 24
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that Robert P. Vrolyk, whose signature
appears below, constitutes and appoints Margaret Sears Mead, C. James Prieur and
David N. Brown, and each of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign the Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 of Sun Life Assurance
Company of Canada (U.S.) and any amendments thereto and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or his substitute or substitutes, may do or cause
to be done by virtue hereof.
/s/ Robert P. Vrolyk
----------------------------------------
Robert P. Vrolyk
March 10, 1998
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