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As filed with the Securities and Exchange Commission on April 14, 1999
Registration No. 333-62837
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-2
POST-EFFECTIVE AMENDMENT NO. 2 TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Sun Life Assurance Company of Canada (U.S.)
(Exact Name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
38-1082080
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(I.R.S. Employer Identification No.)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
(781) 237-6030
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Copies to:
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Edward M. Shea, Assistant Vice President and Senior Counsel Michael Berenson
Sun Life Assurance Company of Canada (U.S.) Jorden Burt Boros Cicchetti
Retirement Products and Services Berenson & Johnson LLP
One Copley Place 1025 Thomas Jefferson Street, N.W.
Boston, Massachusetts, 02116 Suite 400E
(781) 237-6030 Washington, DC 20007
(202) 965-8100
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PART I
INFORMATION REQUIRED IN PROSPECTUS
Attached hereto and made a part hereof is the Prospectus dated May 1, 1999.
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PROSPECTUS
MAY 1, 1999
FUTURITY FIXED ANNUITY
This Prospectus describes the Futurity Fixed Annuity, a single payment
deferred annuity contract ("Contract" or "Contracts"). The Contract is designed
for use in connection with retirement and deferred compensation plans, some of
which may qualify as retirement programs under Sections 401, 403, 408 or 408A of
the Internal Revenue Code of 1986, as amended (the "Code"). The Contract
provides for the accumulation of values on a fixed basis, and for annuity
payments which do not vary as to dollar amount and which will begin on a future
date you select.
The Contracts are offered by Sun Life Assurance Company of Canada (U.S.)
(the "Company;" also "we," "us," "our"). Our Principal Executive Offices are
located at One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481,
telephone (781) 237-6030. Our Annuity Service Mailing Address is: Sun Life
Assurance Company of Canada (U.S.), Retirement Products and Services, P.O. Box
9133, Boston, Massachusetts 02117, telephone (888) 388-8748. We are an indirect
wholly-owned subsidiary of Sun Life Assurance Company of Canada, one of the
largest life insurance companies in Canada.
The Company issues Contracts on either an individual or a group basis,
depending on the state or jurisdiction where the Contract is issued. A Contract
issued to an individual ("Individual Contract") is evidenced by an Individual
Contract. Participation in a Contract issued to a group ("Group Contract") is
evidenced by a certificate ("Certificate") which describes the Participant's
interest under the Group Contract. Unless otherwise expressly indicated,
references in this Prospectus to "Contracts" include Individual Contracts, Group
Contracts and Certificates issued under Group Contracts, and references to
"Participants" include Individual Contract Owners and individuals participating
under Group Contracts ("Participants;" also "you," "your").
The minimum Purchase Payment for a Contract is $10,000, unless the Company
waives this requirement. If you desire to make a Purchase Payment in excess of
$1,000,000, you must obtain our prior approval.
An Accumulation Account is established for each Participant in order to
determine benefits under the Contract. You may allocate your Net Purchase
Payment to only one of the available Guarantee Periods. The Guarantee Periods
have durations of one to ten years, although not all may be available. Your
Purchase Payment, together with any interest credited, is held in the Fixed
Account, which is part of our general account (See "The Fixed Account," page
10).
Values under a Contract accumulate on a fixed basis. Your Accumulation
Account is credited at an interest rate ("Guaranteed Interest Rate") for the
duration of the Guarantee Period you choose, subject to any applicable
withdrawal charge or Market Value Adjustment. The Minimum Average Interest Rate
for any Guarantee Period will be at least three percent (3%) per year,
compounded annually. We may not change a Guaranteed Interest Rate during the
Guarantee Period. However, Guaranteed Interest Rates for subsequent Guarantee
Periods cannot be predicted and will be determined at our sole discretion
(subject to the Minimum Average Interest Rate guarantee).
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THE CONTRACTS ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE
PRINCIPAL AMOUNT INVESTED. FOR A MORE DETAILED DESCRIPTION OF THE RISKS
ASSOCIATED WITH PURCHASING A CONTRACT, PLEASE REFER TO PAGES 11 THROUGH 13 OF
THIS PROSPECTUS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS CONTAINS INFORMATION ABOUT THE CONTRACTS THAT A PROSPECTIVE
PURCHASER SHOULD KNOW BEFORE INVESTING. YOU SHOULD RETAIN THIS PROSPECTUS FOR
FUTURE REFERENCE.
We will not assess a sales charge against your Purchase Payment or a
withdrawal charge upon annuitization (except for period certain annuities of
less than ten years) or if you make a transfer. Except as discussed below, you
may withdraw a portion (as specified in your Contract) of your Accumulation
Account in each Account Year without being subject to a withdrawal charge, and
you may withdraw your Purchase Payment without charge after the Company has held
it for seven years (although your withdrawal may be subject to a Market Value
Adjustment). In addition, we will not assess a withdrawal charge on amounts
withdrawn on or after the later of (a) the end of the Initial Guarantee Period
of (b) the end of the third Account Year. However, if you otherwise withdraw any
part of your Accumulation Account, we may deduct a withdrawal charge, which
ranges from 7% to 0%. In no event will the withdrawal charges assessed against
your Accumulation Account exceed 7% of your Accumulation Account Value (See
"Withdrawal Charges," page 15).
Generally, any cash withdrawal (other than a withdrawal upon annuitization
or as the result of a transfer) is subject to a Market Value Adjustment. The
Market Value Adjustment will reflect the relationship between the current rate
(which is the Guaranteed Interest Rate currently declared by the Company for
Guarantee Periods equal to the balance of the Contract's Guarantee Period) and
the Guaranteed Interest Rate applicable to the Contract. Generally, if the
Guaranteed Interest Rate is lower than our currently declared rate, the
application of the Market Value Adjustment results in a lower payment upon
withdrawal. Similarly, except as described below under the section titled "Cash
Withdrawals, Withdrawal Charges and Market Value Adjustment--Market Value
Adjustment," if the Guaranteed Interest Rate is higher than the currently
declared rate, the application of the Market Value Adjustment results in a
higher payment upon withdrawal. The Market Value Adjustment also does not apply
to a withdrawal effective within 30 days prior to the Expiration Date of the
applicable Guarantee Period or the withdrawal of the free withdrawal amount (See
"Market Value Adjustment," page 16).
The Contracts provide that the Company may modify the withdrawal charges,
transfer charges, the tables used to determine the amount of the first monthly
fixed annuity payments and the formula used to calculate the Market Value
Adjustment. However, the modification will apply only to Accumulation Accounts
established after the effective date of such modification (See "Modification,"
page 23).
We reserve the right to defer the payment of any withdrawals for not more
than six months from the date we receive a written withdrawal request.
Contracts sold in certain states are subject to a deduction for premium
taxes. These premium taxes are deducted from the Accumulation Account (See
"Premium Taxes," page 24).
Subject to certain conditions, and during the Accumulation Period, you may
transfer the entire Accumulation Account Value to another Guarantee Period
available under the Contracts. No partial transfers are permitted. Currently
there is no charge for transfers. However, transfers are subject to the Market
Value Adjustment unless the transfer is effective within 30 days prior to an
Expiration Date and other restrictions may apply (See "Transfer Privilege;
Telephone Transfers," page 13).
If the Participant dies prior to the Annuity Commencement Date, we will
pay a death benefit to the Beneficiary. If the Annuitant dies on or after the
Annuity Commencement Date, no death benefit is payable, except as may be
provided under the Annuity Option elected (See "Death Benefit," page 17).
Annuity Payments begin on the Annuity Commencement Date. You select the
Annuity Commencement Date, frequency of payments and the Annuity Option (See
"Annuity Provisions," page 19).
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We periodically furnish Owners and Participants with certain reports and
statements (See "Periodic Statements," page 23). Such reports, other than
prospectuses, do not include the Company's financial statements.
If you are not satisfied with your Contract, you may return it to us at
our Annuity Service Mailing Address within ten days after you receive the
Contract. When we receive your Contract, it will be canceled and the
Accumulation Account Value on the date on which the Contract was received by us
will be refunded to you. However, if applicable state or federal law so
requires, we will refund the full amount of any Purchase Payment received by us,
the "free look" period may be greater than ten days and alternative methods of
returning the Contract may be acceptable.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended, (the "1934 Act") and, in accordance therewith,
files reports and other information with the Securities and Exchange Commission
(the "Commission"). Such reports and other information can be inspected and
copied at the public reference facilities of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. and at the Commission's Regional Offices
located at 75 Park Place, New York, New York and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois. Copies of such materials
also can be obtained, for a fee, from the Commission's Public Reference Section,
450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a
Website that contains the text of reports, proxy and information statements and
other information as filed electronically by the Company with the Commission;
these filings are found at the following address: http://www.sec.gov.
The Company has filed a registration statement and related exhibits
(collectively, the "Registration Statement") with respect to the Contracts with
the Commission under the Securities Act of 1933. This Prospectus has been filed
as a part of the Registration Statement and does not contain all of the
information set forth in the Registration Statement. Reference is hereby made to
the Registration Statement for further information relating to the Company and
the Contracts. The Registration Statement may be inspected and copied, and
copies can be obtained for a fee as described above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Annual Report on Form 10-K for the year ended December 31, 1998, which
the Company has filed with the Commission under the 1934 Act, is incorporated by
reference in this Prospectus.
Any statement contained in a document incorporated by reference in this
Prospectus shall be deemed modified or superseded by this Prospectus to the
extent that a statement contained in a later-filed document or in this
Prospectus shall modify or supersede such statement. Any statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will furnish you, without charge, upon your written or oral
request, copies of the reports referred to above which have been incorporated by
reference in this Prospectus. Any documents so provided will not include the
exhibits to such reports, unless the exhibits are specifically incorporated by
reference in this Prospectus. Requests for such documents should be directed to
the Secretary, Sun Life Assurance Company of Canada (U.S.), One Sun Life
Executive Park, Wellesley Hills, Massachusetts 02481, telephone (800) 225-3950.
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TABLE OF CONTENTS
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Special Terms 6
This Prospectus is a Catalog of Facts 9
Uses of the Contracts 9
The Company 9
The Fixed Account 10
The Purchase Payment and Contract Values During the Accumulation Period 11
The Purchase Payment 11
Accumulation Account 12
Guarantee Period 12
Guaranteed Interest Rates 12
Transfer Privilege; Telephone Transfers 13
Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest Rates 13
Cash Withdrawals, Withdrawal Charges and Market Value Adjustment 14
Cash Withdrawals 14
Withdrawal Charges 15
Section 403(b) Annuities 16
Market Value Adjustment 16
Death Benefit 17
Death Benefit Provided by the Contract 17
Election and Effective Date of Election 18
Death of Participant 18
Payment of Death Benefit 19
Amount of Death Benefit 19
Annuity Provisions 19
Annuity Commencement Date 19
Election--Change of Annuity Option 20
Annuity Options 20
Determination of Annuity Payments 21
Annuity Payment Rates 21
Other Contract Provisions 22
Designation and Change of Beneficiary 22
Exercise of Contract Rights 22
Change of Ownership 22
Periodic Statements 23
Modification 23
Discontinuance of New Participants 23
Right to Return 23
Premium Taxes 24
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Federal Tax Status 24
Introduction 24
Tax Treatment of the Company 24
Taxation of Annuities in General 24
Qualified Retirement Plans 26
Pension and Profit-Sharing Plans 26
Tax-Sheltered Annuities 26
Individual Retirement Accounts 26
Roth IRAs 27
Distribution of the Contracts 27
Additional Information About the Company 28
General 28
Selected Financial Data 28
Management's Discussion and Analysis of Financial Condition and Results of Operations 29
Quantitative and Qualitative Disclosure About Market Risk 36
Demutualization 38
Year 2000 Compliance 38
Sale of Subsidiary 39
Reinsurance 39
Reserves 39
Investments 40
Competition 40
Employees 40
Properties 40
The Company's Directors and Executive Officers 41
State Regulation 44
Accountants 44
Registration Statements 44
Appendix--Examples of the Market Value Adjustment 68
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SPECIAL TERMS
Any reference in this Prospectus to "receipt" or "received" by the Company
means receipt at the Company's Annuity Service Mailing Address, Sun Life
Assurance Company of Canada (U.S.), Retirement Products and Services, P.O. Box
9133, Boston, Massachusetts 02117.
The following terms as used in this Prospectus have the indicated
meanings:
ACCOUNT YEARS and ACCOUNT ANNIVERSARIES: The first Account Year is the
period of 12 months plus a part of a month as measured from the Date of Coverage
for each Participant through the last day of the calendar month in which the
Purchase Payment is received. All Account Years and Account Anniversaries
thereafter are 12 month periods based upon the first day of the calendar month
which follows the calendar month of coverage. For example, if the Date of
Coverage is in March, the first Account Year is determined from the Date of
Coverage and ends on March 31 in the following year; all subsequent Account
Years and all Account Anniversaries will be measured from April 1.
ACCUMULATION ACCOUNT: An account established for each Participant to which
the Net Purchase Payment and any interest are credited.
ACCUMULATION ACCOUNT VALUE: The value of the Accumulation Account on any
date.
ACCUMULATION PERIOD: The period before the Annuity Commencement Date and
during the lifetime of the Participant.
*ANNUITANT: The person (or persons) on whose life (or lives) the first
annuity payment is to be made. If the Annuitant dies prior to the Annuity
Commencement Date, the Co-Annuitant, if any, will become the Annuitant. If,
prior to the Annuity Commencement Date, the Co-Annuitant dies or if no
Co-Annuitant is named, the Participant becomes the Annuitant upon the
Annuitant's death.
*ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment
under a Contract is to be made.
*ANNUITY OPTION: The method for making annuity payments.
APPLICATION: The document, if any, signed by each Participant that serves
as his or her application for participation under a Group Contract or for
purchase of an Individual Contract.
*BENEFICIARY: Prior to the Annuity Commencement Date, the person or entity
having the right to receive the death benefit set forth in each Contact and, for
Non-Qualified Contracts, who, in the event of the Participant's death, is the
"designated beneficiary" for purposes of Section 72(s) of the Code. After the
Annuity Commencement Date, the Beneficiary is the person or entity having the
right, upon the death of the Payee, to receive any remaining payments due under
the Annuity Option elected.
CERTIFICATE: The document which evidences the coverage of a Participant
under a Group Contract. Unless otherwise expressly indicated, references in this
Prospectus to "Contracts" include Certificates.
CODE: The Internal Revenue Code of 1986, as amended.
DATE OF COVERAGE: The date on which a Participant's Accumulation Account
becomes effective.
DEATH BENEFIT DATE: The date on which the Company receives Due Proof of
Death.
DUE PROOF OF DEATH: An original certified copy of an official death
certificate, an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death, and/or any other proof satisfactory to
the Company.
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* As specified on the Contract Specifications Page or the Certificate
Specifications Page (as appropriate), unless changed.
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EXPIRATION DATE: The last day of a Guarantee Period.
*FLOATING RATE: The indexed rate published in The Wall Street Journal two
business days prior to the Floating Rate Reset Date. In the event the Floating
Rate is no longer published in The Wall Street Journal, the Company will use an
actuarially based method of determining the indexed rate, which method will be
determined in a manner the Company believes is equitable.
FLOATING RATE GUARANTEE PERIOD: A Guarantee Period for which the
Guaranteed Interest Rate changes on each Floating Rate Reset Date.
FLOATING RATE RESET DATE: The first Floating Rate Reset Date shall be the
first business day of the first calendar quarter that begins after a Floating
Rate Guarantee Period is elected. Thereafter, a new Floating Rate Reset Date
will occur on the first business day of each subsequent calendar quarter until
the Expiration Date of the particular Floating Rate Guarantee Period.
FLOATING RATE SPREAD: The amount deducted from the Floating Rate to
determine the Guaranteed Interest Rate in effect initially and on each Floating
Rate Reset Date during a Floating Rate Guarantee Period. The Floating Rate
Spread remains constant throughout a Floating Rate Guarantee Period. However,
the Floating Rate Spread may change for a new Floating Rate Guarantee Period.
GUARANTEE AMOUNT: The amount of the Accumulation Account Value in a
particular Guarantee Period with a particular Expiration Date (including
interest earned thereon).
GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is
credited.
GUARANTEED INTEREST RATE: The rate of interest credited by the Company on
a compound annual basis during a particular Guarantee Period.
*MINIMUM AVERAGE INTEREST RATE: The minimum average rate of interest that
may be credited by the Company on a compound annual basis, as determined at the
end of a particular Guarantee Period or upon surrender of the Contract, as
applicable.
NET PURCHASE PAYMENT: The portion of the Purchase Payment remaining after
the deduction of any applicable premium tax or similar tax.
NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement
plan which does not receive favorable federal income tax treatment under
Sections 401, 403, 408, or 408A or any other applicable section of the Code. The
Participant's interest in the Contract must be owned by a natural person or
agent for a natural person in order for the Contract to receive favorable income
tax treatment as an annuity.
*OWNER: The person or entity named on the Group Contract Specifications
Page who is entitled to exercise all rights and privileges of ownership under
the Group Contract.
PARTICIPANT (ALSO "YOU," "YOUR"): In the case of an Individual Contract,
the owner of the Contract. In the case of a Group Contract, the person named on
the Certificate Specifications Page who is entitled to exercise all rights and
privileges of ownership under the Certificate, except as reserved by the Owner.
If the Contract is a Non-Qualified Contract, the Participant must be a natural
person or agent for a natural person in order for the Contract to receive
favorable income tax treatment as an annuity. If the Contract is a Qualified
Contract (other than a Section 403 contract), the Participant must be a trustee
or custodian of a retirement plan which meets the requirements of Section 401,
Section 408(c), Section 408(k), Section 408A, or any other applicable section of
the Code, and the Qualified Plan Endorsement must be attached to and made a part
of the Contract.
PAYEE: A recipient of payments under the Contract.
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* As specified on the Contract Specifications Page or the Certificate
Specifications Page (as appropriate), unless changed.
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PURCHASE PAYMENT: The amount paid to the Company by or on behalf of the
Participant as consideration for the benefits provided by the Contract.
QUALIFIED CONTRACT: A Contract used in connection with a retirement plan
which may receive favorable federal income tax treatment under Sections 401,
403, 408, or 408A or any other applicable section of the Code.
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THIS PROSPECTUS IS A CATALOG OF FACTS
This Prospectus contains information about the Contracts, which provide
fixed benefits. It describes the Contracts' uses and objectives, its benefits
and costs, and the rights and privileges of Owners and Participants. It also
contains information about the Company and the Fixed Account. This Prospectus
has been carefully prepared in non-technical language to help you decide whether
the purchase of a Contract fits the needs of your retirement plan. We urge you
to read it carefully and retain it for future reference.
A Fixed Annuity provides that Purchase Payments, less certain deductions,
will accumulate at a Guaranteed Interest Rate prior to the Annuity Commencement
Date. After the Annuity Commencement Date, annuity payments will be made to the
Annuitant. Under a Fixed Annuity, the investment risk is assumed by the Company
(except in the case of early withdrawals (See "Cash Withdrawals" and "Market
Value Adjustment")), and the amounts of the annuity payments do not vary.
However, each Participant bears the risk that the Guaranteed Interest Rate
credited to the Contract may not exceed the Minimum Average Interest Rate
specified in the Contract.
USES OF THE CONTRACTS
The Contracts are designed to be used in connection with retirement plans,
some of which meet the requirements of Section 401 (including Section 401(k)),
Section 403, Section 408(b), Section 408(c), Section 408(k), Section 408(p) or
Section 408A of the Code; however, the Company may discontinue offering new
Contracts in connection with certain types of qualified plans.
Certain federal tax advantages are currently available to retirement plans
which qualify under the Code as (a) self-employed individuals' retirement plans
under Section 401; (b) corporate or association retirement plans under Section
401; (c) annuity purchase plans sponsored by certain tax exempt organizations or
public school systems under Section 403(b); or (d) individual retirement
accounts, including employer or association of employees individual retirement
accounts under Section 408(c), SEP-IRAs under Section 408(k), Simple Retirement
Accounts under Section 408(p), and Roth IRAs under Section 408A (See "Federal
Tax Status").
The Contracts are also designed to be used in connection with certain
non-tax-qualified retirement plans, such as payroll savings plans, and by such
other groups (trusteed or nontrusteed) as may be eligible under applicable law.
THE COMPANY
Sun Life Assurance Company of Canada (U.S.) (the "Company;" also "we,"
"us," and "our") is a stock life insurance company which was incorporated under
the laws of Delaware on January 12, 1970. Its Executive Offices are located at
One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481, telephone
(781) 237-6030. The Company currently is authorized to do business in 48 states,
the District of Columbia and Puerto Rico, and it is anticipated that the Company
will be authorized to do business in all states except New York. The Company
issues life insurance policies and individual and group annuities. The Company
has formed a wholly-owned subsidiary, Sun Life Insurance and Annuity Company of
New York, which issues individual fixed and combination fixed/variable annuity
contracts and group life and long-term disability insurance in New York. The
Company's other active subsidiaries are: Sun Capital Advisers, Inc., a
registered investment adviser; Clarendon Insurance Agency, Inc., a registered
broker-dealer that acts as the general distributor of the Contracts and other
annuity and life insurance contracts issued by the Company and its affiliates;
Sun Life of Canada (U.S.) Distributors, Inc., a registered broker-dealer and
investment adviser; New London Trust, F.S.B., a federally chartered savings
bank; Massachusetts Casualty Insurance Company, which issues individual
disability income policies; Sun Life Financial Services Limited, which provides
off-shore administrative services to the Company and its parent company, Sun
Life Assurance Company of Canada (sometimes referred to in this Prospectus as
"Sun Life (Canada)"); and Sun Life Information Services Ireland Limited, an
offshore technology center.
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc. ("Life Holdco"). Life Holdco is a wholly-owned subsidiary of Sun
Life Assurance Company of Canada--U.S. Operations Holdings, Inc. ("U.S.
Holdco"). U.S. Holdco is a wholly-owned subsidiary of Sun Life (Canada),
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150 King Street West, Toronto, Ontario, Canada. Sun Life (Canada) is a mutual
life insurance company incorporated pursuant to Act of Parliament of Canada in
1865 and currently transacts business in all of the Canadian provinces and
territories, in all U.S. states except New York, and in the District of
Columbia, Puerto Rico, the Virgin Islands, Great Britain, Ireland, Bermuda, Hong
Kong, and the Philippines.
On February 5, 1999, the Company finalized the sale of Massachusetts
Casualty Insurance Company, a wholly-owned subsidiary that issued only
individual disability insurance contracts, to Centre Solutions (U.S.) Limited, a
wholly-owned subsidiary of Centre Reinsurance Holdings Limited for approximately
$34 million. The impact of this sale to the ongoing operations of the Company is
not expected to be material.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding
shares of Massachusetts Financial Services Company ("MFS"). On December 24,
1997, the Company transferred all of its shares of MFS to its parent, Life
Holdco, in the form of a dividend. On December 31, 1997, the Company purchased
all of the outstanding shares of Clarendon Insurance Agency, Inc. from MFS.
On January 27, 1998, SLOC announced that its Board of Directors requested
management world-wide to develop a plan to convert from a mutual life insurance
company into a publicly traded stock company through demutualization worldwide.
Management has put in place a full time task force which, together with a
worldwide team of actuarial, financial and legal advisers, has begun work. The
Board will decide later this year whether to proceed with demutualization,
following the completion of the plan. Demutualization would require regulatory
and policyholder approval. Based on information known to date, the potential
demutualization of SLOC is not expected to have any significant impact on the
Company.
THE FIXED ACCOUNT
The Fixed Account is made up of all of the general assets of the Company,
other than those allocated to any unitized separate account. The Purchase
Payment is allocated to the Guarantee Period you elect at the time your
Accumulation Account is established. Your Accumulation Account Value may be
transferred to another Guarantee Period available under the Contract, subject to
certain restrictions (See "Transfer Privilege"). Assets supporting amounts
allocated to Guarantee Periods become part of the Company's general account
assets and are available to fund the claims of all classes of customers of the
Company, including claims for benefits under the Contracts.
The Company invests the assets of the Fixed Account in those assets chosen
by the Company and allowed by applicable state laws regarding the nature and
quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
investment. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments.
The Company's general investment strategy is to invest the assets of the
Fixed Account in investment grade debt securities and mortgages. The Company
intends to invest the assets of the Fixed Account primarily in such debt
instruments as follows:
- Securities issued by the United States Government or its agencies or
instrumentalities, which securities may or may not be guaranteed by the
United States Government;
- Investment grade debt securities, I.E., those which have a rating, at
the time of purchase, within the four highest grades assigned by
Moody's Investors Services, Inc. ("Moody's") or Standard & Poor's
Corporation ("Standard & Poor's") (Aaa, Aa, A or Baa and AAA, AA, A or
BBB, respectively) or any other nationally recognized rating service;
- Other debt instruments, including, but not limited to, issues of or
guaranteed by banks or bank holding companies and other corporations,
which obligations, although not rated by Moody's or Standard & Poor's,
are deemed by the Company's management to have an investment quality
comparable to securities which may be purchased as stated above; and
- Other evidences of indebtedness secured by mortgages or deeds of trust
representing liens upon real estate.
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The Company may also invest a portion of the Fixed Account in below
investment grade debt instruments. Instruments rated Baa and/or BBB or lower
normally involve a higher risk of default and are less liquid than higher rated
instruments. If the rating of an investment grade debt security held by the
Company is subsequently downgraded to below investment grade, the Company's
decision to retain or dispose of the security will be made based upon our
individual evaluation of the circumstances surrounding the downgrade and the
prospects for continued deterioration, stabilization and/or improvement.
In pursuing its general investment strategy with respect to amounts
allocated to the Fixed Account, the Company uses immunization strategies
appropriate to the various Guarantee Periods. This includes,
with respect to investments and average terms of investments, using dedication
(cash flow matching) and/ or duration matching to minimize the Company's risk of
not achieving the rates it is crediting under Guarantee Periods in volatile
interest rate environments.
We are not obligated to invest amounts allocated to the Fixed Account
according to any particular strategy, except as may be required by applicable
state insurance laws. Investment income from such Fixed Account assets will be
allocated between the Company and all contracts participating in the Fixed
Account, including the Contracts, in accordance with the terms of such
contracts.
Fixed annuity payments made to Annuitants under the Contracts will not be
affected by the mortality experience (death rate) of the persons receiving such
payments or of the general population. The Company assumes this "mortality risk"
by virtue of annuity rates incorporated in the Contracts which cannot be changed
(except as described under "Modification" with respect to Accumulation Accounts
established after the effective date of such modification). In addition, the
Company guarantees that it will not impose a charge for maintenance of the
Contracts, regardless of its actual expenses (except as described under
"Modification" with respect to Accumulation Accounts established after the
effective date of such modification).
The amount of investment income allocated to the Contracts will vary from
Guarantee Period to Guarantee Period in our sole discretion. However, the
Company guarantees that it will credit interest at the Minimum Average Interest
Rate, compounded annually, to amounts allocated to the Fixed Account under the
Contracts. The Company may (but is not obligated to) declare Guaranteed Interest
Rates in excess of the Minimum Average Interest Rate.
We are aware of no statutory limitations on the maximum amount of interest
we may credit, and the Company's Board of Directors has set no limitations.
However, inherent in our exercise of discretion in this regard is the equitable
allocation of distributable earnings and surplus among our various policyholders
and contract owners and our sole stockholder.
THE PURCHASE PAYMENT AND CONTRACT VALUES DURING THE ACCUMULATION PERIOD
THE PURCHASE PAYMENT
- PLACE AND AMOUNT. Your Purchase Payment is paid to the Company at its
Annuity Service Mailing Address. The Company generally will not accept
a Purchase Payment which is less than $10,000; exceptions will be
determined by the Company on an individual basis. In addition, the
Company's prior approval is required before it will accept a Purchase
Payment which exceeds $1,000,000.
A completed Application, if required, and the Purchase Payment are
forwarded to the Company for acceptance. Upon acceptance, in the case of
an Individual Contract, the Contract is issued to the Participant, and
in the case of a Group Contract, the Contract and Certificate(s), as
applicable, are issued to the Owner and the Participant(s),
respectively. The Purchase Payment, minus any applicable premium tax or
similar tax (the "Net Purchase Payment"), is credited to the
Accumulation Account. The Company generally confirms receipt of the
Purchase Payment in writing within five business days of receipt. Your
Accumulation Account starts earning interest on the day the Purchase
Payment is applied.
If an Application or a purchase order is not properly completed, we will
attempt to contact the prospective Participant in writing or by
telephone. If the Application or purchase order has not
11
<PAGE>
been properly completed within five business days after we receive it,
we will return the Purchase Payment.
- ALLOCATION OF NET PURCHASE PAYMENT. The Net Purchase Payment is
allocated to the Guarantee Period selected by the Participant in the
Application, from among such Guarantee Periods as may be made available
from time to time by the Company.
ACCUMULATION ACCOUNT
We will establish an Accumulation Account for each Participant and will
maintain the Accumulation Account during the Accumulation Period. The
Accumulation Account is automatically continued in full force during the
lifetime of the Participant and until the Annuity Commencement Date or until the
Accumulation Account is surrendered.
GUARANTEE PERIOD
You may elect one Guarantee Period of one to ten years from among those
made available from time to time by the Company. The Guarantee Period that you
elect determines the Guaranteed Interest Rate. Amounts allocated to a particular
Guarantee Period, less any applicable premium taxes or similar taxes and less
any amounts subsequently withdrawn, earn interest at the Guaranteed Interest
Rate in effect during the Guarantee Period.
The Initial Guarantee Period begins on the date the Net Purchase Payment
is applied. Except for Floating Rate Guarantee Periods, the Initial Guarantee
Period ends when the number of calendar years in the Guarantee Period elected
(measured from the end of the calendar month in which the Net Purchase Payment
was applied) has elapsed. For Floating Rate Guarantee Periods, the Initial
Guarantee Period ends when the number of calendar years in the Floating Rate
Guarantee Period elected (measured from the end of the calendar quarter in which
the Net Purchase Payment was applied) has elapsed. The last day of a Guarantee
Period is the Expiration Date. Subsequent Guarantee Periods begin on the first
day following the Expiration Date. For Floating Rate Guarantee Periods, the
Expiration Date always occurs at the end of a calendar quarter. For other
Guarantee Periods, the Expiration Date always occurs at the end of a calendar
month.
We will mail written notification to the Participant at least 45 and no
more than 75 days prior to the Expiration Date of a Guarantee Period. A new
Guarantee Period of the same duration and type as the previous Guarantee Period
will commence automatically at the end of the previous Guarantee Period, unless
the Company receives, in writing or other manner acceptable to us, prior to the
end of such Guarantee Period, an election by the Participant of a different
Guarantee Period from among those being offered by the Company at such time.
We reserve the right to add or remove Guarantee Periods available for
election by the Participant.
GUARANTEED INTEREST RATES
The Company periodically establishes a Guaranteed Interest Rate for each
Guarantee Period. There is no specific formula for the determination of
Guaranteed Interest Rates. Some of the factors that the Company may consider in
establishing Guaranteed Interest Rates, are:
- general economic trends
- rates of return currently available and anticipated on the Company's
investments
- regulatory and tax requirements
- competitive factors
- sales commissions and administrative and distribution expenses borne by
the Company
Guaranteed Interest Rates will be reflective of expected investment yields
and interest rates available on the types of debt instruments in which the
Company intends to invest. These rates are guaranteed for the duration of the
respective Guarantee Periods. Interest is credited to your Accumulation Account
daily at an
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<PAGE>
annual effective rate of interest. However, any Accumulation Account Value
withdrawn is subject to any applicable withdrawal charge and may be subject to a
Market Value Adjustment (See "Market Value Adjustment").
For a Floating Rate Guarantee Period, the Guaranteed Interest Rate may
change on each Floating Rate Reset Date; however, the Floating Rate Spread used
by the Company to compute the Guaranteed Interest Rate will remain constant
throughout such Floating Rate Guarantee Period. The Company will determine a new
Floating Rate Spread at the beginning of each Floating Rate Guarantee Period.
The Minimum Average Interest Rate will not be less than three percent (3%)
per year, compounded annually. The Participant bears the risk that the
Guaranteed Interest Rate to be credited may not exceed the Minimum Average
Interest Rate for any Guarantee Period.
On any Expiration Date, and on the date on which a Contract is surrendered
in full, the Accumulation Account Value (before the application of any
applicable withdrawal charge and/or Market Value Adjustment) will not be less
than the Net Purchase Payment, less any previous withdrawals, accumulated at an
effective annual rate of interest equal to the Minimum Average Interest Rate.
Subject to the above guarantees, the Guaranteed Interest Rate credited during a
particular calendar quarter to a Floating Rate Guarantee Period may be less than
the Minimum Average Interest Rate.
TRANSFER PRIVILEGE; TELEPHONE TRANSFERS
At any time during the Accumulation Period, you may transfer your entire
Accumulation Account Value to a new Guarantee Period, subject to the conditions
set forth below. No partial transfers are permitted. One transfer per Account
Year is permitted and a minimum of 30 calendar days must elapse between
transfers. No transfer is allowed within 30 days after the Date of Coverage. A
transfer will be subject to the Market Value Adjustment (See "Market Value
Adjustment"), unless the transfer is effective within 30 days prior to an
Expiration Date. The Company reserves the right, in its sole discretion, to
delay the effective date of any transfer for a period not to exceed six months
from the date written request for such transfer is received by the Company.
Under current law, there is no tax liability to you if you make a transfer.
Except as described below, a transfer generally is effective on the date
the request for transfer is received by the Company, if such request is received
in good order by 4:00 p.m. Eastern Time on any date on which the Company is open
for business. The Company generally is open for business on any day that the New
York Stock Exchange is open for business.
If you make a transfer, we will establish a new Guarantee Period for the
amount being transferred. Any such new Guarantee Period will begin on the
effective date of the transfer and end on the new Expiration Date. The amount
transferred will earn interest at the Guaranteed Interest Rate declared by the
Company for the new Guarantee Period as of the effective date of the transfer.
You or your agent of record may request a transfer either in writing or by
telephone. The telephone transfer privilege is made available to Participants
automatically without the Participants' election. The Company employs reasonable
procedures to confirm that instructions communicated by telephone by
Participants and their agents of record are genuine. Such procedures may include
one or more of the following: requesting identifying information, such as name,
Contract number, Social Security Number, and/ or personal identification number;
tape recording all telephone transactions; providing written confirmation
thereof to both the Participant and any agent of record, at the last address of
record; or such other procedures as the Company may deem reasonable. Although
the Company's failure to follow reasonable procedures may result in the
Company's liability for any losses due to unauthorized or fraudulent telephone
transfers, the Company will not be liable for following instructions
communicated by telephone which it reasonably believes to be genuine. The
Participant bears the risk of incurring a loss on actions taken by the Company
in reliance on telephone instructions which the Company reasonably believed to
be genuine.
WAIVERS; REDUCED CHARGES; CREDITS; BONUS GUARANTEED INTEREST RATES
The Company may reduce or waive the withdrawal charge, credit additional
amounts, or grant bonus Guaranteed Interest Rates in situations where selling
and/or maintenance costs associated with the Contracts are reduced, such as the
sale of several Contracts to the same Participant, sales of large Contracts,
13
<PAGE>
and certain group sales. In addition, the Company may waive the withdrawal
charge, credit additional amounts, or grant bonus Guaranteed Interest Rates in
connection with Contracts sold to officers, directors and employees of the
Company or its affiliates, registered representatives and employees of
broker-dealers with a current selling agreement with the Company and their
affiliates, employees of affiliated asset management firms, and persons who have
retired from such positions ("Eligible Employees") and immediate family members
of Eligible Employees. The Company may reduce or waive such charges, credit
additional amounts, or grant bonus Guaranteed Interest Rates on any Contract
where, for example, expenses associated with the sale of the Contract and/or
costs or services associated with administering and maintaining the Contract are
reduced. Eligible Employees and their immediate family members may also purchase
a Contract without regard to minimum Purchase Payment requirements. For other
situations in which withdrawal charges may be waived, see "Withdrawal Charges."
CASH WITHDRAWALS, WITHDRAWAL CHARGES AND MARKET VALUE ADJUSTMENT
CASH WITHDRAWALS
At any time before the Annuity Commencement Date, you may elect to receive
a cash withdrawal payment by filing with the Company at its Annuity Service
Mailing Address, a written election in such form as the Company may require. Any
such election shall specify the amount of the withdrawal and will be effective
on the date that it is received by the Company. The Company reserves the right
to defer the payment of amounts withdrawn for a period not to exceed six months
from the date the Company receives a written request for such withdrawal. The
Company is not required to pay interest on amounts so deferred.
You may request a full surrender or a partial withdrawal. A full surrender
will result in a cash withdrawal payment equal to:
(1) the Accumulation Account Value as of the date the Company receives
the request, plus or minus
(2) any applicable Market Value Adjustment, minus
(3) any applicable withdrawal charge (determined as a percentage of (1)
before any application of a Market Value Adjustment).
Upon a full surrender, the Contract will be canceled and no further benefits
will be payable thereunder. A request for a partial withdrawal (I.E., a payment
of an amount less than that paid under a full surrender) will reduce the
Accumulation Account Value by
(1) the dollar amount of the cash withdrawal amount, plus or minus
(2) any applicable Market Value Adjustment, plus
(3) any applicable withdrawal charge (determined as a percentage of (1)
before any application of a Market Value Adjustment).
If you request a partial withdrawal which would cause your Accumulation Account
Value to be less than $1,000, the partial withdrawal will be treated as a full
surrender.
All cash withdrawals, except those effective within 30 days prior to the
Expiration Date of a Guarantee Period or the withdrawal of the "free withdrawal
amount," will be subject to the Market Value Adjustment described in this
Prospectus (See "Market Value Adjustment"). Any applicable Market Value
Adjustment will be deducted from or added to (as applicable) your Accumulation
Account (or, in the case of a partial withdrawal, the dollar amount of the cash
withdrawal amount) before the application of any withdrawal charge.
Upon request, the Company will advise the Participant of the amounts that
would be payable in the event of a full surrender or partial withdrawal.
Since the Qualified Contracts will be issued in connection with retirement
plans which meet the requirements of Sections 401, 403, 408, and 408A of the
Code, you should refer to the terms of your particular retirement plan for any
limitations or restrictions on cash withdrawals. For special restrictions
14
<PAGE>
applicable to withdrawals from Contracts used with Tax-Sheltered Annuities
established pursuant to Section 403(b) of the Code, see "Section 403(b)
Annuities," below.
WITHDRAWAL CHARGES
We deduct no sales charges from your Purchase Payment. However, we will
assess a withdrawal charge, when applicable, as reimbursement to us for certain
expenses relating to the distribution of the Contracts, including commissions,
costs of preparing sales literature and other promotional costs and acquisition
expenses. A cash withdrawal under either a Qualified Contract or a Non-Qualified
Contract may result in a tax penalty of ten percent (10%) (See "Federal Tax
Status").
You may withdraw a portion of your Accumulation Account Value each year
without incurring any withdrawal charge, and after seven years your entire
Accumulation Account Value may be withdrawn free of any withdrawal charge. In
addition, no withdrawal charge is imposed on amounts withdrawn on or after the
later of:
(a) the end of the Initial Guarantee Period, or
(b) the end of the third Account Year.
No withdrawal charge is assessed upon annuitization (except for period certain
annuities of less than ten years), upon payment of the death benefit (unless the
Participant was age 86 or older on the Date of Coverage), or upon the transfer
of your Accumulation Account Value to a new Guarantee Period.
The withdrawal charge is not assessed on an Accumulation Account
established for the personal account of an employee of the Company or of any of
its affiliates, or of a licensed insurance agent engaged in distributing the
Contracts, and the Company may waive the withdrawal charge with respect to a
Purchase Payment derived from the surrender of other annuity contracts and/or
certificates issued by the Company.
All other full or partial withdrawals are subject to a withdrawal charge
which will be determined on the following basis:
(a) FREE WITHDRAWAL AMOUNT: The free withdrawal amount in any Account
Year is the greater of:
(1) 10% of that Account Year's beginning Accumulation Account Value,
or
(2) any amounts required to be withdrawn to comply with any
mandatory distribution requirements applicable to Qualified
Contracts under federal law.
(b) AMOUNT SUBJECT TO WITHDRAWAL CHARGE: For a partial withdrawal or full
surrender, the amount subject to a withdrawal charge equals the amount
of the partial withdrawal or full surrender, minus any of the current
Account Year's remaining free withdrawal amount.
(c) WITHDRAWAL CHARGE PERCENTAGE: The withdrawal charge percentage varies
according to the number of complete Account Years occurring between
the Account Year in which the Net Purchase Payment was credited to the
Accumulation Account and the Account Year in which it is withdrawn.
(d) AMOUNT OF WITHDRAWAL CHARGE: The amount of the withdrawal charge is
determined by multiplying the amount subject to the withdrawal charge
by the applicable withdrawal charge percentage, in accordance with the
following table:
<TABLE>
<CAPTION>
NUMBER OF COMPLETE WITHDRAWAL CHARGE
ACCOUNT YEARS PERCENTAGE
- -------------------- -------------------
<S> <C>
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 or more 0%
</TABLE>
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<PAGE>
In no event shall the aggregate withdrawal charges assessed against an
Accumulation Account exceed 7% of the Contract's Accumulation Account Value (See
the Appendix for examples of withdrawals, withdrawal charges and the Market
Value Adjustment). The Company may, upon notice to the Owner, modify the
withdrawal charges under a Group Contract, provided that such modification shall
apply only to Accumulation Accounts established after the effective date of such
modification (See "Modification").
SECTION 403(B) ANNUITIES
The Code imposes restrictions on cash withdrawals from Contracts used with
Section 403(b) Annuities. In order for such Contracts to receive tax deferred
treatment, the Contracts must provide that cash withdrawals of amounts
attributable to salary reduction contributions (other than withdrawals of
Accumulation Account Value as of December 31, 1988 ("Pre-1989 Account Value"))
may be made only when the Participant:
(a) attains age 59 1/2,
(b) separates from service with the employer,
(c) dies, or
(d) becomes disabled (within the meaning of Section 72(m)(7) of the
Code).
These restrictions apply to any growth or interest on or after January 1, 1989
on Pre-1989 Account Value, salary reduction contributions made on or after
January 1, 1989, and any growth or interest on such contributions ("Restricted
Account Value").
In cases of financial hardship, withdrawals of Restricted Account Value
are permitted to the extent of contributions. Earnings on contributions cannot
be withdrawn for hardship reasons. While specific rules defining hardship have
not been issued by the Internal Revenue Service, it is expected that to qualify
for a hardship distribution, the Participant must have an immediate and heavy
bona fide financial need and lack other resources reasonably available to
satisfy the need. Hardship withdrawals (as well as certain other premature
withdrawals) will be subject to a 10% tax penalty, in addition to any withdrawal
charge applicable under the Contract (See "Federal Tax Status"). Under certain
circumstances, the 10% tax penalty may not apply if the withdrawal is made to
pay medical expenses. You should consult your tax adviser.
Under the terms of a particular Section 403(b) plan, the Participant may
be entitled to transfer all or a portion of the Accumulation Account Value to
one or more alternative funding options. Participants should consult the
documents governing their plan and the person who administers the plan for
information as to such investment alternatives.
For information on the federal income tax withholding rules that apply to
distributions from Qualified Contracts (including Section 403(b) Annuities), see
"Federal Tax Status."
MARKET VALUE ADJUSTMENT
Any cash withdrawal, other than a withdrawal effective within 30 days
prior to an Expiration Date or the withdrawal of the "free withdrawal amount,"
is subject to a Market Value Adjustment ("MVA"). (For this purpose, transfers,
death benefit distributions and amounts applied to purchase an annuity are
treated as cash withdrawals.)
The MVA reflects the relationship between the Current Rate (as defined
below) for the amount being withdrawn and the Guaranteed Interest Rate
applicable to the amount being withdrawn. It also reflects the time remaining in
the applicable Guarantee Period. Generally, if the Guaranteed Interest Rate is
lower than the applicable Current Rate, then the application of the MVA will
result in a lower payment upon withdrawal. Similarly, if the Guaranteed Interest
Rate is higher than the applicable Current Rate plus the "b factor" referenced
below, the application of the MVA generally will result in a higher payment upon
withdrawal.
The MVA is determined by multiplying the amount being withdrawn, before
deduction of any applicable withdrawal charge, by the market value adjustment
factor.
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<PAGE>
The market value adjustment factor for all Guarantee Periods, except
Floating Rate Guarantee Periods, is:
<TABLE>
<S> <C>
N/12
1 + I
( --------- ) -1
1 + J + b
</TABLE>
where,
I is the Guaranteed Interest Rate currently being credited to the
Accumulation Account,
J is the Guaranteed Interest Rate declared by the Company, as of the date
of the application of the MVA, for current allocations to Guarantee Periods
equal to the balance of the current Guarantee Period, rounded to the next higher
number of complete years (the "Current Rate"),
b is a factor which the Company will determine for a Contract and which
will not exceed 0.25%, and
N is the number of complete months remaining in the current Guarantee
Period.
In determining J, if the Company currently does not offer the applicable
Guarantee Period, then the rate will be determined by linear interpolation of
the current rates for Guarantee Periods that are available. If no Guarantee
Periods are available to perform a linear interpolation, the Company will use an
equitable method and will inform the appropriate state regulatory authority of
such method.
The market value adjustment factor for each Floating Rate Guarantee Period
is:
<TABLE>
<C> <C>
N/12
1 + F - X
( -------------- ) -1
1 + F - Y + b
</TABLE>
where,
F is the Floating Rate currently being used to determine the Guaranteed
Interest Rate for the Floating Rate Guarantee Period;
X is the Floating Rate Spread in effect during the current Floating Rate
Guarantee Period,
Y is the Floating Rate Spread, as of the date of the application of the
MVA, for current allocations to new Floating Rate Guarantee Periods equal to the
balance of the current Floating Rate Guarantee Period, rounded up to the next
higher number of complete years,
b is a factor which the Company will determine for a Contract and which is
set forth on the Contract Specifications Page or the Certificate Specifications
Page (as appropriate) and which will not exceed 0.25%, and
N is the number of complete months remaining in the current Floating Rate
Guarantee Period.
In the determination of Y, if the Company currently does not offer the
applicable Floating Rate Guarantee Period, then the rate will be determined by
using the next longer Floating Rate Guarantee Period that is available. If the
Company currently does not offer a longer Floating Rate Guarantee Period, the
Company will determine, in an equitable manner and in its sole discretion, the
value of Y.
The b factor currently is zero (0).
See the Appendix for examples of the application of the MVA.
DEATH BENEFIT
DEATH BENEFIT PROVIDED BY THE CONTRACT
- If the Participant dies while the Contract is in effect and prior to
the Annuity Commencement Date, the Company will, upon receipt of Due
Proof of Death of the Participant, pay a death benefit to the
Beneficiary.
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<PAGE>
- If the designated Beneficiary does not survive the Participant, the
Company will, upon receipt of Due Proof of Death of the Participant
and/or the Beneficiary, if applicable, pay the death benefit in one sum
to the estate of the deceased Participant.
- If the Annuitant dies on or after the Annuity Commencement Date, no
death benefit will be payable under the Contract, except as may be
provided under the elected Annuity Option.
- If the Participant is not a natural person, the Annuitant is considered
the "Participant" for purposes of the death benefit provided by the
Contract.
ELECTION AND EFFECTIVE DATE OF ELECTION
During your lifetime and prior to the Annuity Commencement Date, you may
elect to have the death benefit applied under one or more of the Annuity Options
available under the Contract to effect a Fixed Annuity for the Beneficiary as
Payee after your death. The Annuity Option chosen must comply with Section 72(s)
of the Code.
If no method of settlement of the death benefit is in effect on the date
of your death, the Beneficiary may elect either: (a) to receive the death
benefit in the form of a single cash payment, or (b) to have the death benefit
applied under one or more of the Annuity Options (on the Annuity Commencement
Date described under "Payment of Death Benefit") to effect a Fixed Annuity for
the Beneficiary as Payee. Either election may be made, or subsequently revoked,
by filing with the Company at its Annuity Service Mailing Address, a written
election or revocation of an election in such form as the Company may require.
Any election or revocation of an election of a method of settlement of the death
benefit by the Participant will become effective on the date the Company
receives it. For the purposes of the "Payment of Death Benefit" and "Amount of
Death Benefit" sections of this Prospectus, any election by the Participant of a
method of settlement of the death benefit which is in effect on the date of the
Participant's death will be deemed effective on the date the Company receives
Due Proof of Death of the Participant.
Any election of a method of settlement of the death benefit by the
Beneficiary will become effective on the later of: (a) the date the election is
received by the Company, or (b) the date Due Proof of Death of the Participant
is received by the Company. If an election by the Beneficiary is not received by
the Company within 60 days following the date Due Proof of Death of the
Participant is received by the Company, the Beneficiary will be deemed to have
elected a cash payment as of the last day of the 60 day period.
In all cases, no Participant or Beneficiary shall be entitled to exercise
any rights that would adversely affect the treatment of the Contract as an
annuity contract under the Code. (See "Death of Participant").
DEATH OF PARTICIPANT
If a Participant under a Non-Qualified Contract dies prior to the Annuity
Commencement Date, the death benefit must be distributed to the "designated
beneficiary" (as defined below) either: (a) within five years after the date of
death of the Participant, or (b) as an annuity over some period not greater than
the life or expected life of the designated beneficiary, with annuity payments
beginning within one year after the date of death of the Participant. For this
purpose (and for purposes of Section 72(s) of the Code), the person named as
Beneficiary shall be considered the designated beneficiary, and if no person
then living has been so named, then the Annuitant shall automatically be the
designated beneficiary. If the designated beneficiary is the surviving spouse of
the deceased Participant, the spouse can elect to continue the Contract in the
spouse's own name as Participant, in which case these mandatory distribution
requirements will apply on the spouse's death.
If the Payee dies on or after the Annuity Commencement Date and before the
entire Accumulation Account has been distributed, the remaining portion of such
Accumulation Account, if any, must be distributed at least as rapidly as the
method of distribution then in effect.
In any case where a non-natural person is the holder of the Contract for
the purposes of Section 72(s) of the Code, (a) the distribution requirements
described above shall apply upon the death of any Annuitant, and (b) a change in
any Annuitant shall be treated as the death of an Annuitant.
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<PAGE>
In no cases shall a Participant or Beneficiary be entitled to exercise any
rights that would adversely affect the treatment of the Contract as an annuity
contract under the Code.
Any distributions upon the death of a Participant under a Qualified
Contract will be subject to the laws and regulations governing the particular
retirement or deferred compensation plan in connection with which the Qualified
Contract was issued.
PAYMENT OF DEATH BENEFIT
If the Participant has elected settlement under one or more of the Annuity
Options available under the Contract:
- the Annuity Commencement Date will be the first day of the calendar
month following the Death Benefit Date, and
- the Accumulation Account will be maintained in effect until the Annuity
Commencement Date.
If the death benefit is to be paid in cash to the Beneficiary, payment
will be made within seven calendar days of the Death Benefit Date.
AMOUNT OF DEATH BENEFIT
The death benefit is determined by the Company as of the Death Benefit
Date.
- If the Participant was age 85 or less on the Date of Coverage, the
death benefit equals the greater of:
(1) the Accumulation Account Value on the Death Benefit Date; or
(2) the amount which would have been payable in the event of a full
surrender of the Contract on the Death Benefit Date.
For the purposes of determining the amount payable under (2), the
Accumulation Account Value will be adjusted by the difference between
(2) and (1).
- If the Participant was age 86 or older on the Date of Coverage, the
death benefit is equal to the amount which would have been payable in
the event of a full surrender of the Contract on the Death Benefit
Date. The Accumulation Account Value will be adjusted to equal such
amount.
ANNUITY PROVISIONS
ANNUITY COMMENCEMENT DATE
Annuity payments begin on the Annuity Commencement Date which you select.
The Annuity Commencement Date may not be sooner than the first day of the second
calendar month following the Date of Coverage. If no such date has been
specified, the Annuity Commencement Date will be the first day of the first
month following the Annuitant's 90th birthday.
If more than one person is named as Annuitant, due to the designation of a
Co-Annuitant, the Annuity Commencement Date will be no later than the first day
of the first month following the 90th birthday of the youngest of the named
Annuitants. In most situations, current law requires that the Annuity
Commencement Date under a Qualified Contract be no later than April 1 following
the year the Annuitant reaches age 70 1/2 (or, for Qualified Contracts other
than IRAs, no later than April 1 following the year the Annuitant retires, if
later than the year the Annuitant reaches age 70 1/2). The terms of your
particular retirement plan may impose additional limitations.
You may change your Annuity Commencement Date from time to time by written
notice to the Company in such form as the Company may require, provided that the
Company receives notice of each change at least 30 days prior to the then
current Annuity Commencement Date and the new Annuity Commencement Date is a
date which is:
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<PAGE>
(a) at least 30 days after the date notice of the change is received
by the Company;
(b) the first day of a month; and
(c) not later than the first day of the first month following the
Annuitant's 90th birthday, unless otherwise restricted, in the
case of a Qualified Contract, by the particular retirement plan
or by applicable law, or unless waived by the Company.
The Annuity Commencement Date may also be changed by your election of an
Annuity Option (See "Death Benefit").
On the Annuity Commencement Date, your Accumulation Account will be
canceled and its adjusted value will be applied to provide an annuity under one
or more of the options described under the heading "Annuity Options," below. No
withdrawal charge will be imposed upon amounts applied to purchase an annuity,
except that period certain annuities of less than ten years may incur a
withdrawal charge. A Market Value Adjustment may apply (See "Determination of
Annuity Payments").
No payments may be requested under the Contract's cash withdrawal
provisions on or after the Annuity Commencement Date and no cash withdrawal will
be permitted except as may be available under the Annuity Option elected by you.
Since the Contracts may be issued in connection with retirement plans
which meet the requirements of Sections 401, 403, 408, or 408A of the Code, as
well as certain non-qualified plans, you should refer to the terms of your
particular retirement plan for any limitations or restrictions on the Annuity
Commencement Date.
ELECTION/CHANGE OF ANNUITY OPTION
During the lifetime of the Participant and prior to the Annuity
Commencement Date, the Participant may elect to one or more of the Annuity
Options described below, or such other settlement option as may be agreed to by
the Company, for the Annuitant as Payee. The Participant may also change any
election, but written notice of any election or change of election must be
received by the Company at least 30 days prior to the Annuity Commencement Date.
If no election is in effect on the 30th day before the Annuity Commencement
Date, Annuity Option B, for a Life Annuity with 120 monthly payments certain,
will be determined to have been elected. If there is no election of a sole
Annuitant in effect on the 30th day before the Annuity Commencement Date, the
person designated as Co-Annuitant will be the Payee under the applicable Annuity
Option.
Annuity Options may also be elected by the Participant or the Beneficiary
(See "Death Benefit").
You should refer to the terms of your particular retirement plan and any
applicable legislation for any limitations or restrictions on the Annuity
Options which may be elected.
You should be aware that no change of Annuity Option is permitted after
the Annuity Commencement Date.
ANNUITY OPTIONS
No lump sum settlement option is available under the Contract. You may
surrender your Contract prior to the Annuity Commencement Date. Upon surrender,
any applicable surrender charge and Market Value Adjustment may will be deducted
from the cash withdrawal payment and a Market Value Adjustment, if applicable,
will be applied.
ANNUITY OPTION A. LIFE ANNUITY: Monthly payments during the lifetime of
the Payee. This option offers a higher level of monthly payments than Annuity
Options B or C because no further payments are payable after the death of the
Payee and there is no provision for a death benefit payable to a Beneficiary.
ANNUITY OPTION B. LIFE ANNUITY WITH 60, 120, 180 OR 240 MONTHLY PAYMENTS
CERTAIN: Monthly payments during the lifetime of the Payee and in any event for
60, 120, 180 or 240 months certain, as elected. The election of a longer period
certain results in smaller monthly payments than would be the case if a shorter
period certain were elected. In the event of the death of the Payee under this
option, the Contract provides
20
<PAGE>
that the Company will pay any remaining payments to the Payee's designated
beneficiary. If there is no designated beneficiary entitled to the remaining
payments then living, the discounted value of the remaining payments, if any,
will be calculated and paid in one sum to the deceased Payee's estate. In
addition, any Beneficiary who becomes entitled to any remaining payments under
this option may elect to receive the discounted value of the amounts due under
this option in one sum. In the event of the death of the Beneficiary who has
become entitled to receive any remaining payments under an Annuity Option, the
Company will pay the discounted value of such remaining payments, in one sum, to
the deceased Beneficiary's estate.
ANNUITY OPTION C. JOINT AND SURVIVOR ANNUITY: Monthly payments payable
during the joint lifetime of the Payee and a designated second person and during
the lifetime of the survivor. During the lifetime of the survivor, monthly
payments will be determined using the percentage chosen at the time of election
of this option.
ANNUITY OPTION D. MONTHLY PAYMENTS FOR A SPECIFIED PERIOD CERTAIN: Monthly
payments for a specified period of time (at least five years but not exceeding
30 years), as elected. In the event of the death of the Payee under this option,
the Contract provides that, as described under Annuity Option B above, in
certain circumstances the discounted value of the remaining payments, if any,
will be calculated and paid in one sum.
DETERMINATION OF ANNUITY PAYMENTS
On the Annuity Commencement Date the Accumulation Account will be canceled
and its adjusted value will be applied to provide a Fixed Annuity. The adjusted
value will equal:
(1) the Accumulation Account Value on the date immediately preceding
the Annuity Commencement Date, plus or minus
(2) any applicable Market Value Adjustment, and minus
(3) any applicable premium taxes or similar taxes.
Amounts applied to provide period certain annuities of less than ten years
under Annuity Options B and D will also be reduced by any applicable withdrawal
charges.
If the amount to be applied under any annuity option is less than $10,000,
or if the first annuity payment payable in accordance with such option is less
than $50, the Company will pay the amount to be applied in a single payment to
the Payee.
The dollar amount of each fixed annuity payment will be determined by the
Company in accordance with the Annuity Payment Rates found in the Contract. Such
Annuity Payments Rates are based on the Minimum Average Interest Rate, or, if
more favorable to the Payee(s), in accordance with the Annuity Payment Rates
published by the Company and in use on the Annuity Commencement Date.
ANNUITY PAYMENT RATES
The Contract contains Annuity Payment Rates for each Annuity Option. The
rates show, for each $1,000 applied, the dollar amount of the monthly fixed
annuity payment, when this payment is based on the Minimum Average Interest
Rate. The Company may change these rates for any Accumulation Accounts
established after the effective date of such change (See "Modification").
The Contract also describes the method of determining the adjusted age of
the Payee. The mortality table used in determining the annuity payment rates for
Annuity Options A, B and C is the 1983 Individual Annuitant Mortality Table.
Participants should be aware that annuity payment rates may vary according
to the Annuity Option elected and the adjusted age of the Payee.
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<PAGE>
OTHER CONTRACT PROVISIONS
DESIGNATION AND CHANGE OF BENEFICIARY
The Beneficiary designation made by you will remain in effect until you
change it.
Subject to the rights of an irrevocably designated Beneficiary, you may
change or revoke the designation of a Beneficiary. Any such change or revocation
must be filed with the Company and shall be in such form as the Company may
require. The change or revocation of a Beneficiary designation will not be
binding upon the Company until the Company receives it. When the Company
receives a change or revocation of a Beneficiary, such change or revocation will
be effective as of the date on which you signed it; however, the Company is not
liable for any payment made or action taken by the Company before the Company
received the change or revocation.
You should refer to the terms of your particular retirement plan and any
applicable legislation for any restrictions on the Beneficiary designation.
EXERCISE OF CONTRACT RIGHTS
An Individual Contract shall belong to the individual Participant to whom
the Contract is issued. A Group Contract shall belong to the Owner. In the case
of a Group Contract, all Contract rights and privileges may be expressly
reserved by the Owner, failing which, each Participant shall be entitled to
exercise such rights and privileges. In any case, such rights and privileges can
be exercised without the consent of the Beneficiary (other than an irrevocably
designated Beneficiary) or any other person. Such rights and privileges may be
exercised only during the Participant's lifetime and prior to the Annuity
Commencement Date, except as otherwise provided in the Contract.
The Annuitant becomes the Payee on and after the Annuity Commencement
Date. The Beneficiary becomes the Payee on the death of the Participant prior to
the Annuity Commencement Date or upon the death of the Annuitant after the
Annuity Commencement Date. Such Payees may thereafter exercise such rights and
privileges, if any, of ownership which continue under the Contract.
CHANGE OF OWNERSHIP
Ownership of a Qualified Contract may only be transferred to:
(a) the Annuitant;
(b) a trustee or successor trustee of a pension or profit sharing
trust which is qualified under Section 401 of the Code;
(c) the employer of the Annuitant, provided that the Qualified
Contract after transfer is maintained under the terms of a
retirement plan qualified under Section 403(a) of the Code for
the benefit of the Annuitant;
(d) the trustee of an individual retirement account plan qualified
under Section 408 of the Code for the benefit of the Participants
under a Group Contract; or
(e) as otherwise permitted from time to time by laws and regulations
governing the retirement or deferred compensation plans for which
a Qualified Contract may be issued.
Subject to the foregoing, a Qualified Contract may not be sold, assigned,
transferred, discounted or pledged as collateral for a loan or as security for
the performance of an obligation or for any other purpose to any person other
than the Company.
Ownership of a Non-Qualified Contract may be changed prior to the Annuity
Commencement Date by filing written notification with the Company at its Annuity
Service Mailing Address; and each Participant, in like manner, may change the
ownership interest in a Contract. When such notification is received by the
Company, the change will be effective as of the date on which the request for
change was signed by the Owner or Participant, as appropriate, but the change
will be without prejudice to the Company on account of any payment made or any
action taken by the Company prior to receiving the change.
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<PAGE>
A change of ownership will not be binding upon the Company until the
Company receives written notification of such change.
PERIODIC STATEMENTS
During the Accumulation Period, the Company will mail to you, at least
once during each Account Year, a statement showing the value of your
Accumulation Account. Such statement shall be accurate as of a date not more
than two months previous to the mailing date. The Company will also mail such
other statements reflecting transactions in your Accumulation Account as may be
required by law.
These periodic statements contain important information concerning any
transactions in your Accumulation Account. It is your obligation to review each
statement carefully. If you find any error or discrepancy in the information
presented therein, you should report it to the Company, at the address or
telephone number provided on the statement, within 60 days of the date of such
statement. Unless the Company receives notice of any such error or discrepancy
from you within such 60 day period, the Company may not be responsible for
correcting the error.
MODIFICATION
Upon notice to you, the Company may modify a Contract if such
modification:
(i) is necessary to ensure compliance with applicable laws or
regulations to which the Company is subject; or
(ii) is necessary to assure continued qualification of the Contract
under the Code or other federal or state laws relating to
retirement annuities or annuity contracts; or
(iii) provides additional fixed accumulation options; or
(iv) is otherwise in the best interests of Owners or Participants, as
applicable.
The Company will not modify the Contract without first notifying the
Participant, in the case of an Individual Contract, and the Owner and
Participant(s), in the case of a Group Contract (or the Payee(s) during the
annuity period). In the event of any such modification, the Company may make
appropriate endorsement in the Contract to reflect the modification.
In addition, the Company may modify a Group Contract to impose a charge
for maintenance of the Contract or to change the withdrawal charges, the tables
used in determining the amount of the guaranteed annuity payments and the
formula used to calculate the Market Value Adjustment, provided that the
modification shall apply only to Accumulation Accounts established after the
effective date of such modification. In order to exercise its modification
rights in these particular instances, the Company will provide the Owner with
written notice of the modification. The notice shall specify the effective date
of the modification, which must be at least 60 days following the date on which
the Company mails the notice of modification. All of the charges and the annuity
tables which are provided in the Group Contract prior to any such modification
will remain in effect permanently, unless improved by the Company, with respect
to Accumulation Accounts established prior to the effective date of such
modification.
DISCONTINUANCE OF NEW PARTICIPANTS
The Company may limit or discontinue the acceptance of new Applications
and the issuance of new Certificates under a Group Contract upon 30 days' prior
written notice to the Owner. Such limitation or discontinuance shall have no
effect on rights or benefits with respect to any Accumulation Accounts
established under such Group Contract prior to the effective date of the
limitation or discontinuance.
RIGHT TO RETURN
If you are not satisfied with your Contract, you may return the Contract
to the Annuity Service Mailing Address, within ten days after it was delivered
to you. Generally, upon receiving the returned Contract, the Company will cancel
it and your Accumulation Account Value at the end of the Valuation Period during
which the Contract was received by the Company will be refunded to you. However,
if applicable state law so
23
<PAGE>
requires, the "free look" period may be greater than ten days, the Purchase
Payment may be refunded, and alternative methods of returning the Contract may
be acceptable.
With respect to Individual Retirement Accounts, the Code requires the
Company to furnish a Participant establishing an Individual Retirement Account
("IRA") with a disclosure statement containing certain information about the
Contract and applicable legal requirements. This statement must be furnished on
or before the date the IRA is established. If the Participant is furnished with
such disclosure statement before the seventh day preceding the date the IRA is
established, the Participant will not have any right of revocation. If the
disclosure statement is furnished after the seventh day preceding the
establishment of the IRA, then the Participant may give a notice of revocation
to the Company at any time within seven days after the date on which the
Contract becomes effective. Upon such revocation, the Company will refund the
Purchase Payment made by the Participant. This right of revocation is in
addition to the return privilege set forth in the preceding paragraph. The
Company will allow a Participant establishing an IRA a "ten day free-look,"
notwithstanding the provisions of the Code.
PREMIUM TAXES
A deduction, when applicable, is made for premium taxes or similar state
or local taxes. The amount of such applicable tax varies by jurisdiction and
may, from time to time, be changed by the legislature or other authority. In
many jurisdictions, there is no premium tax at all. The Company believes that
such premium taxes or similar taxes currently range from 0% to 3.5%. For more
complete information, you should consult a tax adviser. The Company's current
policy is to deduct any applicable tax from the amount applied to provide an
annuity at the time annuity payments commence. However, the Company reserves the
right to deduct such taxes on or after the date they are incurred.
FEDERAL TAX STATUS
INTRODUCTION
The Contract is designed for use by personal retirement plans and
employer, association and other group retirement plans under the provisions of
Sections 401 (including Section 401(k)), 403, 408(b), 408(c), 408(k), 408(p) and
408A of the Internal Revenue Code (the "Code"), as well as non-qualified
retirement plans. The ultimate effect of federal income taxes may depend upon
the type of retirement plan for which the Contract is purchased, among other
factors. The following discussion is general in nature, is based upon the
Company's understanding of current federal income tax laws, and is not intended
as tax advice. Congress may enact legislation affecting the tax treatment of
annuity contracts, which could be applied retroactively to Contracts purchased
before the date of enactment. Also, because the Code is not in force in the
Commonwealth of Puerto Rico, some references in this discussion will not apply
to Contracts issued in Puerto Rico. Any person contemplating the purchase of a
Contract should consult a qualified tax adviser.
Participants should be aware that the Company does not make any guarantee
regarding the federal, state or local tax status of any Contract or any
transaction involving the Contracts.
TAX TREATMENT OF THE COMPANY
The Company is taxed as a life insurance company under Subchapter L of the
Code.
TAXATION OF ANNUITIES IN GENERAL
The Purchase Payment made under a Non-Qualified Contract is not deductible
from the Participant's income for federal income tax purposes. Participants
under Qualified Contracts should consult a tax adviser regarding the tax
treatment of Purchase Payments.
Generally, no taxes are imposed on the increase in the value of a Contract
until a distribution occurs, either as an annuity payment or as a cash
withdrawal or lump-sum payment prior to the Annuity Commencement Date. However,
corporate Owners and Participants and other Owners and Participants that are not
natural persons are subject to taxation on the annual increase in value of a
Non-Qualified Contract, unless the non-natural person holds the Contract as
agent for a natural person (for example, a bank holding a Contract as trustee
under a trust agreement). The taxation of annuities held by non-natural persons
does not
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<PAGE>
apply to earnings accumulated under an "immediate annuity," which the Code
defines as a single premium contract with an annuity commencement date within
one year of the date of purchase. Also, the Internal Revenue Service might
assert that Owners or Participants under both Qualified Contracts and
Non-Qualified Contracts annually receive, and are subject to tax on, a deemed
distribution equal to the cost of any life insurance benefit provided by the
Contracts.
The following discussion applies to both Individual Contracts and Group
Contracts. Because the Code is unclear in its application to a group annuity
contract where the owner is distinct from the individuals who receive the
contract benefits, the discussion as applied to the Group Contracts is the
Company's best understanding of the operation of the Code in the context of
group contracts. However, Owners and Participants should consult a qualified tax
adviser.
Under a Non-Qualified Contract, a partial cash withdrawal (I.E., a
withdrawal of less than the entire Accumulation Account Value) before the
Annuity Commencement Date is treated first as a withdrawal from the increase in
the Accumulation Account Value, rather than as a return of the Purchase Payment.
The amount of the withdrawal allocable to this increase is includible in the
Participant's income and is subject to tax at ordinary income rates. If part or
all of an Accumulation Account Value is assigned or pledged as collateral for a
loan, the amount assigned or pledged must be treated as if it were withdrawn
from the Contract.
In the case of annuity payments under a Non-Qualified Contract occuring
after the Annuity Commencement Date, a portion of each payment is treated as a
nontaxable return of the Purchase Payment. The nontaxable portion is determined
by applying an "exclusion ratio" to each annuity payment. An exclusion ratio, in
general, is the ratio that the total amount the Participant paid for the
Contract bears to the Payee's expected return under the Contract. The remainder
of the payment is taxable at ordinary income rates.
The total amount that a Payee may exclude from income through application
of the "exclusion ratio" is limited to the amount the Participant paid for the
Contract. If the Annuitant survives for his full life expectancy, so that the
Payee recovers the entire amount paid for the Contract, any subsequent annuity
payments will be fully taxable as income. Conversely, if the Annuitant dies
before the Payee recovers the entire amount paid, the Payee will be allowed a
deduction for the unrecovered amount of the Purchase Payment.
Taxable cash withdrawals and lump-sum payments from Non-Qualified
Contracts may be subject to a penalty tax equal to 10% of the amount treated as
taxable income. This 10% penalty also may apply to certain annuity payments.
This penalty will not apply in certain circumstances (such as where the
distribution is made upon the death of the Participant). The withdrawal penalty
also does not apply to distributions under an immediate annuity (as defined
above).
In the case of Qualified Contracts, distributions generally are taxable
and distributions made prior to age 59 1/2 are subject to a 10% penalty tax,
although this penalty tax will not apply in certain circumstances. Certain
distributions, known as "eligible rollover distributions," if rolled over to
certain other qualified retirement plans (either directly or after being
distributed to the Participant or Payee), are not taxable until distributed from
the plan to which they are rolled over. In general, an "eligible rollover
distribution" is any taxable distribution other than a hardship distribution or
a distribution that is part of a series of payments made for life or for a
specified period of ten years or more.
Owners, Participants, Annuitants, Payees and Beneficiaries should seek
qualified advice about the tax consequences of distributions, withdrawals,
rollovers and payments under the retirement plans in connection with which the
Contracts are purchased.
If the Participant under a Non-Qualified Contract dies, the value of the
Contract generally must be distributed within a specified period (See "Death
Benefit"). For Contracts owned by non-natural persons, a change in the Annuitant
is treated as the death of the Participant.
A Participant under Qualified Contract should refer to the terms of the
applicable retirement plan and consult a tax adviser regarding distribution
requirements upon the death of the Participant.
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<PAGE>
The transfer of a Non-Qualified Contract by gift (other than to the
Participant's spouse) is treated as the receipt by the Participant of income in
an amount equal to the Accumulation Account Value minus the total amount paid
for the Contract.
The Company will withhold and remit to the U.S. Government a part of the
taxable portion of each distribution made under a Non-Qualified Contract or
under a Qualified Contract issued for use with an individual retirement account,
unless the Participant or Payee provides his or her taxpayer identification
number to the Company and notifies the Company (in the manner prescribed) before
the time of the distribution that he or she chooses not to have any amounts
withheld.
In the case of distributions from a Qualified Contract (other than
distributions from a Contract issued for use with an individual retirement
account), the Company or the plan administrator is required to withhold and
remit to the U.S. Government 20% of each distribution that is an eligible
rollover distribution (as defined above), unless the Participant or Payee elects
to make a direct rollover of the distribution to another qualified retirement
plan that is eligible to receive the rollover. If a distribution from a
Qualified Contract is not an eligible rollover distribution, then the
Participant or Payee can choose not to have amounts withheld as described above
for Non-Qualified Contracts and Qualified Contracts issued for use with
individual retirement accounts.
Amounts withheld from any distribution may be credited against the
Participant's or Payee's federal income tax liability for the year of the
distribution.
THE FOLLOWING INFORMATION SHOULD BE CONSIDERED ONLY WHEN AN IMMEDIATE
ANNUITY CONTRACT AND A DEFERRED ANNUITY CONTRACT ARE PURCHASED TOGETHER: The
Company understands that the Treasury Department is in the process of
reconsidering the tax treatment of annuity payments under an immediate annuity
contract (as defined above) purchased together with a deferred annuity contract.
The Company believes that any adverse change in the existing tax treatment of
such immediate annuity contracts is likely to be prospective, that is, it would
not apply to contracts issued before such a change is announced. However, there
can be no assurance that any such change, if adopted, would not be applied
retroactively.
QUALIFIED RETIREMENT PLANS
The Qualified Contracts are designed for use with several types of
qualified retirement plans. The tax rules applicable to participants in such
qualified retirement plans vary according to the type of plan and its terms and
conditions. Therefore, this discussion does not attempt to provide more than
general information about the use of the Qualified Contracts with the various
types of qualified retirement plans. Participants under such plans as well as
Owners, Annuitants, Payees and Beneficiaries are cautioned that the rights of
any person to any benefits under these plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Qualified Contracts issued in connection therewith. These terms and
conditions may include restrictions on, among other things, ownership,
transferability, assignability, contributions and distributions. Any person
contemplating the purchase of a Qualified Contract should consult a qualified
tax adviser. In addition, Owners, Participants, Payees, Beneficiaries and
administrators of qualified retirement plans should consider and consult their
tax advisers concerning whether the death benefit payable under the Contract
affects the qualified status of their retirement plan. Following are brief
descriptions of various types of qualified retirement plans and the use of the
Qualified Contracts in connection therewith.
PENSION AND PROFIT-SHARING PLANS
Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of retirement plans for
employees. The Tax Equity and Fiscal Responsibility Act of 1982 eliminated most
differences between qualified retirement plans of corporations and those of
self-employed individuals. The Contract may be purchased by those who would have
been covered under the rules governing old H.R. 10 (Keogh) Plans, as well as by
corporate plans. Such retirement plans may permit the purchase of Qualified
Contracts to provide benefits under the plans. Employers intending to use the
Qualified Contracts in connection with such plans should seek qualified advice
in connection therewith.
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<PAGE>
TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees
of certain types of charitable, educational and scientific organizations
specified in Section 501(c)(3) of the Code to purchase annuity contracts and,
subject to certain limitations, exclude the amount of purchase payments from
gross income for tax purposes. Such annuity contracts are commonly referred to
as "Tax-Sheltered Annuities." Purchasers of the Qualified Contracts for such
purposes should seek qualified advice as to eligibility, limitations on
permissible amounts of Purchase Payments and tax consequences of distributions
(See "Section 403(b) Annuities").
INDIVIDUAL RETIREMENT ACCOUNTS
Sections 219 and 408 of the Code permit eligible individuals to contribute
to an individual retirement program (including Simplified Employee Pension
Plans, Employer/Association of Employees Established Individual Retirement
Account Trusts, and Simple Retirement Accounts) known as an Individual
Retirement Account ("IRA"). These IRAs are subject to limitations on the amount
that may be contributed, the persons who may be eligible, and the time when
distributions may commence. In addition, certain distributions from some other
types of retirement plans may be placed on a tax-deferred basis in an IRA.
Sales of the Contract for use with IRAs may be subject to special
requirements imposed by the Internal Revenue Service. The Company will provide
purchasers of Contracts to be used in connection with IRAs with such
supplementary information as may be required by the Internal Revenue Service or
other appropriate agency. Additionally, purchasers of Contracts to be used in
connection with IRAs will have the right to revoke their Contracts under certain
circumstances (See "Right to Return Contract").
ROTH IRAS
Section 408A of the Code permits an individual to contribute to an
individual retirement program called a Roth IRA. Unlike contributions to a
regular IRA under Section 408 of the Code, contributions to a Roth IRA are not
made on tax-deferred basis. However, distributions are tax-free, provided
certain requirements are satisfied. Like regular IRAs, Roth IRAs are subject to
limitations on the amount that may be contributed and the time when
distributions may commence. A regular IRA may be converted into a Roth IRA and
the resulting income may be spread over four years if the conversion occurs
before January 1, 1999. The Company will provide to purchasers of the Contracts
to be used in connection with Roth IRAs such supplementary information as may be
required by the Internal Revenue Service or other appropriate agency.
DISTRIBUTION OF THE CONTRACTS
The Contracts are offered by the Company on a continuous basis. The
Contracts are sold by licensed insurance agents in those states where the
Contracts may be lawfully sold. The agents are registered representatives of
broker-dealers registered under the Securities Exchange Act of 1934. The
broker-dealers are members of the National Association of Securities Dealers,
Inc. and have entered into distribution agreements with the Company and the
General Distributor, Clarendon Insurance Agency, Inc. ("Clarendon"), One Sun
Life Executive Park, Wellesley Hills, Massachusetts 02481. Clarendon is a
wholly-owned subsidiary of the Company and is registered as a broker-dealer with
the Securities and Exchange Commission under the Securities Exchange Act of
1934. Clarendon is a member of the National Association of Securities Dealers,
Inc. and acts as the general distributor of certain other annuity contracts
issued by the Company and its wholly-owned subsidiary, Sun Life Insurance and
Annuity Company of New York, and variable life insurance contracts issued by the
Company.
Commissions and other distribution compensation with respect to the
Contracts will be paid by the Company and will not be more than 5.75% of the
Purchase Payment. Commissions will not be paid with respect to Accumulation
Accounts established for the personal account of employees of the Company or any
of its affiliates, or of persons engaged in the distribution of the Contracts,
or of immediate family members of such employees or persons. In addition,
commissions may be waived or reduced in connection with certain transactions
(See "Waivers, Reduced Charges; Credits; Bonus Guaranteed Interest Rates").
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In addition to commissions, the Company may provide additional promotional
incentives, in the form of cash or other compensation. In some instances, these
incentives may be offered only to certain broker-dealers that sell or are
expected to sell during specified time periods certain minimum amounts of the
Contracts or other contracts offered by the Company.
ADDITIONAL INFORMATION ABOUT THE COMPANY
GENERAL
The Company is engaged in the sale of individual variable life insurance
and individual and group fixed and variable annuities. These products are sold
in both the tax qualified and non-tax qualified markets and 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. See notes to financial statements
for industry segment information.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Individual insurance products $ 155,907 $ 204,670 $ 207,845
Retirement products $ 2,194,895 $ 2,204,693 $ 1,834,327
------------ ------------ ------------
$ 2,350,802 $ 2,409,363 $ 2,042,172
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the statutory financial statements of the Company and notes
thereto included in this Prospectus beginning on page 45.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues
Premiums, annuity deposits and other revenue $ 2,581,463 $ 2,623,629 $ 2,215,322 $ 1,883,901 $ 1,997,525
Net investment income and realized gains 187,208 298,121 310,172 315,966 312,583
----------- ----------- ----------- ----------- -----------
2,768,671 2,921,750 2,525,494 2,199,867 2,310,108
----------- ----------- ----------- ----------- -----------
Benefits and expenses
Policyholder benefits 2,416,950 2,579,104 2,232,528 1,995,208 2,102,290
Other expenses 214,607 206,065 175,342 150,937 186,892
----------- ----------- ----------- ----------- -----------
2,631,557 2,785,169 2,407,870 2,146,145 2,289,182
----------- ----------- ----------- ----------- -----------
Operating gain 137,114 136,581 117,624 53,722 20,926
Federal income tax expense (benefit) 11,713 7,339 (5,400) 17,807 19,469
----------- ----------- ----------- ----------- -----------
Net income $ 125,401 $ 129,242 $ 123,024 $ 35,915 $ 1,457
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Assets $16,902,621 $15,925,357 $13,621,952 $12,359,683 $10,117,822
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Surplus notes $ 565,000 $ 565,000 $ 315,000 $ 650,000 $ 335,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</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 in Management's Discussion and Analysis of Financial Conditions
and Results of Operations.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAUTIONARY STATEMENT
This Prospectus includes forward looking statements by the Company under
the Private Securities Litigation Reform Act of 1995. These statements are not
matters of historical fact; they relate to such topics as future product sales,
Year 2000 compliance, volume growth, market share, market risk and financial
goals. It is important to understand that these forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those that the statements anticipate. These risks and
uncertainties may concern, among other things:
- The Company's ability to identify and address Year 2000 issues
successfully, in a timely manner, and at reasonable cost. They also may
concern the ability of the Company's vendors, suppliers, other service
providers, and customers to successfully address their own Year 2000
issues in a timely manner.
- Heightened competition, particularly in terms of price, product
features, and distribution capability, which could constrain the
Company's growth and profitability.
- Changes in interest rates and market conditions.
- Regulatory and legislative developments.
- Developments in consumer preferences and behavior patterns.
RESULTS OF OPERATIONS
NET INCOME
Net income decreased by $3.8 million to $125.4 million in 1998, reflecting
an increase of $22.5 million in income from operations and a decrease of $26.3
million in net realized capital gains. (In the following discussion, "income
from operations" refers to the statutory statement of operations line item, net
gain from operations after dividends to policyholders and federal income tax and
before realized capital gains.)
Income from operations increased from $102.5 million in 1997 to $125.0
million in 1998, mainly as a result of the following factors:
- A $16.7 million increase, to $31.4 million in 1998, in the income from
operations from the Company's Retirement Products and Services segment.
(This is discussed in the "Retirement Products and Services Segment"
section below.)
- The effect of terminating certain reinsurance agreements with the
Company's ultimate parent. The termination of these agreements was the
predominant factor in the $71.1 million increase in income from
operations for the Company's Individual Insurance segment.
- The effects of the Company's December 1997 reorganization (described in
the "Corporate Segment" section below), as a result of which
Massachusetts Financial Services Company ("MFS") was no longer a
subsidiary of the Company. As a result of this reorganization,
dividends from subsidiaries were lower in 1998 than in 1997 and certain
subsidiary tax benefits were no longer available to the Company. Also
affecting income from operations for the Corporate segment in 1998 was
that income earned on the proceeds of a December 1997 issuance of a
$250 million surplus note was lower than the related interest expense.
Net realized capital gains decreased from $26.7 million in 1997 to $0.4
million in 1998. This change also reflected the Company's reorganization, as a
result of which the Company had a realized capital gain of $21.2 million in
1997.
Net income increased by $6.2 million to $129.2 million in 1997, as
compared to 1996 reflecting a decrease of $15.6 million in income from
operations and an increase of $21.8 million in net realized capital gains.
29
<PAGE>
Income from operations decreased from $118.2 million in 1996 to $102.5
million in 1997, mainly as a result of the following factors:
- A $7.6 million decrease, to $14.7 million, in income from operations
from the Company's Retirement Products and Services segment. (This is
discussed in the "Retirement Products and Services Segment" section
below.)
- An increase of $6.5 million, compared to 1996, in the effects of the
reinsurance arrangements between the Company and its ultimate parent.
- A decrease, by approximately $9 million, in dividends from
subsidiaries, as well as higher taxes and expenses in the Corporate
segment.
As noted above, the $21.9 million increase in net realized capital gains,
from $4.8 million in 1996 to $26.7 million in 1997, was caused mainly by the
December 1997 Company reorganization, as a result of which the Company had a
realized capital gain of $21.2 million in 1997.
INCOME FROM OPERATIONS BY SEGMENT
The Company's income from operations reflects the operations of its three
business segments: the Retirement Products and Services segment, the Individual
Insurance segment and the Corporate segment. The following table provides a
summary:
INCOME FROM OPERATIONS BY SEGMENT*
($ IN MILLIONS)
<TABLE>
<CAPTION>
% CHANGE
--------------------------
1998 1997 1996 1998/1997 1997/1996
--------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Individual Insurance 89.1 18.0 11.5 395.0% 56.5%
Retirement Products and Services 31.4 14.7 22.3 113.6% (34.1)%
Corporate 4.5 69.8 84.4 (93.6)% (17.3)%
--------- --------- --------- ----- -----
125.0 102.5 118.2 22.0% (13.3)%
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
</TABLE>
*Before realized capital gains
These results are discussed more fully below.
RETIREMENT PRODUCTS AND SERVICES SEGMENT
The Retirement Products and Services segment focuses on the savings and
retirement needs of those preparing for retirement or those who have already
retired. It primarily markets to upscale consumers in the U.S., selling
individual and group fixed and variable annuities. Its major product lines,
"Regatta" and "Futurity," are combination fixed/variable annuities. In these
combination annuities, contract holders have the choice of allocating payments
either to a fixed account, which provides a guaranteed rate of return, or to
variable accounts. Withdrawals from the Company's fixed account are subject to
market value adjustment. In the variable accounts, the contract holder can
choose from a range of investment options and styles. The return depends upon
investment performance of the options selected. Investment funds available under
Regatta are managed by MFS, an affiliate of the Company. Investment funds
available under Futurity products are managed by several investment managers,
including MFS and Sun Capital Advisers, Inc., a subsidiary of the Company.
The Company distributes these annuity products through a variety of
channels. For the Regatta products, about half are sold through securities
brokers, a further one-fourth through financial institutions, and the remainder
through insurance agents and financial planners. The Futurity products,
introduced in February 1998, are distributed through a dedicated wholesaler
network, including Sun Life of Canada (US) Distributors, Inc., that services
similar distribution channels.
Although new pension products are not currently sold, there has been a
substantial block of group retirement business in-force, including guaranteed
investment contracts ("GICs"), pension plans and group annuities. A significant
portion of these pension contracts are non-surrenderable, with the result that
the
30
<PAGE>
Company's liquidity exposure is limited. GICs were marketed directly in the U.S.
through independent managers. In 1997, the Company decided to no longer market
group pension and GIC products.
Following are the major factors affecting the Retirement Products and
Services segment results compared to the prior year:
1998 COMPARED TO 1997:
- A SHIFTING PATTERN IN SALES. Annuity deposits declined by about $27
million, or 1%, to $2.2 billion in 1998. Fixed annuity account deposits
were lower by approximately 7% in 1998, while deposits into variable
annuity accounts have been increasing in total and as a proportion of
total annuity deposits. These trends reflected market conditions and
competitive factors.
Deposits into the Dollar Cost Averaging (DCA) programs, a feature of
the Company's combination fixed/variable annuity products, were a
significant element of account deposits. Under these programs, which
were redesigned in late 1996, deposits are made into the fixed portion
of the annuity contract and receive a bonus rate of interest for the
policy year. During the year, the fixed deposit is systematically
transferred to the variable portion of the contract in equal periodic
installments. DCA deposits overall were flat in 1998 compared to 1997.
This pattern resulted, in part, from heightened competition, as other
companies introduced similar DCA programs within the past year. During
the fourth quarter of 1998, the Company introduced a higher DCA rate
and a new six-month DCA program. DCA deposits for that quarter were
higher, compared to the preceding 1998 quarters.
An increase in variable account deposits in 1998 reflected both the
continuing strong growth in equity markets generally and the continuing
strong performance of the investment funds underlying the Company's
variable annuity products. The continuing strong equity markets, low
interest rate environment, and demographic trends, among other factors,
have increased the demand and market for wealth accumulation products
in the U.S., particularly for variable annuities. These factors have
contributed to the growth in the Company's variable account deposits in
1998, despite heightened competition.
The Company introduced its Futurity line of products in February 1998.
Related deposits represented about 6% of the total for the Retirement
Products and Services segment in 1998, reflecting this recent
introduction. The Company expects that sales for the Futurity product
will continue to increase in the future, based on its beliefs that
market demand is growing for multi-manager variable annuity products,
such as Futurity; that the productivity of Futurity's wholesale
distribution network, established in 1998, will continue to grow; and
that the marketplace will respond favorably to future introductions of
new Futurity products and product enhancements.
- HIGHER FEE INCOME RESULTING FROM HIGHER VARIABLE ANNUITY ACCOUNT
BALANCES. The main factors driving this growth in account balances have
been market appreciation and net deposit activity. This growth has
generated corresponding increases in fee income, since fees are
determined based on the average assets held in these accounts. Fee
income increased by approximately $43 million, or 39%, in 1998.
- WHILE THERE HAS BEEN A SHIFT TO VARIABLE ACCOUNTS FROM THE GENERAL
ACCOUNT, NET INVESTMENT INCOME HAS DECLINED. Net investment income
reflects only income earned on invested assets of the general account.
In 1998, net investment income for the Retirement Products and Services
segment decreased by about $40 million, or 20%, compared to 1997,
mainly as a result of the decline in average invested assets in the
Company's general account. This decline in average general account
assets mainly reflected the shift in deposits in recent years from the
fixed account to variable accounts. It also reflected the Company's
decision in 1997 to no longer market group pension and GIC products.
- LOWER POLICYHOLDER BENEFITS, MAINLY REFLECTING LOWER SURRENDER ACTIVITY
COMPARED TO 1997. During 1997 and into the first half of 1998,
surrender and withdrawal activity was high. This activity primarily
related to a block of separate account contracts that had been issued
seven or more
31
<PAGE>
years previously and for which the surrender charge periods had
expired. While variable account surrenders have continued to rise,
general account surrenders have declined. As a result of this pattern
of activity, policyholder benefits (of which surrenders and
withdrawals, the related changes in the liability for premium and other
deposit funds, and related separate account transfers are the major
elements) increased in 1997 and were lower in 1998. The Company expects
that as the separate account block of business continues to grow, and
as a higher proportion of it is no longer subject to surrender charges,
surrenders will tend to increase.
- INVESTMENTS IN TECHNOLOGY AND INFRASTRUCTURE TO ENHANCE ANNUITY
OPERATIONS. As a result of these investments, operational expenses
increased by approximately $12 million, or 25%, in 1998 compared to
1997. These increases reflected three main factors:
(1) HIGHER VOLUMES OF ANNUITY BUSINESS, REQUIRING GREATER
ADMINISTRATIVE SUPPORT. The Company expects that increases in the
volume of its annuity business will continue to have a similar
effect on expenses in the near term.
(2) IMPROVEMENTS TO THE COMPUTER SYSTEMS AND TECHNOLOGY THAT
SUPPORT THE ANNUITY BUSINESS. These improvements involved
information systems supporting the growth of the Company's
in-force business, particularly its combination fixed/variable
annuities. The Company expects to continue to invest in its
systems and technology in the future. The extent and nature of
these investments will depend on the Company's assessments of
the relative costs and benefits of given projects.
(3) COSTS ASSOCIATED WITH THE PRODUCT DESIGN AND IMPLEMENTATION OF
THE NEW FUTURITY MULTI-MANAGER ANNUITY PRODUCT AND THE DEVELOPMENT
OF A NEW PRODUCT WITHIN THE REGATTA PRODUCT LINE. The Company
expects to continue to invest in further product enhancements
in the future.
1997 COMPARED TO 1996:
- STRONG FIXED ACCOUNT DEPOSITS. Fixed account deposits in 1997 were
approximately $650 million, or 240%, higher than in 1996. This increase
resulted mainly from the Company's redesign of its DCA programs in late
1996. The Company benefited at the time from the popularity of its DCA
program features and from the absence of major competitors offering
similar features.
- IN 1997, VARIABLE ANNUITY DEPOSITS WERE ABOUT $200 MILLION, OR 16%,
LOWER THAN IN 1996. This trend reflected heightened competition,
uncertainties in the marketplace regarding the attractiveness of
variable annuities, and customer preferences for depositing into the
DCA programs rather than directly into the variable accounts.
- HIGHER FEE INCOME RESULTING FROM HIGHER VARIABLE ANNUITY ACCOUNT
BALANCES. The main factors driving this growth in account balances were
market appreciation and net deposit activity. This growth generated
corresponding increases in fee income, since fees are determined based
on the average assets held in these accounts.
- DECLINING GENERAL ACCOUNT BALANCES, RESULTING IN DECLINING NET
INVESTMENT INCOME. In 1997, net investment income for the Retirement
Products and Services segment decreased by about 16%, mainly as a
result of a decline in average invested assets in the Company's general
account. This decline in average general account assets mainly
reflected the Company's decision in 1997 to no longer market group
pension and GIC products.
- HIGHER POLICYHOLDER BENEFITS, MAINLY REFLECTING HIGH SURRENDER ACTIVITY
IN 1997. As noted above, surrender and withdrawal activity was high in
1997. This activity primarily related to a block of separate account
contracts that had been issued seven or more years previously and for
which the surrender charge period had expired. As a result of this
pattern of activity, policyholder benefits (of which surrenders and
withdrawals, the related changes in the liability for premium and other
deposit funds, and related separate account transfers are the major
elements) were unusually high in 1997 compared to 1996.
32
<PAGE>
- HIGHER COMMISSIONS. Commissions increased by approximately $22 million,
or 20%, in 1997, directly reflecting higher sales of combination
fixed/variable annuity products in 1997 compared to 1996.
- HIGHER OPERATIONAL EXPENSES. Operational expenses increased by
approximately $5 million, or 13%, as a result of the additional
staffing needed to administer higher volumes of business and because of
non-recurring costs of moving the Retirement Products and Services
operations to a new facility.
INDIVIDUAL INSURANCE SEGMENT
The Individual Insurance segment comprises two main elements: internal
reinsurance and variable life products.
INTERNAL REINSURANCE
In recent years, the Company has had various reinsurance agreements with its
ultimate parent, Sun Life (Canada). In some of these arrangements, Sun Life
(Canada) has reinsured the mortality risks of individual life policies sold in
prior years by the Company. In another agreement, which became effective January
1, 1991 and terminated October 1, 1998, the Company reinsured certain individual
life insurance contracts issued by Sun Life (Canada). The latter agreement had a
significant effect on net income in both 1997 and 1998. The former agreements,
in the aggregate, also affected net income in those years, but to a much lesser
extent. The effects of these agreements on the Company's net income are
summarized in the following table.
INTERNAL REINSURANCE-EFFECT ON INCOME FROM OPERATIONS BEFORE INCOME TAXES
($ IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
1991 Agreement
Effect on operations $ 24.6 $ 37.1 $ 35.2
Effect of termination 65.7 -- --
Other Agreements
Effect on operations (2.1) (1.4) (1.6)
--------- --------- ---------
Total $ 88.2 $ 35.7 $ 33.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
Because the 1991 agreement was in effect only through the first nine
months of 1998, related net income was correspondingly lower in 1998 than in
1997. Also contributing to the lower 1998 net income from operations from this
agreement were proportionately higher death claims in 1998. The effect of
terminating this agreement was to further increase 1998 net income by $65.7
million. Neither the net income effect of this agreement's operations nor that
of its termination will recur. The termination-related increase in 1998
represents a reasonable approximation of the value of the stream of future
earnings that the agreement would have generated had it not been terminated.
VARIABLE LIFE PRODUCTS
This business includes the sale of individual variable life insurance
products, primarily the Company's variable universal life product for the
company-owned life insurance ("COLI") market. This product was introduced in
late 1997. The Company expects the variable life business to grow and become
more significant in the future.
CORPORATE SEGMENT
This segment includes the capital of the Company, its investments in
subsidiaries and items not otherwise attributable to either the Retirement
Products and Services and Individual Insurance segments. In
33
<PAGE>
1998, income from operations decreased by $65.3 million to $4.5 million for this
segment. This decrease reflected two main factors:
- DIVIDENDS FROM SUBSIDIARIES WERE LOWER THAN IN 1997 BY $37.5 MILLION.
This decrease mainly resulted from a December 1997 reorganization, in
which the Company transferred its ownership of MFS to its parent
company. As a result of this reorganization, the Company received no
dividends from MFS in 1998. By comparison, it received $33.1 million of
MFS dividends in 1997.
- Net investment income other than dividends from subsidiaries, was lower
than in 1997 by $5.9, reflecting the effect of the Company's December
1997 issuance of a $250 million surplus note to its upstream holding
company. Interest expense exceeded investment earnings on the related
funds.
In 1997, income from operations for this segment decreased by $14.6
million, to $69.8 million. This decrease mainly reflected a decrease, by
approximately $9 million, in dividends from subsidiaries. It also reflected
higher taxes and expenses.
FINANCIAL CONDITION & LIQUIDITY
ASSETS
The Company's total assets comprise those held in its general account and
those held in its separate accounts. General account assets support general
account liabilities. Separate accounts and their assets are of two main types:
- Those assets held in a "fixed" separate account, which the Company
established for amounts that contract holders allocate to the fixed
portion of their combination fixed/variable deferred annuity contracts.
Fixed separate account assets are available to fund general account
liabilities and general account assets are available to fund the
liabilities of this fixed separate account. The Company manages the assets
of this fixed separate account according to general account investment
policy guidelines.
- Those assets held in a number of registered and non-registered "variable"
separate accounts as investment vehicles for the Company's variable life
and annuity contracts. Policyholders may choose from among various
investment options offered under these contracts according to their
individual needs and preferences. Policyholders assume the investment
risks associated with these choices. General account and fixed separate
account assets are not available to fund the liabilities of these variable
accounts.
The following table summarizes significant changes in asset balances
during 1998 and 1997. The changes are discussed below.
<TABLE>
<CAPTION>
ASSETS % CHANGE
1998 1997 1996 1998/1997 1997/1996
----------- ----------- ----------- ------------ ------------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
General account assets $ 2,932.2 $ 4,513.5 $ 4,593.9 (35.0)% (1.75)%
Fixed separate account assets 2,195.6 2,343.9 2,108.8 (6.3)% 11.15%
----------- ----------- ----------- ----- ------
$ 5,127.8 $ 6,857.4 $ 6,702.7 (25.2)% 2.31%
Variable separate account assets 11,774.8 9,068.0 6,919.2 29.9% 31.06%
----------- ----------- ----------- ----- ------
Total assets $ 16,902.6 $ 15,925.4 $ 13,621.9 6.1% 16.91%
----------- ----------- ----------- ----- ------
----------- ----------- ----------- ----- ------
</TABLE>
General account and fixed separate account assets, taken together,
decreased by 25% in 1998, but variable separate account assets increased by 30%
that year. In 1997, growth in the general account and fixed separate account was
low; variable separate account assets increased by 31%. This growth in variable
accounts relative to the general and fixed accounts reflects two main factors:
appreciation of the funds held in the variable separate accounts has exceeded
that of the funds held in the general and fixed separate accounts; and annuity
deposits into variable accounts have increased, while annuity deposits into
fixed
34
<PAGE>
accounts have slowed. The Company believes this pattern reflects a shift in the
preferences of policyholders, which is largely attributable to the strong
performance of equity markets in general and of the Company's variable account
funds in particular.
The assets of the Company's general account are available to support
general account liabilities. For management purposes, it is the Company's
practice to segment its general account to facilitate the matching of assets and
liabilities. General account assets primarily comprise cash and invested assets,
which represented 98.7% of general account assets at year-end 1998. Major types
of invested asset holdings included bonds, mortgages, real estate and common
stock. The Company's bond holdings comprised 60.9% of the Company's portfolio at
year-end 1998. Bonds included both public and private issues. It is the
Company's policy to acquire only investment-grade securities. As a result, the
overall quality of the bond portfolio is high. At year-end 1998, only 5.3% of
these securities were rated below-investment-grade; I.E., they had National
Association of Insurance Commissioners ("NAIC") ratings lower than "1" or "2."
The Company's mortgage holdings amounted to $535.0 million at year-end 1998,
representing 18.5% of the total portfolio. All mortgage holdings at year-end
1998 were in good standing. The Company believes that the high quality of its
mortgage portfolio is largely attributable to its stringent underwriting
standards. At year-end 1998, investment real estate amounted to $78.0 million,
representing about 2.7% of the total portfolio. The Company invests in real
estate to enhance yields and, because of the long-term nature of these
investments, the Company uses them for purposes of matching with products having
long-term liability durations. Common stock holdings amounted to $128.4 million,
representing about 4.4% of the portfolio. These holdings comprised the Company's
ownership shares in subsidiaries.
Other general account assets decreased by $1,021.4 million in 1998. This
change primarily reflected the effect of terminating the internal reinsurance
agreement with the Company's ultimate parent, discussed in "Internal
Reinsurance," above.
LIABILITIES
As with assets, the proportion of variable separate account liabilities to
total liabilities has been increasing. Most of the Company's liabilities
comprise reserves for life insurance and for annuity contracts and deposit
funds. The Company expects the declining trend in general account liabilities to
continue, because it believes that net maturities will continue to exceed sales
for the fixed contracts associated with these liabilities. This trend stems
mainly from the Company's 1997 decision to discontinue selling group pension and
GIC contracts and to focus its marketing efforts on its combination
fixed/variable annuity products.
In December 1997, the Company borrowed $110.0 million from Sun Life
Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("U.S. Holdco"),
its upstream holding company. The Company repaid this note during the first
quarter of 1998.
The termination of the internal reinsurance agreement discussed above
resulted in a $1.0 billion decrease in liabilities as compared to 1997.
CAPITAL MARKETS RISK MANAGEMENT
See "Quantitative and Qualitative Disclosures About Market Risk" below for
a discussion of the Company's capital markets risk management.
CAPITAL RESOURCES
CAPITAL ADEQUACY
The National Association of Insurance Commissioners ("NAIC") adopted
regulations at the end of 1993 that established minimum capitalization
requirements for insurance companies, based on risk-based capital ("RBC")
formulas. These requirements are intended to identify undercapitalized
companies, so that specific regulatory actions can be taken on a timely basis.
The RBC formula for life insurance companies sets capital requirements related
to asset, insurance, interest rate, and business risks. According to the RBC
calculation, the Company's capital was well in excess of its required capital at
year-end 1998.
35
<PAGE>
LIQUIDITY
The Company's liquidity requirements are generally met by funds from
operations. The Company's main uses of funds are to pay out death benefits and
other maturing insurance and annuity contract obligations; to make pay-outs on
contract terminations; to purchase new investments; to fund new business
ventures; and to pay normal operating expenditures and taxes. The Company's main
sources of funds are premiums and deposits on insurance and annuity products;
proceeds from the sale of investments; income from investments; and repayments
of investment principal.
In managing its general account and fixed separate account assets in
relation to its liabilities, the Company has segmented these assets by product
or by groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. Among other matters,
this investment policy considers liquidity requirements and provides cash flow
estimates. The Company reviews these policies quarterly.
The Company's liquidity targets are intended to enable it to meet its
day-to-day cash requirements. On a quarterly basis, the Company compares its
total "liquifiable" assets to its total demand liabilities. Liquifiable assets
comprise cash and assets that could quickly be converted to cash should the need
arise. These assets include short-term investments and other current assets and
investment-grade bonds. The Company's policy is to maintain a liquidity ratio in
excess of 100%, and it did so throughout 1998. Based on its ongoing liquidity
analyses, the Company believes that its available liquidity is more than
sufficient to meet its liquidity needs.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This discussion covers market risks associated with investment portfolios
that support the Company's general account liabilities. This discussion does not
cover market risks associated with those investment portfolios that support
separate account products. For these products, the policyholder, rather than the
Company, assumes these market risks.
GENERAL
The assets of the Company's general account are available to support
general account liabilities. For purposes of managing these assets in relation
to these liabilities, the Company notionally segments these assets by product or
by groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. The policy covers
the segment's liability characteristics and liquidity requirements, provides
cash flow estimates, and sets targets for asset mix, duration, and quality. Each
quarter, investment and business unit managers review these policies to ensure
that the policies remain appropriate, taking into account each segment's
liability characteristics.
TYPES OF MARKET RISKS
The Company's stringent underwriting standards and practices have resulted
in high-quality portfolios and have the effect of limiting credit risk. It is
the Company's policy, for example, not to purchase below-investment-grade
securities. Also, as a matter of investment policy, the Company assumes no
foreign currency or commodity risk; nor does it assume equity price risk except
to the extent that it holds real estate in its portfolios. (At year-end 1998,
investment real estate holdings represented approximately 3% of its total
general account portfolio.) The management of interest rate risk exposure is
discussed below.
INTEREST RATE RISK MANAGEMENT
The Company's fixed interest rate liabilities are primarily supported by
well diversified portfolios of fixed interest investments. They are also
supported by holdings of real estate and floating rate notes. All of these fixed
interest investments are held for other than trading purposes and can include
publicly issued and privately placed bonds and commercial mortgage loans. Public
bonds can include Treasury bonds, corporate bonds, and money market instruments.
The Company's fixed income portfolios also hold securitized assets, including
mortgage-backed securities (MBS) and asset-backed securities. These securities
are subject to the same standards applied to other portfolio investments,
including relative value criteria and
36
<PAGE>
diversification guidelines. In portfolios backing interest-sensitive
liabilities, the Company's policy is to limit MBS holdings to less than 10% of
total portfolio assets. In all portfolios, the Company restricts MBS investments
to pass-through securities issued by U.S. Government agencies and to
collateralized mortgage obligations, which are expected to exhibit relatively
low volatility. The Company does not engage in leveraged transactions and it
does not invest in the more speculative forms of these instruments such as the
interest-only, principal-only, inverse floater, or residual tranches.
Changes in the level of domestic interest rates affect the market value of
fixed interest assets and liabilities. Segments whose liabilities mainly arise
from the sale of products containing interest rate guarantees for certain terms
are sensitive to changes in interest rates. In these segments, the Company uses
"immunization" strategies, which are specifically designed to minimize the loss
from wide fluctuations in interest rates. The Company supports these strategies
using analytical and modeling software acquired from outside vendors.
Significant features of the Company's immunization models include:
- an economic or market value basis for both assets and liabilities;
- an option pricing methodology;
- the use of effective duration and convexity to measure interest rate
sensitivity; and
- the use of "key rate durations" to estimate interest rate exposure at
different parts of the yield curve and to estimate the exposure to
non-parallel shifts in the yield curve.
The Company's Interest Rate Risk Committee meets monthly. After reviewing
duration analyses, market conditions and forecasts, the Committee develops
specific asset management strategies for the interest-sensitive portfolios.
These strategies may involve managing to achieve small intentional mismatches,
either in terms of total effective duration or for certain key rate durations,
between the liabilities and related assets of particular segments. The Company
manages these mismatches to a tolerance range of plus or minus 0.5.
Asset strategies may include the use of Treasury futures or interest rate
swaps to adjust the duration profiles for particular portfolios. All derivative
transactions are conducted under written operating guidelines and are marked to
market. Total positions and exposures are reported to the Company's Board of
Directors on a monthly basis. The counterparties to hedging transactions are
major highly rated financial institutions, with respect to which the risk of the
Company's incurring losses related to credit exposures is considered remote.
Liabilities categorized as financial instruments and held in the Company's
general account at December 31, 1998 had a fair value of $1,538.3 million. Fixed
income investments supporting those liabilities had a fair value of $2,710.1
million at that date. The Company performed a sensitivity analysis on these
interest-sensitive liabilities and assets at December 31, 1998. The analysis
showed that if there were an immediate increase of 100 basis points in interest
rates, the fair value of the liabilities would show a net decrease of $46.3
million and the corresponding assets would show a net decrease of $113.2
million.
By comparison, liabilities categorized as financial instruments and held
in the Company's general account at December 31, 1997 had a fair value of
$1,986.4 million. Fixed income investments supporting those liabilities had a
fair value of $3,276.2 million at that date. The Company performed a sensitivity
analysis on these interest-sensitive liabilities and assets at December 31,
1997. The analysis showed that if there were an immediate increase of 100 basis
points in interest rates, the fair value of the liabilities would show a net
decrease of $56.0 million and the corresponding assets would show a net decrease
of $108.0 million.
The Company produced these estimates using computer models. Since these
models reflect assumptions about the future, they contain an element of
uncertainty. For example, the models contain assumptions about future
policyholder behavior and asset cash flows. Actual policyholder behavior and
asset cash flows could differ from what the models show. As a result, the
models' estimates of duration and market values may not reflect what actually
will occur. The models are further limited by the fact that they do not provide
for the possibility that management action could be taken to mitigate adverse
results. The
37
<PAGE>
Company believes that this limitation is one of conservatism, that is, it will
tend to cause the models to produce estimates that are generally worse than one
might actually expect, all other things being equal.
Based on its processes for analyzing and managing interest rate risk, the
Company believes its exposure to interest rate changes will not materially
affect its near-term financial position, results of operations, or cash flows.
DEMUTUALIZATION
On January 27, 1998, Sun Life (Canada) announced that its Board of
Directors had requested management world-wide to develop a plan to convert from
a mutual life insurance company into a publicly traded stock company through
demutualization worldwide. Management has put in place a full time task force
which, together with a worldwide team of actuarial, financial and legal
advisers, has begun work. The Board will decide later this year whether to
proceed with demutualization, following the completion of the plan.
Demutualization would require regulatory and policyholder approval. Based on
information known to date, the potential demutualization of Sun Life (Canada) is
not expected to have any significant impact on the Company.
YEAR 2000 COMPLIANCE
During the fourth quarter of 1996, the Company, Sun Life (Canada) and
affiliates began a comprehensive analysis of its information technology ("IT")
and non-IT systems, including its hardware, software, data, data feed products,
and internal and external supporting services, to address the ability of these
systems to correctly process date calculations through the year 2000 and beyond.
The Company created a full-time Year 2000 project team in early 1997 to manage
this endeavor across the Company. This team, which works with dedicated
personnel from all business units and with the legal and audit departments,
reports directly to the Company's senior management on a monthly basis. In
addition, the Company's Year 2000 project is periodically reviewed by internal
and external auditors.
To date, relevant systems have been identified and their components
inventoried, needed resolutions have been documented, timelines and project
plans have been developed, and remediation and testing are in process. Over 90%
of the components have been remediated, tested and are certified as Year 2000
compliant. The majority of the remaining components are in the testing phase and
are expected to be certified over the course of this year.
In mid-1997, the project team contacted all key vendors to obtain either
their certification for the products and services provided or their plan to make
those products and services compliant. Approximately 95% of these vendors have
responded and the project team has reviewed the responses and validated and
conducted tests with the vendors where appropriate. In addition, the project
team continues to work with critical business partners, such as third-party
administrators, investment property managers, investment mortgage
correspondents, and others, with the goal that these partners will continue to
be able to support the Company's objective of assuring Year 2000 compliance.
Non-IT applications, including building security, HVAC systems, and other
such systems, will be tested. Compliant client server and mainframe environments
have been built which allow for testing of critical dates such as December
31,1999, January 1, 2000, February 28, 2000, February 29, 2000 and March 1, 2000
without impact to current production.
Although the Company expects all critical systems to be Year 2000
compliant before the end of 1999, there can be no assurance that this result
will be achieved. Factors giving rise to this uncertainty include possible loss
of technical resources to perform the work, failure to identify all susceptible
systems, non-compliance by third-parties whose systems and operations affect the
Company, and other similar uncertainties. A possible worst-case scenario might
include one or more of the Company's significant systems being non-compliant.
Such a scenario could result in material disruption to the Company's operations.
Consequences of such disruptions could include, among other possibilities, the
inability to update customers' accounts, process payments and other financial
transactions; and report accurate data to customers, management, regulators, and
others. Consequences also could include business interruptions or shutdowns,
reputational harm, increased scrutiny by regulators, and litigation related to
Year 2000 issues. Such
38
<PAGE>
potential consequences, depending on their nature and duration, could have a
material impact on the Company's results of operations and financial position.
In order to mitigate the risks to the Company of material adverse
operational or financial impacts from failure to achieve planned Year 2000
compliance, the Company has established contingency planning at the business
unit and corporate levels. Each business unit has ranked its applications as
being of high, medium or low business risk to ensure that the most critical are
addressed first. The business units also have developed alternate plans of
action where possible, and established dates for the alternate plans to be
enacted. On the corporate level, the Company is in the process of enhancing its
business continuation plan by identifying minimum requirements for facilities,
computing, staffing, and other factors, and it is developing a plan to support
those requirements.
As of year-end 1998, the Company had expended, cumulatively, approximately
$4.2 million on its Year 2000 effort, and it expects to incur a further $1.3
million on this effort in 1999.
SALE OF SUBSIDIARY
In February 1999, the Company completed the sale of its wholly-owned
subsidiary, Massachusetts Casualty Insurance Company ("MCIC"), to Centre
Solutions (U.S.) Limited, a wholly-owned subsidiary of Centre Reinsurance
Holdings, Limited, for approximately $34 million. MCIC sold individual
disability insurance throughout the U.S. This transaction is not expected to
have a significant effect on the operations of the Company.
REINSURANCE
The Company has agreements with Sun Life (Canada) which provide that Sun
Life (Canada) will reinsure the mortality risks of the individual life insurance
contracts previously sold by the Company. Under these agreements, basic death
benefits and supplementary benefits are reinsured on a yearly renewable term
basis and coinsurance basis, respectively. Reinsurance transactions under these
agreements in 1998 had the effect of decreasing net income from operations by
$2,128,000.
Effective January 1, 1991 the Company entered into an agreement with Sun
Life (Canada) under which certain individual life insurance contracts issued by
Sun Life (Canada) were reinsured by the Company on a 90% coinsurance basis. Also
effective January 1, 1991, the Company entered into an agreement with Sun Life
(Canada) which provides that Sun Life (Canada) will reinsure the mortality risks
in excess of $500,000 per policy for the individual life insurance contracts
assumed by the Company in the reinsurance agreement described above. Death
benefits are reinsured on a yearly renewable term basis. The life reinsurance
assumed agreement requires the reinsurer to withhold funds in an amount equal to
the reserves assumed. These agreements had the effect of increasing income from
operations by approximately $24,579,000 for the year ended December 31, 1998.
The Company terminated these agreements, effective October 1, 1998, resulting in
an increase in income from operations of $65,679,000, which included a cash
settlement.
The Company has also executed reinsurance agreements with unaffiliated
companies. These agreements provide reinsurance of certain individual life
insurance contracts on a modified coinsurance basis under which all deficiency
reserves are ceded; as well as reinsurance for variable universal life on a
yearly renewable term basis for which the Company has a maximum retention of
$2,000,000.
RESERVES
In accordance with the life insurance laws and regulations under which the
Company operates, it is obligated to carry on its books, as liabilities,
actuarially determined reserves to meet its obligations on its outstanding
contracts. Reserves are based on mortality tables in general use in the United
States and are computed to equal amounts that, with additions from premiums to
be received, and with interest on such reserves compounded annually at certain
assumed rates, will be sufficient to meet the Company's policy obligations at
their maturities or in the event of an insured's death. In the accompanying
Financial Statements, these reserves are determined in accordance with statutory
regulations.
39
<PAGE>
INVESTMENTS
Of the Company's total assets of $16.9 billion at December 31, 1998, 82.7%
($13.98 billion) consisted of unitized and non-unitized separate account assets,
10.4% ($1.76 billion) was invested in bonds and similar securities, 3.2% ($541
million) was invested in mortgages, 0.7 % ($118.3 million) was invested in
subsidiaries, 0.6% ($101.4 million) was invested in real estate, and the
remaining 2.4% ($405.6 million) was invested in cash and other assets.
COMPETITION
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing insurance products. According to a 1998 statistical study, published
by A.M. Best, the Company ranked 37th among North American life insurance
companies based upon total assets as of December 31, 1997. Its ultimate parent
company, Sun Life (Canada), ranked 21st. A.M. Best has assigned the Company and
Sun Life (Canada) its highest classification, A++, as of December 31, 1997.
Standard & Poor's and Duff & Phelps each have assigned the Company and Sun Life
(Canada) their AAA rating, their ratings for insurer financial strength and
claims paying ability, respectively. Moody's Investor Service, Inc. has assigned
the Company an unsolicited rating of Aa-2 for financial strength, which is their
third highest rating level.
EMPLOYEES
The Company and Sun Life (Canada) 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. Expenses under this agreement amounted to approximately $16,344,000 in
1998. As of March 31, 1999, the Company had 392 direct employees employed at its
Principal Executive Office in Wellesley Hills, Massachusetts and at its
Retirement Products and Services Division in Boston, Massachusetts.
PROPERTIES
The Company occupies office space owned by it and leased to Sun Life
(Canada), and certain unrelated parties for lease terms not exceeding five
years. The Company also occupies office space which it leases from unaffiliated
parties for various lease terms. Rent received by the Company under the leases
amounted to approximately $6,856,000 in 1998.
40
<PAGE>
THE COMPANY'S DIRECTORS AND EXECUTIVE OFFICERS
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.
DONALD A. STEWART, 52, Chairman and Director (1996*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is Chairman, Chief Executive Officer and a Director of Sun Life
Assurance Company of Canada; Chairman and a Director of Sun Life Insurance and
Annuity Company of New York; and a Director of Massachusetts Financial Services
Company, Sun Life Financial Services Limited, Spectrum United Holdings, Inc.,
and Sun Life of Canada (UK) Holdings, plc.
C. JAMES PRIEUR, 48, President and Director (1998*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
He is President and Chief Operating Officer of Sun Life Assurance Company
of Canada; Chairman and a Director of Sun Life of Canada (U.S.) Distributors,
Inc., Sun Life Insurance and Annuity Company of New York, and Sun Capital
Advisers, Inc.; Chairman and Executive Vice President of Sun Capital Advisers
Trust; President and a 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; and a
Director of Sun Life Financial Services, Ltd., Clarendon Insurance Agency, Inc.,
and Sun Life Information Services Ireland Limited.
DAVID D. HORN, 57, Director (1985*)
Strong Road
New Vineyard, Maine 04956
He was formerly Senior Vice President and General Manager for the United
States of Sun Life Assurance Company of Canada, retiring in December, 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.
JOHN D. MCNEIL, 65, Director (1982*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is a Director of Sun Life Assurance Company of Canada and Sun Life
Financial Holdings, Inc.; Chairman and a Trustee of MFS/Sun Life Series Trust;
Chairman and a Member of the Boards of Managers of Money Market Variable
Account, High Yield Variable Account, Capital Appreciation Variable Account,
Government Securities Variable Account, World Governments Variable Account,
Total Return Variable Account and Managed Sectors Variable Account; and a
Director of Sun Life Insurance and Annuity Company of New York; Massachusetts
Financial Services Company, SLC Services Peru, S.A., Administradora de Fondos de
Pensiones Cuprum S.A., Spectrum United Holdings, Inc., Sun Life Trust Company,
Sun Life Savings & Mortgage Corporation, Sun Life of Canada UK Holdings, plc;
Shell (Canada) Limited, Canadian Pacific, Ltd., and Canadian Pacific Securities
(Ontario) Limited.
- ---------
*Year elected Director
41
<PAGE>
ANGUS A. MACNAUGHTON, 67, Director (1985*)
Metro Tower, Suite 1170
950 Tower Lane
Foster City, California 94404
He is President of Genstar Investment Corporation; 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., the San Francisco Opera, and Genstar Capital Corporation;
President and Director of Genstar Investment L.L.C.; and Vice Chairman and a
Director of Barrick Gold Corporation.
JOHN S. LANE, 64, Director (1991*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is Senior Vice President, Investments of Sun Life Assurance Company of
Canada; and a Director of Sun Life Insurance and Annuity Company of New York.
RICHARD B. BAILEY, 72, Director (1983*)
63 Atlantic Avenue
Boston, Massachusetts 02110
He is a Director of Sun Life Insurance and Annuity Company of New York and
Cambridge Trust Company; and a Director/Trustee of certain Funds in the MFS
Family of Funds.
M. COLYER CRUM, 66, Director (1986*)
104 Westcliff Street
Weston, Massachusetts 02193
He is Professor Emeritus of the Harvard Business School; Chairman and a
Director of Phaeton International/N.V.; a Director of Sun Life Assurance Company
of Canada, Sun Life Insurance and Annuity Company of New York, Cambridge
Bancorp, Cambridge Trust Company, Merrill Lynch Global Growth Fund, Inc.,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch Capital Fund, Inc., Merrill Lynch U.S.A. Government Reserves,
Merrill Lynch U.S. Treasury Money Fund, MuniVest Florida Fund, MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Insured Fund, Inc., and a Trustee of Merrill
Lynch Global Resources Trust, Merrill Lynch Ready Assets Trust, MuniYield
Florida Insured Fund, and MuniYield Pennsylvania Fund. Prior to July, 1996, he
was a Professor at the Harvard Business School.
S. CAESAR RABOY, 62, Director (1996*)
220 Boylston Street
Boston, Massachusetts 02110
He formerly was Senior Vice President and Deputy General Manager for the
United States of Sun Life Assurance Company of Canada; Senior Vice President of
Sun Life Insurance and Annuity Company of New York; and Vice President of Sun
Life Financial Services Limited, retiring in December, 1998. He is a Director of
Sun Life Insurance and Annuity Company of New York, Sun Life Financial Services
Limited, Sun Life of Canada (U.S.) Distributors, Inc., Clarendon Insurance
Agency, Inc., and Fleet National Bank.
JAMES M. A. ANDERSON, 49, Vice President, Investments (1998)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
He is Vice President, Investments, of Sun Life Assurance Company of Canada
and Sun Life Insurance and Annuity Company of New York; President and a Director
of Sun Capital Advisers, Inc.; President and Chief Executive Officer of Sun
Capital Advisers Trust; Vice President and a Director of Sun Life of Canada
(U.S.) Holdings, Inc., Sun Life of Canada (U.S.) Financial Services Holdings,
Inc., and Sun Canada Financial Co.; Vice President, Investments, and a Director
of Sun Life of Canada (U.S.) Distributors, Inc.; and
- ---------
*Year elected Director
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<PAGE>
a Director of New London Trust, F.S.B., Sun Benefit Services Company, Inc., and
Clarendon Insurance Agency, Inc.
L. BROCK THOMSON, 57, Vice President and Treasurer (1974)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
He is Vice President, Portfolio Management for the United States of Sun
Life Assurance Company of Canada; and Vice President and Treasurer of Sun Life
of Canada (U.S.) Distributors, Inc., Sun Benefit Services Company, Inc., Sun
Life Insurance and Annuity Company of New York, and Clarendon Insurance Agency,
Inc.
ROBERT P. VROLYK, 45, Vice President and Actuary (1986)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
He is Vice President, Finance of Sun Life Assurance Company of Canada;
Vice President, Controller and Actuary of Sun Life Insurance and Annuity Company
of New York; Vice President and a Director of Sun 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.,
and Sun Life Assurance Company of Canada-- U.S. Operations Holdings, Inc.; Vice
President, Treasurer and a Director of Sun Capital Advisers, Inc.; Treasurer and
a Director of Sun Life of Canada (U.S.) SPE 97-1, Inc.; Treasurer and Chief
Financial Officer of Sun Capital Advisers Trust; and a Director of Clarendon
Insurance Agency, Inc., Sun Benefit Services Company, Inc., and Sun Life
Information Services Ireland Limited.
PETER F. DEMUTH, 40, Vice President, Chief Counsel and Assistant Secretary
(1998)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
He is Vice President and Chief Counsel for the United States of Sun Life
Assurance Company of Canada; Assistant Secretary of Sun Life Insurance and
Annuity Company of New York; and Assistant Secretary of Sun Capital Advisers
Trust.
ELLEN B. KING, 42, Secretary (1998)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
She is Counsel of Sun Life Assurance Company of Canada; Secretary of Sun
Life Insurance and Annuity Company of New York, Sun Canada Financial Co., Sun
Life Assurance Company of Canada -- U.S. Operations Holdings, Inc., Sun Life of
Canada (U.S.) Holdings, Inc., Sun Life of Canada (U.S.) Financial Services
Holdings, Inc., Sun Life of Canada (U.S.) SPE 97-1, Inc., and Sun Benefit
Services Company, 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.
EXECUTIVE COMPENSATION
All of the executive officers of the Company also serve as officers of Sun
Life Assurance Company of Canada and receive no compensation directly from the
Company. Allocations have been made as to such officers' time devoted to duties
as executive officers of the Company and its subsidiaries. The allocated cash
compensation of all executive officers of the Company as a group for services
rendered in all capacities to the Company and its subsidiaries during 1998
totaled $723,000.
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 in 1999, Messrs. Bailey, Crum, Horn, MacNaughton and Raboy will
receive compensation in the amount of $7,000 per year, plus $1,000 for each
meeting attended, plus expenses.
No shares of the Company are owned by any executive officer or director.
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings,
Inc., One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481, which
is in turn a wholly-owned subsidiary of Sun Life Assurance Company of
Canada--U.S. Operations Holdings, Inc., a wholly-owned subsidiary of Sun Life
Assurance Company of Canada.
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<PAGE>
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 amounts 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, Sun Life (Canada) 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 many 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,
tax law changes affecting the taxation of insurance companies, the tax treatment
of insurance products and its impact on the relative desirability of various
personal investment vehicles.
ACCOUNTANTS
The statutory financial statements of the Company as of December 31, 1998
and 1997 and for each of the three years in the period ended December 31, 1998,
included and incorporated by reference in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and elsewhere in the registration statement, which are included
and incorporated by reference herein, and have been so included and incorporated
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
REGISTRATION STATEMENTS
Registration statements have been filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 as amended, with
respect to the Contracts. This Prospectus does not contain all the information
set forth in the registration statements and the exhibits filed as part of the
registration statements, to all of which reference is hereby made for further
information concerning the Fixed Account, the Company and the Contracts.
Statements found in this Prospectus as to the terms of the Contracts and other
legal instruments are summaries, and reference is made to such instruments as
filed.
------------------------
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<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
DECEMBER 31, 1998 AND 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 1,763,468 $ 1,910,699
Common stocks 128,445 117,229
Mortgage loans on real estate 535,003 684,035
Properties acquired in satisfaction of debt 17,207 22,475
Investment real estate 78,021 78,426
Policy loans 41,944 40,348
Cash and short-term investments 265,226 544,418
Other invested assets 64,177 55,716
Life insurance premiums and annuity considerations due and uncollected -- 9,203
Investment income due and accrued 35,706 39,279
Federal income tax recoverable and interest thereon 1,110 --
Receivable from parent, subsidiaries and affiliates -- 27,136
Funds withheld on reinsurance assumed -- 982,653
Other assets 1,928 1,842
-------------- --------------
General account assets 2,932,235 4,513,459
Separate account assets:
Unitized 11,774,745 9,068,021
Non-unitized 2,195,641 2,343,877
-------------- --------------
Total Admitted Assets $ 16,902,621 $ 15,925,357
-------------- --------------
-------------- --------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 1,216,107 $ 2,188,243
Supplementary contracts 1,885 2,247
Policy and contract claims 369 2,460
Provision for policyholders' dividends and coupons payable -- 32,500
Liability for premium and other deposit funds 1,000,875 1,450,705
Surrender values on cancelled policies 5 215
Interest maintenance reserve 40,490 33,830
Commissions to agents due or accrued 2,615 2,826
General expenses due or accrued 5,932 6,238
Transfers from Separate Accounts due or accrued (361,863) (284,078)
Taxes, licenses and fees due or accrued, excluding FIT 401 105
Federal income taxes due or accrued 25,019 56,384
Unearned investment income 23 34
Amounts withheld or retained by company as agent or trustee 529 47
Remittances and items not allocated 5,176 1,363
Borrowed money -- 110,142
Asset valuation reserve 44,392 47,605
Payable to parent, subsidiaries, and affiliates 30,381 --
Payable for securities 428 27,104
Other liabilities 9,770 2,924
-------------- --------------
General account liabilities 2,022,534 3,680,894
Separate account liabilities:
Unitized 11,774,522 9,067,891
Non-unitized 2,195,641 2,343,877
-------------- --------------
Total liabilities 15,992,697 15,092,662
-------------- --------------
CAPITAL STOCK AND SURPLUS
Common capital stock 5,900 5,900
-------------- --------------
Surplus notes 565,000 565,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 139,669 62,440
-------------- --------------
Surplus 904,024 826,795
-------------- --------------
Total common capital stock and surplus 909,924 832,695
-------------- --------------
Total Liabilities, Capital Stock and Surplus $ 16,902,621 $ 15,925,357
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
45
<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, 1998, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Premiums and annuity considerations $ 210,198 $ 254,066 $ 266,942
Deposit-type funds 2,140,604 2,155,297 1,775,230
Considerations for supplementary
contracts without life
contingencies and dividend
accumulations 2,086 1,615 2,340
Net investment income 184,532 270,249 303,753
Amortization of interest maintenance
reserve 2,282 1,166 1,557
Income from fees associated with
investment management and
administration and contract
guarantees from Separate Account 141,211 109,757 83,278
Net gain from operations from
Separate Account -- 5 --
Other income 87,364 102,889 87,532
---------- ---------- ----------
Total 2,768,277 2,895,044 2,520,632
---------- ---------- ----------
BENEFITS AND EXPENSES:
Death benefits 15,335 17,284 12,394
Annuity benefits 153,636 148,135 146,654
Disability benefits and benefits
under accident and health policies 104 132 105
Surrender benefits and other fund
withdrawals 1,933,833 1,854,004 1,507,263
Interest on policy or contract funds (140) 699 2,205
Payments on supplementary contracts
without life contingencies and
dividend accumulations 2,528 1,687 2,120
Increase (decrease) in aggregate
reserves for life and accident and
health policies and contracts (972,135) 127,278 162,678
Decrease in liability for premium
and other deposit funds (449,831) (447,603) (392,348)
Increase (decrease) in reserve for
supplementary contracts without
life contingencies and for
dividend and coupon accumulations (362) 42 327
---------- ---------- ----------
Total 682,968 1,701,658 1,441,398
Commissions on premiums and annuity
considerations (direct business
only) 137,718 132,700 109,894
Commissions and expense allowances
on reinsurance assumed 13,032 17,951 18,910
General insurance expenses 58,132 46,624 37,206
Insurance taxes, licenses and fees,
excluding federal income taxes 7,388 8,267 8,431
Increase (decrease) in loading on
and cost of collection in excess
of loading on deferred and
uncollected premiums (1,663) 523 901
Net transfers to Separate Accounts 722,851 844,130 761,941
Reserve and fund adjustments on
reinsurance terminated 1,017,112 -- --
---------- ---------- ----------
Total 2,637,538 2,751,853 2,378,681
---------- ---------- ----------
Net gain from operations before
dividends to policyholders and
Federal Income Taxes 130,739 143,191 141,951
Dividends to policyholders (5,981) 33,316 29,189
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
before Federal Income Taxes 136,720 109,875 112,762
Federal income tax expense
(benefit), (excluding tax on
capital gains) 11,713 7,339 (5,400)
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
federal income taxes and before
realized capital gains 125,007 102,536 118,162
Net realized capital gains less
capital gains tax and transferred
to the IMR 394 26,706 4,862
---------- ---------- ----------
NET INCOME $ 125,401 $ 129,242 $ 123,024
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
46
<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, 1998, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Capital and surplus, Beginning of year $ 832,695 $ 567,143 $ 792,452
---------- ----------- -----------
Net income 125,401 129,242 123,024
Change in net unrealized capital gains (losses) (384) 1,152 (1,715)
Change in non-admitted assets and related items (1,086) (463) 67
Change in reserve on account of change in valuation
basis -- 39,016 --
Change in asset valuation reserve 3,213 6,307 (11,812)
Surplus (contributed to) withdrawn from Separate
Accounts during period 82 -- 100
Other changes in surplus in Separate Accounts Statements 10 -- --
Change in surplus notes -- 250,000 (335,000)
Dividends to stockholders (50,000) (159,722) --
Aggregate write-ins for gains and losses in surplus (7) 20 27
---------- ----------- -----------
Net change in capital and surplus for the year 77,229 265,552 (225,309)
---------- ----------- -----------
Capital and surplus, End of year $ 909,924 $ 832,695 $ 567,143
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
47
<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, 1998, 1997 AND 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash Provided by Operations:
Premiums, annuity considerations and
deposit funds received $ 2,361,669 $ 2,410,919 $ 2,059,577
Considerations for supplementary
contracts and dividend accumulations
received 2,086 1,615 2,340
Net investment income received 236,944 345,279 324,914
Other income received 253,147 208,223 88,295
----------- ----------- -----------
Total receipts 2,853,846 2,966,036 2,475,126
----------- ----------- -----------
Benefits paid (other than dividends) 2,107,736 2,020,747 1,671,483
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 217,023 203,650 172,015
Net cash transferred to Separate
Accounts 800,636 895,465 755,605
Dividends paid to policyholders 26,519 28,316 22,689
Federal income tax payments
(recoveries),(excluding tax on
capital gains) 46,965 1,397 (15,363)
Other--net (138) 698 2,205
----------- ----------- -----------
Total payments 3,198,741 3,150,273 2,608,634
----------- ----------- -----------
Net cash used in operations (344,895) (184,237) (133,508)
----------- ----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$2,038 for 1998, $750 for 1997 and
$1,555 for 1996) 1,261,396 1,343,803 1,768,147
Issuance (repayment) of surplus notes -- 250,000 (335,000)
Other cash provided (used) (40,529) 71,095 147,956
----------- ----------- -----------
Total cash provided 1,220,867 1,664,898 1,581,103
----------- ----------- -----------
Cash Applied:
Cost of long-term investments acquired (967,901) (773,783) (1,318,880)
Other cash applied (187,263) (310,519) (177,982)
----------- ----------- -----------
Total cash applied (1,155,164) (1,084,302) (1,496,862)
Net change in cash and short-term
investments (279,192) 396,359 (49,267)
Cash and short-term investments:
Beginning of year 544,418 148,059 197,326
----------- ----------- -----------
End of year $ 265,226 $ 544,418 $ 148,059
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
48
<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, 1998, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Sun Life Assurance Company of Canada (U.S.) (the "Company") is incorporated as a
life insurance company and is currently engaged in the sale of individual
variable life insurance, individual fixed and variable annuities, group fixed
and variable annuities and group pension contracts.
Effective May 1, 1997, the Company became a wholly-owned subsidiary of the newly
established Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On
December 18, 1997, Life Holdco became a wholly-owned subsidiary of the Sun Life
Assurance Company of Canada - U.S. Operations Holdings, Inc. ("US Holdco"). US
Holdco is a wholly-owned subsidiary of Sun Life Assurance Company of Canada
("SLOC"). Prior to December 18, 1997, Life Holdco was a direct wholly-owned
subsidiary of SLOC.
The Company, which is domiciled in the State of Delaware, prepares its financial
statements in accordance with statutory accounting practices prescribed or
permitted by the State of Delaware Insurance Department. Prescribed accounting
practices include practices described in a variety of publications of the
National Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations and general administrative rules. Permitted accounting practices
encompass all accounting practices not so prescribed. The permitted accounting
practices adopted by the Company are not material to the financial statements.
Prior to 1996, statutory accounting practices were recognized by the insurance
industry and the accounting profession as generally accepted accounting
principles for mutual life insurance companies and stock life insurance
companies wholly-owned by mutual life insurance companies. In April 1993, the
Financial Accounting Standards Board ("FASB") issued an interpretation (the
"Interpretation"), that became effective in 1996, which changed the previous
practice of mutual life insurance companies (and stock life insurance companies
that are wholly-owned subsidiaries of mutual life insurance companies) with
respect to utilizing statutory basis financial statements for general purposes,
in that it will no longer allow such financial statements to be described as
having been prepared in conformity with generally accepted accounting principles
("GAAP"). Consequently, these financial statements prepared in conformity with
statutory accounting practices, as described above, vary from and are not
intended to present the Company's financial position, results of operations or
cash flow in conformity with generally accepted accounting principles. (See Note
20 for further discussion relative to the Company's basis of financial statement
presentation.) The effects on the financial statements of the variances between
the statutory basis of accounting and GAAP, although not reasonably
determinable, are presumed to be material.
INVESTED ASSETS
Bonds are carried at cost, adjusted for amortization of premium or accrual of
discount. Investments in non-insurance subsidiaries are carried on the equity
basis. Investments in mortgage backed securities are generally carried at
amortized cost. Changes in prepayment assumptions and resulting cash flows are
evaluated periodically. The adjusted yield is used to calculate investment
income in future periods. If current book value exceeds future undiscounted cash
flows, a realized capital loss is recorded and amortized through IMR.
Investments in insurance subsidiaries are carried at their statutory surplus
values. Mortgage loans acquired at a premium or discount are carried at
amortized values and other mortgage loans are carried at the amounts of the
unpaid balances. Real estate investments are carried at the lower of cost,
adjusted for accumulated depreciation or appraised value, less encumbrances.
Short-term investments are carried at amortized cost, which approximates fair
value. Depreciation of buildings and improvements is calculated using the
straight-line method over the estimated useful life of the property, generally
40 to 50 years.
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.
49
<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, 1998, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
INCOME AND EXPENSES
For life and annuity contracts, premiums are recognized as revenues over the
premium paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
SEPARATE ACCOUNTS
The Company has established unitized separate accounts applicable to various
classes of contracts providing for variable benefits. Contracts for which funds
are invested in separate accounts include variable life insurance and individual
and group qualified and non-qualified variable annuity contracts.
Assets and liabilities of the separate accounts, representing net deposits and
accumulated net investment earnings less fees, held primarily for the benefit of
contract holders, are shown as separate captions in the financial statements.
Assets held in the separate accounts are carried at market value as determined
by quoted market prices of the underlying investments.
The Company has also established a non-unitized separate account for amounts
allocated to the fixed portion of certain combination fixed/variable deferred
annuity contracts. The assets of this account are available to fund general
account liabilities, and general account assets are available to fund
liabilities of this account.
Gains (losses) from mortality experience and investment experience of the
separate accounts, not applicable to contract owners, are transferred to (from)
the general account. Accumulated gains (losses) that have not been transferred
are recorded as a payable (receivable) to (from) the general account. Amounts
payable to the general account of the Company were $361,863,000 in 1998 and
$284,078,000 in 1997.
CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING
As described more fully in Note 10, during 1997 the Company changed certain
assumptions used in determining actuarial reserves.
In March 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles ("Codification"). The
Codification, which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be effective January 1,
2001. However, statutory accounting principles will continue to be established
by individual state laws and permitted practices and it is uncertain when, or
if, the state of Delaware will require adoption of Codification for the
preparation of statutory financial statements. The Company has not finalized the
quantification of the effects of Codification on its statutory financial
statements.
OTHER
Preparation of the financial statements requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to amounts as
presented in the current year.
50
<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, 1998, 1997 AND 1996
2. INVESTMENTS IN SUBSIDIARIES
The Company owns all of the outstanding shares of Sun Life Insurance and Annuity
Company of New York ("Sun Life (N.Y.)"), Massachusetts Casualty Insurance
Company ("MCIC"), Sun Life of Canada (U.S.) Distributors, Inc. (formerly Sun
Investment Services Company) ("Sundisco"), New London Trust, F.S.B. ("NLT"), Sun
Life Financial Services Limited ("SLFSL"), Sun Benefit Services Company, Inc.
("Sunbesco"), Sun Capital Advisers, Inc. ("Sun Capital"), Sun Life Finance
Corporation ("Sunfinco"), Sun Life of Canada (U.S.) SPE 97-1, Inc. ("SPE 97-1"),
Clarendon Insurance Agency, Inc. ("Clarendon") and Sun Life Information Services
Ireland Ltd. ("SLISL").
On February 5, 1999, the Company finalized the sale of MCIC, a disability
insurance company which issues primarily individual disability income policies,
to Centre Solutions (U.S.) Limited, a wholly-owned subsidiary of Centre
Reinsurance Holdings Limited for approximately $34 million. The impact of this
sale to the ongoing operations of the Company is not expected to be material.
On September 28, 1998, the Company formed SLISL as an offshore technology center
for the purpose of completing systems projects for affiliates.
On October 30, 1997, the Company established a wholly-owned special purpose
corporation, SPE 97-1, for the purpose of engaging in activities incidental to
securitizing mortgage loans.
On December 31, 1997, the Company purchased from Massachusetts Financial
Services ("MFS") all of the outstanding shares of Clarendon, a registered
broker-dealer that acts as the general distributor of certain annuity and life
insurance contracts issued by the Company and its affiliates.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares of
MFS. On December 24, 1997, the Company transferred all of its shares of MFS to
Life Holdco in the form of a dividend valued at $159,722,000. As a result of
this transaction, the Company realized a gain of $21,195,000 of undistributed
earnings.
MFS, a registered investment adviser, serves as investment adviser to the mutual
funds in the MFS family of funds as well as certain mutual funds and separate
accounts established by the Company. The MFS Asset Management Group provides
investment advice to substantial private clients.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity
contracts and group life and disability insurance contracts in the State of New
York.
Sundisco is a registered investment adviser and broker-dealer.
NLT is a federally chartered savings bank.
SLFSL serves as the marketing administrator for the distribution of the offshore
products of Sun Life Assurance Company of Canada (Bermuda), an affiliate.
Sun Capital is a registered investment adviser.
Sunfinco and Sunbesco are currently inactive.
On September 28, 1998 a $500,000 note was issued by SLISL to the Company at a
rate of 6.0%, maturing on September 28, 2002.
A $110,000,000 note was issued to the Company by MFS on February 11, 1998 at an
interest rate of 6.0% due February 11, 1999. Another $110,000,000 note was
issued to the Company by MFS on December 22, 1998 at an interest rate of 5.55%
due February 11, 1999.
51
<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, 1998, 1997 AND 1996
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED):
On December 23, 1997, the Company issued a $110,000,000 note to US Holdco at an
interest rate of 5.80%, which was repaid on March 1, 1998. A $110,000,000 note
was also issued to the Company by MFS on December 23, 1997 at an interest rate
of 5.85% and was repaid on February 11, 1998.
On December 31, 1996, the Company issued a $58,000,000 note to SLOC at an
interest rate of 5.70% which was repaid on February 10, 1997. Also on December
31, 1996, the Company was issued a $58,000,000 note by MFS at an interest rate
of 5.76%. This note was repaid to the Company on February 10, 1997. On December
31, 1998, 1997 and 1996, the Company had an additional $20,000,000 in notes
issued by MFS, scheduled to mature in 2000.
During 1998, 1997, and 1996, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
MCIC -- $ 2,000 $ 10,000
SLFSL $ 750 1,000 1,500
SPE 97-1 -- 20,377 --
Sundisco 10,000 -- --
Sun Capital 500 -- --
Clarendon 10 -- --
SLISL 502 -- --
</TABLE>
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1998, 1997 and 1996 and for the years then ended, follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Intangible assets $ -- $ -- $ 9,646
Other assets 1,315,317 1,190,951 1,376,014
Liabilities (1,186,872) (1,073,966) (1,241,617)
------------- ------------- -------------
Total net assets $ 128,445 $ 116,985 $ 144,043
------------- ------------- -------------
------------- ------------- -------------
Total revenues $ 222,853 $ 750,364 $ 717,280
Operating expenses (221,933) (646,896) (624,199)
Income tax expense (1,222) (43,987) (42,820)
------------- ------------- -------------
Net income (loss) $ (302) $ 59,481 $ 50,261
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
On December 24, 1997, the Company transferred all of its shares of MFS to its
parent, Life Holdco.
52
<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, 1998, 1997 AND 1996
3. BONDS
Investments in debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term bonds:
United States government and government agencies and
authorities $ 140,417 $ 7,635 $ (177) $ 147,875
States, provinces and political subdivisions 16,632 2,219 -- 18,851
Public utilities 397,670 38,740 (238) 436,172
Transportation 197,207 22,481 (18) 219,670
Finance 144,958 12,542 (494) 157,006
All other corporate bonds 866,584 50,814 (6,419) 910,979
------------ ----------- ----------- ------------
Total long-term bonds 1,763,468 134,431 (7,346) 1,890,553
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 43,400 -- -- 43,400
Affiliates 220,000 -- -- 220,000
------------ ----------- ----------- ------------
Total short-term bonds 263,400 -- -- 263,400
------------ ----------- ----------- ------------
Total bonds $ 2,026,868 $ 134,431 $ (7,346) $ 2,153,953
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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>
53
<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, 1998, 1997 AND 1996
3. BONDS (CONTINUED):
The amortized cost and estimated fair value of bonds at December 31, 1998 are
shown below by contractual maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call and/or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Maturities:
Due in one year or less $ 459,631 $ 460,787
Due after one year through five years 329,625 336,516
Due after five years through ten years 264,372 283,840
Due after ten years 703,341 781,253
------------ ------------
1,756,969 1,862,396
Mortgage-backed securities 269,899 291,557
------------ ------------
Total bonds $ 2,026,868 $ 2,153,953
------------ ------------
------------ ------------
</TABLE>
Proceeds from sales and maturities of investments in debt securities during
1998, 1997, and 1996 were $1,016,811,000, $980,264,000, and $1,554,016,000,
gross gains were $17,025,000, $10,732,000, and $16,975,000 and gross losses were
$866,000, $2,446,000, and $10,885,000, respectively.
Bonds included above with an amortized cost of approximately $2,572,000,
$2,578,000 and $2,060,000 at December 31, 1998, 1997 and 1996, respectively,
were on deposit with governmental authorities as required by law.
Excluding investments in U.S. government and agencies securities, the Company is
not exposed to significant concentration of credit risk in its portfolio.
4. SECURITIES LENDING
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chase Manhattan Bank of New York. The custodian has
indemnified the Company against losses arising from this program. There were no
securities out on loan as of December 31, 1998 and 1997. Income resulting from
this program was $94,000, $200,000 and $137,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
5. MORTGAGE LOANS
The Company invests in commercial first mortgage loans throughout the United
States. The Company monitors the condition of the mortgage loans in its
portfolio. In those cases where mortgages have been restructured, appropriate
allowances for losses have been made. In those cases where, in management's
judgment, the mortgage loans' values are impaired, appropriate losses are
recorded.
54
<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, 1998, 1997 AND 1996
5. MORTGAGE LOANS (CONTINUED):
The following table shows the geographical distribution of the mortgage loan
portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
California $ 82,397 $ 119,122
Massachusetts 53,528 58,981
Michigan 34,357 42,912
New York 21,190 45,696
Ohio 36,171 51,862
Pennsylvania 93,587 97,949
Washington 36,548 54,948
All other 177,225 212,565
---------- ----------
$ 535,003 $ 684,035
---------- ----------
---------- ----------
</TABLE>
The Company has restructured mortgage loans totaling $30,743,000 and $26,284,000
at December 31, 1998 and 1997, respectively, against which there are allowances
for losses of $2,120,000 and $3,026,000, respectively.
The Company has made commitments of mortgage loans on real estate into the
future.The outstanding commitments for these mortgages amount to $18,005,000 and
$12,300,000 at December 31, 1998 and 1997, respectively.
6. INVESTMENT GAINS AND LOSSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net realized gains (losses):
Bonds $ 5,659 $ 2,882 $ 5,631
Common stock of affiliates -- 21,195 --
Common stocks 48
Mortgage loans 2,374 3,837 763
Real estate 955 2,912 599
Other invested assets (3,827) (717) 567
---------- ---------- ---------
Subtotal 5,209 30,109 7,560
Capital gains tax expense 4,815 3,403 2,698
---------- ---------- ---------
Total $ 394 $ 26,706 $ 4,862
---------- ---------- ---------
---------- ---------- ---------
Changes in unrealized gains (losses):
Common stock of affiliates $ (302) $ (2,894) $ (5,739)
Mortgage loans (1,312) 1,524 (600)
Real estate 403 3,377 4,624
Other invested assets 827 (855) --
---------- ---------- ---------
Total $ (384) $ 1,152 $ (1,715)
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
Realized capital gains and losses on bonds and mortgages and interest rate swaps
which relate to changes in levels of interest rates are charged or credited to
an interest maintenance reserve ("IMR") and amortized into income over the
remaining contractual life of the security sold. The net realized capital gains
credited to
55
<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, 1998, 1997 AND 1996
6. INVESTMENT GAINS AND LOSSES (CONTINUED):
the interest maintenance reserve were $8,943,000 in 1998, $6,321,000 in 1997,
and $7,710,000 in 1996. All gains and losses are transferred net of applicable
income taxes.
7. NET INVESTMENT INCOME
Net investment income consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income from bonds $ 167,436 $ 188,924 $ 178,695
Income from investment in common stock of affiliates 3,675 41,181 50,408
Interest income from mortgage loans 53,269 76,073 92,591
Real estate investment income 15,932 17,161 16,249
Interest income from policy loans 2,881 3,582 2,790
Other investment income (loss) (641) (193) 1,710
---------- ---------- ----------
Gross investment income 242,552 326,728 342,443
---------- ---------- ----------
Interest on surplus notes and notes payable (44,903) (42,481) (23,061)
Investment expenses (13,117) (13,998) (15,629)
---------- ---------- ----------
Net investment income $ 184,532 $ 270,249 $ 303,753
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
8. DERIVATIVES
The Company uses derivative instruments for interest rate risk management
purposes, including hedges against specific interest rate risk and to minimize
the Company's exposure to fluctuations in interest rates. The Company's use of
derivatives has included U.S. Treasury futures, conventional interest rate
swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that qualify
as hedges are deferred until the earliest of the completion of the hedging
transaction, determination that the transaction will no longer take place, or
determination that the hedge is no longer effective. Upon completion of the
hedge, where it is impractical to allocate gains or losses to specific hedged
assets or liabilities, gains or losses are deferred in IMR and amortized over
the remaining life of the hedged assets. At December 31, 1998 and 1997 there
were no futures contracts outstanding.
In the case of interest rate and foreign currency swap agreements and forward
spread lock interest rate swap agreements, gains or losses on terminated swaps
are deferred in the IMR and amortized over the shorter of the remaining life of
the hedged asset sold or the remaining term of the swap contract. The net
differential to be paid or received on interest rate swaps is recorded monthly
as interest rates change.
56
<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, 1998, 1997 AND 1996
8. DERIVATIVES (CONTINUED):
Options are used to hedge the stock market interest exposure in the mortality
and expense risk charges and guaranteed minimum death benefit features of the
Company's variable annuities. The Company's open positions are as follows:
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1998
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Conventional interest rate swaps $ 45,000 $ 508
Foreign currency swap 1,178 263
</TABLE>
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1997
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN THOUSANDS)
<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 75,000 693
</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 nonperformance by counterparties. The
counterparties are major financial institutions and management believes that the
risk of incurring losses related to credit risk is remote.
9. LEVERAGED LEASES
The Company is a lessor in a leveraged lease agreement entered into on October
21, 1994, under which equipment having an estimated economic life of 25-40 years
was leased for a term of 9.75 years. The Company's equity investment represented
22.9% of the purchase price of the equipment. The balance of the purchase price
was furnished by third-party long-term debt financing, collateralized by the
equipment and non-recourse to the Company. At the end of the lease term, the
Master Lessee may exercise a fixed price purchase option to purchase the
equipment.
57
<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, 1998, 1997 AND 1996
9. LEVERAGED LEASES (CONTINUED):
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Lease contracts receivable $ 78,937 $ 92,605
Less non-recourse debt (78,920) (92,589)
---------- ----------
17 16
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (8,932) (10,324)
---------- ----------
Investment in leveraged leases 32,235 30,842
Less fees (138) (163)
---------- ----------
Net investment in leveraged leases $ 32,097 $ 30,679
---------- ----------
---------- ----------
</TABLE>
The net investment is included in "other invested assets" on the balance sheet.
10. REINSURANCE
The Company has agreements with SLOC which provide that SLOC will reinsure the
mortality risks of the individual life insurance contracts sold by the Company.
Under these agreements basic death benefits and supplementary benefits are
reinsured on a yearly renewable term basis and coinsurance basis, respectively.
Reinsurance transactions under these agreements had the effect of decreasing
income from operations by approximately $2,128,000, $1,381,000 and $1,603,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
Effective January 1, 1991, the Company entered into an agreement with SLOC under
which certain individual life insurance contracts issued by SLOC were reinsured
by the Company on a 90% coinsurance basis. During 1997 SLOC changed certain
assumptions used in determining the gross and the ceded reserve balance. The
Company reflected the effect of the changes in assumptions to its assumed
reserves as a direct credit to surplus. The effect of the change was a
$39,016,000 decrease in reserves. Also, the agreement required SLOC to reinsure
the mortality risks in excess of $500,000 per policy for the individual life
insurance contracts assumed by the Company. Such death benefits are reinsured on
a yearly renewable term basis. The life reinsurance assumed agreement required
the reinsurer to withhold funds in amounts equal to the reserves assumed. These
agreements had the effect of increasing income from operations by approximately
$24,579,000, $37,050,000 and $35,161,000 for the years ended December 31, 1998,
1997 and 1996, respectively. The Company terminated this agreement effective
October 1, 1998, resulting in an increase in income from operations of
$65,679,000 which included a cash settlement.
58
<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, 1998, 1997 AND 1996
10. REINSURANCE (CONTINUED):
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1998, 1997 and 1996 before the effect of
reinsurance transactions with SLOC:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $ 2,377,364 $ 2,340,733 $ 1,941,423
Net investment income and realized gains 187,208 298,120 310,172
------------ ------------ ------------
Subtotal 2,564,572 2,638,853 2,251,595
------------ ------------ ------------
Benefits and Expenses:
Policyholder benefits 2,312,247 2,350,354 2,011,998
Other expenses 203,238 187,591 155,531
------------ ------------ ------------
Subtotal 2,515,485 2,537,945 2,167,529
------------ ------------ ------------
Income from operations $ 49,087 $ 100,908 $ 84,066
------------ ------------ ------------
------------ ------------ ------------
</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 increasing income from operations by $3,008,000 in 1998, and
decreasing income from operations by $2,658,000 in 1997 and $46,000 in 1996.
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, 1998
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 2,896,529 19
At book value less surrender charges (surrender charge >5%) 10,227,212 66
At book value (minimal or no charge or adjustment) 1,264,453 8
Not subject to discretionary withdrawal provision 1,106,197 7
-------------- ---
Total annuity actuarial reserves and deposit liabilities $ 15,494,391 100
-------------- ---
-------------- ---
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN THOUSANDS)
<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>
59
<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, 1998, 1997 AND 1996
12. SEGMENT INFORMATION
The Company offers financial products and services such as fixed and variable
annuities, retirement plan services and life insurance on an individual basis.
Within these areas, the Company conducts business principally in two operating
segments and maintains a corporate segment to provide for the capital needs of
the various operating segments and to engage in other financing related
activities.
The Individual Insurance segment markets and administers a variety of life
insurance products sold to individuals and corporate owners of individual life
insurance. The products include whole life, universal life and variable life
products.
The Retirement Products and Services ("RPS") segment markets and administers
individual and group variable annuity products, individual and group fixed
annuity products which include market value adjusted annuities, and other
retirement benefit products.
The following amounts pertain to the various business segments:
<TABLE>
<CAPTION>
FEDERAL
TOTAL TOTAL PRETAX INCOME TOTAL
(IN THOUSANDS) REVENUES EXPENDITURES* INCOME TAXES ASSETS
- -------------------------------------------------- ------------ -------------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
1998
Individual Insurance $ 229,710 $ 144,800 $ 84,910 $ (4,148) $ 199,683
RPS 2,527,608 2,483,715 43,893 12,486 16,123,905
Corporate 10,959 3,042 7,917 3,375 579,033
------------ -------------- ---------- ---------- --------------
Total $ 2,768,277 $ 2,631,557 $ 136,720 $ 11,713 $ 16,902,621
------------ -------------- ---------- ---------- --------------
1997
Individual Insurance 304,141 272,333 31,808 13,825 1,143,697
RPS 2,533,006 2,507,591 25,414 10,667 14,043,221
Corporate 57,897 5,244 52,653 (17,153) 738,439
------------ -------------- ---------- ---------- --------------
Total $ 2,895,044 $ 2,785,169 $ 109,875 $ 7,339 $ 15,925,357
------------ -------------- ---------- ---------- --------------
1996
Individual Insurance 281,309 255,846 25,463 13,931 817,115
RPS 2,174,602 2,151,126 23,476 1,203 12,057,572
Corporate 64,721 898 63,823 (20,534) 689,266
------------ -------------- ---------- ---------- --------------
Total $ 2,520,632 $ 2,407,870 $ 112,762 $ (5,400) $ 13,563,953
------------ -------------- ---------- ---------- --------------
</TABLE>
- ------------------------
* Total expenditures include dividends to policyholders of $(5,981) for 1998,
$33,316 for 1997 and $29,189 for 1996.
13. RETIREMENT PLANS
The Company participates with SLOC in a noncontributory defined benefit pension
plan covering essentially all employees. The benefits are based on years of
service and compensation.
The funding policy for the pension plan is to contribute an amount which at
least satisfies the minimum amount required by ERISA; currently, the plan is
fully funded. The Company is charged for its share of the pension cost based
upon its covered participants. Pension plan assets consist principally of
separate accounts of SLOC.
The Company's share of the group's accrued pension cost was $1,178,000 and
$593,000 at December 31, 1998 and 1997, respectively. The Company's share of net
periodic pension cost was $586,000, $146,000 and $27,000, for 1998, 1997 and
1996, respectively.
60
<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, 1998, 1997 AND 1996
13. RETIREMENT PLANS (CONTINUED):
The Company also participates with SLOC and certain affiliates in a 401(k)
savings plan for which substantially all employees are eligible. The Company
matches, up to specified amounts, employees' contributions to the plan. Company
contributions were $231,000, $259,000 and $233,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
OTHER POST-RETIREMENT BENEFIT PLANS
In addition to pension benefits the Company provides certain health, dental, and
life insurance benefits ("post-retirement benefits") for retired employees and
dependents. Substantially all employees may become eligible for these benefits
if they reach normal retirement age while working for the Company, or retire
early upon satisfying an alternate age plus service condition. Life insurance
benefits are generally set at a fixed amount.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employer's Accounting for Postretirement Benefits
Other Than Pensions." SFAS No. 106 requires an accrual of the estimated cost of
retiree benefit payments during the years the employee provides services. SFAS
No. 106 allows recognition of the cumulative effect of the liability in the year
of adoption or the amortization of the obligation over a period of up to 20
years. The obligation of approximately $455,000 is recognized over a period of
ten years. The Company's cash flows are not affected by implementation of this
standard, but implementation decreased net income by $95,000, $117,000, and
$8,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The
Company's post retirement health, dental and life insurance benefits currently
are not funded.
61
<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, 1998, 1997 AND 1996
13. RETIREMENT PLANS (CONTINUED):
OTHER POST-RETIREMENT BENEFIT PLANS CONTINUED
The following table sets forth the change in the pension and other
postretirement benefit plans' benefit obligations and assets as well as the
plans' funded status reconciled with the amount shown in the Company's financial
statements at December 31:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
1998 1997 1998 1997
---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 79,684 $ 70,848 $ 9,845 $ 9,899
Service cost 4,506 4,251 240 306
Interest cost 6,452 5,266 673 725
Amendments -- 1,000 -- --
Actuarial loss (gain) 21,975 -- 308 (801)
Benefits paid (1,825) (1,681) (647) (284)
---------- ---------- ---------- ---------
Benefit obligation at end of year $ 110,792 $ 79,684 $ 10,419 $ 9,845
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
The Company's share:
Benefit obligation at beginning of year $ 5,094 $ 4,529 $ 385 $ 384
Benefit obligation at end of year $ 9,125 $ 5,094 $ 416 $ 385
Change in plan assets:
Fair value of plan assets at beginning of year $ 136,610 $ 122,807 $ -- $ --
Actual return on plan assets 16,790 15,484 -- --
Employer contribution -- -- 647 284
Benefits paid (1,825) (1,681) (647) (284)
---------- ---------- ---------- ---------
Fair value of plan assets at end of year $ 151,575 $ 136,610 $ -- $ --
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Funded status $ 40,783 $ 56,926 $ (10,419) $ (9,845)
Unrecognized net actuarial gain (loss) (2,113) (18,147) 586 257
Unrecognized transition obligation (asset) (24,674) (26,730) 185 230
Unrecognized prior service cost 7,661 8,241 -- --
---------- ---------- ---------- ---------
Prepaid (accrued) benefit cost $ 21,657 $ 20,290 $ (9,648) $ (9,358)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
The Company's share of accrued benefit cost $ (1,178) $ (593) $ (195) $ (102)
Weighted-average assumptions as of December 31:
Discount rate 6.75% 7.50% 6.75% 7.50%
Expected return on plan assets 8.00% 7.50% N/A N/A
Rate of compensation increase 4.50% 4.50% N/A N/A
</TABLE>
62
<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, 1998, 1997 AND 1996
13. RETIREMENT PLANS (CONTINUED):
For measurement purposes, a 10.1% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1998 (5.7% for dental benefits).
The rates were assumed to decrease gradually to 5% for 2005 and remain at that
level thereafter.
<TABLE>
<CAPTION>
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 4,506 $ 4,251 $ 240 $ 306
Interest cost 6,452 5,266 673 725
Expected return on plan assets (10,172) (9,163) -- --
Amortization of transition obligation (asset) (2,056) (2,056) 45 45
Amortization of prior service cost 580 517 -- --
Recognized net actuarial (gain) loss (677) (789) (20) 71
---------- --------- --------- ---------
Net periodic benefit cost $ (1,367) $ (1,974) $ 938 $ 1,147
---------- --------- --------- ---------
---------- --------- --------- ---------
The Company's share of net periodic benefit cost $ 586 $ 146 $ 95 $ 117
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
INCREASE DECREASE
------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Effect on total of service and interest cost components $ 210 $ (170)
Effect on postretirement benefit obligation 2,026 (1,697)
</TABLE>
63
<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, 1998, 1997 AND 1996
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Bonds $ 2,026,868 $ 2,153,953
Mortgages 535,003 556,143
Derivatives -- 771
LIABILITIES:
Insurance reserves $ 121,100 $ 121,100
Individual annuities 274,448 271,849
Pension products 1,104,489 1,145,351
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN THOUSANDS)
<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)
</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.
15. STATUTORY INVESTMENT VALUATION RESERVES
The asset valuation reserve ("AVR") provides a reserve for losses from
investments in bonds, stocks, mortgage loans, real estate and other invested
assets with related increases or decreases being recorded directly to surplus.
64
<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, 1998, 1997 AND 1996
15. STATUTORY INVESTMENT VALUATION RESERVES (CONTINUED):
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve ("IMR") and amortized into income over the remaining contractual life of
the security sold.
The table shown below presents changes in the major elements of the AVR and IMR.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997
-------------------- --------------------
AVR IMR AVR IMR
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 47,605 $ 33,830 $ 53,911 $ 28,675
Net realized investment gains, net of tax 256 8,942 17,400 6,321
Amortization of net investment gains -- (2,282) -- (1,166)
Unrealized investment losses (6,550) -- (2,340) --
Required by formula 3,081 -- (21,366) --
--------- --------- --------- ---------
Balance, end of year $ 44,392 $ 40,490 $ 47,605 $ 33,830
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
16. FEDERAL INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return.
Federal income taxes are calculated for the consolidated group based upon
amounts determined to be payable as a result of operations within the current
year. No provision is recognized for timing differences which may exist between
financial statement and taxable income. Such timing differences include
reserves, depreciation and accrual of market discount on bonds. Cash payments
for federal income taxes were approximately $48,144,000, $31,000,000 and
$19,264,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company is currently undergoing an audit by the Internal Revenue Service.
The Company believes that there will be no material audit adjustments for the
periods under examination.
17. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE)
On December 22, 1997, the Company issued a $250,000,000 surplus note to Life
Holdco. This note has an interest rate of 8.625% and is due on or after November
6, 2027.
On May 9, 1997, the Company issued a short-term note of $600,000,000 to Life
Holdco at an interest rate of 5.10%, which was extended at various interest
rates. This note was repaid on December 22, 1997.
On December 19, 1995, the Company issued surplus notes totaling $315,000,000 to
an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and
7.25%. Of these notes, $157,500,000 will mature in the year 2007 and
$157,500,000 will mature in the year 2015. Interest on these notes is payable
semiannually.
Principal and interest on surplus notes are payable only to the extent that the
Company meets specified requirements regarding free surplus exclusive of the
principal amount and accrued interest, if any, on these notes and with the
consent of the Delaware Insurance Commissioner.
The Company accrued $4,259,000 and $ 964,000 for interest on surplus notes for
the years ended December 31, 1998 and 1997, respectively.
The Company accrued $4,259,000 and $964,000 for interest on surplus notes for
the years ended December 31, 1998 and 1997, respectively.
The Company expensed $44,903,000, $42,481,000 and $23,061,000 for interest on
surplus notes and notes payable for the years ended December 31, 1998, 1997 and
1996, respectively.
65
<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, 1998, 1997 AND 1996
18. TRANSACTIONS WITH AFFILIATES
The Company has an agreement with SLOC which provides that SLOC will furnish, as
requested, personnel as well as certain services and facilities on a
cost-reimbursement basis. Expenses under this agreement amounted to
approximately $16,344,000 in 1998, $15,997,000 in 1997, and $20,192,000 in 1996.
The Company leases office space to SLOC under lease agreements with terms
expiring in September, 1999 and options to extend the terms for each of thirteen
successive five-year terms at fair market rental not to exceed 125% of the fixed
rent for the term which is ending. Rent received by the Company under the leases
for 1998 amounted to approximately $6,856,000.
19. RISK-BASED CAPITAL
Effective December 31, 1993, the NAIC adopted risk-based capital requirements
for life insurance companies. The risk-based capital requirements provide a
method for measuring the minimum acceptable amount of adjusted capital that a
life insurer should have, as determined under statutory accounting practices,
taking into account the risk characteristics of its investments and products.
The Company has met the minimum risk-based capital requirements at December 31,
1998, 1997 and 1996.
20. ACCOUNTING POLICIES AND PRINCIPLES
The financial statements of the Company have been prepared on the basis of
statutory accounting practices which, prior to 1996, were considered by the
insurance industry and the accounting profession to be in accordance with GAAP
for mutual life insurance companies. The primary differences between statutory
accounting practices and GAAP are described as follows. Under statutory
accounting practices, financial statements are not consolidated and investments
in subsidiaries are shown at net equity value. Accordingly, the assets,
liabilities and results of operations of the Company's subsidiaries are not
consolidated with the assets, liabilities and results of operations,
respectively, of the Company. Changes in net equity value of the common stock of
the Company's United States life insurance subsidiaries are directly reflected
in the Company's surplus. Changes in the net equity value of the common stock of
all other subsidiaries are directly reflected in the Company's Asset Valuation
Reserve. Dividends paid by subsidiaries to the Company are included in the
Company's net investment income.
Other differences between statutory accounting practices and GAAP include the
following: statutory accounting practices do not recognize the following assets
or liabilities which are reflected under GAAP: deferred policy acquisition
costs, deferred federal income taxes and statutory nonadmitted assets. Asset
Valuation Reserves and Interest Maintenance Reserves are established under
statutory accounting practices but not under GAAP. Methods for calculating real
estate depreciation and investment valuation allowances differ under statutory
accounting practices and GAAP. Actuarial assumptions and reserving methods
differ under statutory accounting practices and GAAP. Premiums for universal
life and investment-type products are recognized as income for statutory
purposes and as deposits to policyholders' accounts for GAAP.
Because the Company's management uses financial information prepared in
conformity with accounting principles generally accepted in Canada in the normal
course of business, the management of Sun Life Assurance Company of Canada
(U.S.) has determined that the cost of complying with Statement No. 120,
"Accounting and Reporting by Mutual Insurance Enterprises and by Insurance
Enterprises for Certain Long Duration Participating Contracts", exceeds the
benefits that the Company, or the users of its financial statements, would
experience. Consequently, the Company has elected not to apply such standards in
the preparation of these financial statements.
66
<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.) (the "Company") as of December 31, 1998 and 1997, and the related
statutory statements of operations, changes in capital stock and surplus, and
cash flow for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Notes 1 and 20 to the financial statements, the
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
which is a comprehensive basis of accounting other than generally accepted
accounting principles. The effects on the financial statements of the
differences between the statutory basis of accounting and generally accepted
accounting principles, although not reasonably determinable, are presumed to be
material.
In our opinion, the statutory financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities, and capital
stock and surplus of Sun Life Assurance Company of Canada (U.S.) as of December
31, 1998 and 1997, and the results of its operations and its cash flow for each
of the three years in the period ended December 31, 1998 on the basis of
accounting described in Notes 1 and 20.
However, because of the differences between the two bases of accounting referred
to in the second preceding paragraph, in our opinion, the statutory financial
statements referred to above do not present fairly, in conformity with generally
accepted accounting principles, the financial position of Sun Life Assurance
Company of Canada (U.S.) as of December 31, 1998 and 1997 or the results of its
operations or its cash flow for each of the three years in the period ended
December 31, 1998.
As management has stated in Note 20, because the Company's management uses
financial information prepared in accordance with accounting principles
generally accepted in Canada in the normal course of business, the management of
Sun Life Assurance Company of Canada (U.S.) has determined that the cost of
complying with Statement No. 120, ACCOUNTING AND REPORTING BY MUTUAL LIFE
INSURANCE ENTERPRISES AND BY INSURANCE ENTERPRISES FOR CERTAIN LONG-DURATION
PARTICIPATING CONTRACTS, would exceed the benefits that the Company, or the
users of its financial statements, would experience. Consequently, the Company
has elected not to apply such standards in the preparation of these financial
statements.
February 5, 1999
67
<PAGE>
APPENDIX
EXAMPLES OF THE MARKET VALUE ADJUSTMENT (MVA)
1. The MVA factor for all Guarantee Periods, except Floating Rate Guarantee
Periods, is:
<TABLE>
<C> <C>
N/12
1 + I
( -------- ) -1
1 + J + b
</TABLE>
The following examples assume the following:
(a) The Guarantee Amount was allocated to a five year Guarantee Period
with a Guaranteed Interest Rate of 6% or .06 (I).
(b) The date of surrender is two years from the Expiration Date (N =
24).
(c) The value of the Guarantee Amount on the date of surrender is
$11,910.16.
(d) The Accumulation Account Value at the beginning of the current
Account Year was $11,236.00.
(e) No transfers or partial withdrawals have been made.
(f) Withdrawal charges, if any, are calculated in the same manner
described in the Prospectus (See "Withdrawal Charges").
(g) The b factor for the Contract is .0025 (b).
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender, the current rate (J) is 8% or .08.
<TABLE>
<C> <S> <C> <C>
N/12
1 + I
The MVA factor = ( -------- ) -1
1 + J + b
</TABLE>
<TABLE>
<C> <S> <C> <C>
24/12
1 + .06
= ( -------------- ) -1
1 + .08 + .0025
2
= (.979) -1
= .959 -1
= - .041
</TABLE>
The value of the Guarantee Amount less the free withdrawal amount is
multiplied by the MVA factor to determine the MVA:
($11,910.16 - $11,236.00 X .1) X (-.041) = -$443.74
-$443.74 represents the MVA that will be deducted from the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $11,236.00 X .1) X (-$.041) = -$36.05. -$36.05. represents
the MVA that will be deducted from the partial withdrawal amount before the
deduction of any withdrawal charge.
68
<PAGE>
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of surrender, the current rate (J) is 5% or .05.
<TABLE>
<C> <S> <C> <C>
N/12
1 + I
The MVA factor = ( -------- ) -1
1 + J + b
</TABLE>
<TABLE>
<C> <S> <C> <C>
24/12
1 + .06
= ( -------------- ) -1
1 + .05 + .0025
2
= (1.007) -1
= 1.014 -1
= .014
</TABLE>
The value of the Guarantee Amount less the free withdrawal amount is
multiplied by the MVA factor to determine the MVA:
($11,910.16 - $11,236.00 X .1) X .014 = $154.28
$154.28 represents the MVA that would be added to the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $11,236.00 X .1) X (.019) = $12.53.
$12.53 represents the MVA that would be added to the partial withdrawal
amount before the deduction of any withdrawal charge.
2. The MVA factor for Floating Rate Guarantee Periods is calculated similarly
applying the following formula:
[(1 + F - X)/(1 + F - Y + b)]N/12 -1
where,
F is the Floating Rate currently being used in determining the Floating
Rate Guarantee Period's Guaranteed Interest Rate,
X is the Floating Rate Spread in effect during the current Floating Rate
Guarantee Period,
Y is the Floating Rate Spread, as of the date of the application of the
MVA, for current allocations to new Floating Rate Guarantee Periods equal
to the balance of the current Floating Rate Guarantee Period, rounded up
to the next higher number of complete years,
b is a factor which the Company will determine for a Contract and which
will not exceed 0.25%, and
N is the number of complete months remaining in the current Floating Rate
Guarantee Period.
In the determination of Y, if the Company currently does not offer the
applicable Floating Rate Guarantee Period, then the rate will be determined by
using the next longer Floating Rate Guarantee Period that is available. If the
Company currently does not offer a longer Floating Rate Guarantee Period, the
Company will determine, in an equitable manner and in its sole discretion, the
value of Y.
3. The following examples assume the following:
(a) The Guarantee Amount was allocated to a five year Guarantee Period
with a Guaranteed Interest Rate of LIBOR - 1.25% (X = 1.25%).
(b) The date of surrender is two years from the Expiration Date (N =
24).
(c) The value of the Floating Rate Guarantee Amount on the date of
surrender is $11,910.16.
(d) The Account Value at the beginning of the current Account Year was
$11,236.00.
(e) No transfers or partial withdrawals affecting this Guarantee
Amount have been made.
69
<PAGE>
(f) Withdrawal charges, if any, are calculated in the same manner
described in the Prospectus (See "Withdrawal Charges").
(g) The LIBOR rate currently used for crediting interest to the
Contract equals 7.25% (F).
(h) The b factor for the Contract is .0025 (b).
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender, the current Floating Rate Spread (Y)
is .90%.
<TABLE>
<C> <S> <C> <C>
N/12
1 + F - X
The MVA factor = ( -------------- ) -1
1 + F - Y + b
</TABLE>
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
24/12
1 + .0725 - .0125
= ( ------------------------- ) -1
1 + .0725 - .0090 + .0025
2
= (.994) -1
= .989 -1
= -.011
</TABLE>
The value of the Guarantee Amount less the free withdrawal amount is
multiplied by the MVA factor to determine the MVA:
($11,910.16 - $11,236 X .1) X (-.011) = -$121.08
-$121.08 represents the MVA that will be deducted from the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $11,236 X .1) X (-.011) = -$9.84. -$9.84 represents the
MVA that will be deducted from the value of the Gurantee Amount before the
deduction of any withdrawal charge.
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of surrender, the current Floating Rate Spread (Y)
is 1.60%.
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
N/12
1 + F - X
The MVA factor = ( -------------- ) -1
1 + F - Y + b
</TABLE>
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
24/12
1 + .0725 - .0125
= ( ------------------------ ) -1
1 + .0725 - .0160 + .0025
2
= (1.001) -1
= 1.002 -1
= .002
</TABLE>
The value of the Guarantee Amount less the free withdrawal amount is
multiplied by the MVA factor to determine the MVA:
($11,910.16 - $11,236 X .1) X .002 = $20.38
$20.38 represents the MVA that would be added to the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $11,236 X .1) X (.002) = $1.66.
$1.66 represents the MVA that would be added to the partial withdrawal
amount before the deduction of any withdrawal charge.
70
<PAGE>
<TABLE>
<S> <C>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS:
RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 9133
BOSTON, MASSACHUSETTS 02117
TELEPHONE:
Toll Free (888) 786-2435
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
LEGAL COUNSEL
Jorden Burt Boros Cicchetti Berenson & Johnson LLP
1025 Thomas Jefferson Street, N.W.
Suite 400E
Washington, D.C. 20007
AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110
FUTFIX-1 5/99
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not Applicable
Item 15. INDEMNIFICATION
Article 8 of the By-Laws of Sun Life Assurance Company of Canada (U.S.)
provides for indemnification of directors and officers as follows:
Section 8.01 (a). Every person who is or was a director or officer or
employee of this corporation or of any other corporation which he
served at the request of this corporation and in which this corporation
owns or owned shares of capital stock or of which it is or was a
creditor shall have a right to be indemnified by this corporation
against all liability and reasonable expense incurred by him in
connection with or resulting from any claim, action, suit or proceeding
in which he may become involved as a party or otherwise by reason of
his being or having been a director, officer or employee of this
corporation or such other corporation, provided (1) said claim, action,
suit or proceeding shall be prosecuted to a final determination and he
shall be vindicated on the merits, or (2) in the absence of such a
final determination vindicating him on the merits, the board of
directors shall determine that he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful; said determination to be made by the board of directors
acting through a quorum of disinterested directors, or in its absence
on the opinion of counsel.
(b) For purposes of the preceding subsection: (1) "liability and
reasonable expenses" shall include but not be limited to reasonable
counsel fees and disbursements, amounts of any judgment, fine or
penalty, and reasonable amounts paid in settlement; (2) "claim, action,
suit or proceeding" shall include every such claim, action, suit or
proceeding, whether civil or criminal, derivative or otherwise,
administrative, judicial or legislative, any appeal relating thereto,
and shall include any reasonable apprehension or threat of such a
claim, action, suit or proceeding; (3) a settlement, plea of nolo
contendere, consent judgment, adverse civil judgment, or conviction
shall not of itself create a presumption that the conduct of the person
seeking indemnification did not meet the standard of conduct set forth
in subsection (a)(2) hereof.
(c) (Notwithstanding the foregoing, the following limitations
shall apply with respect to any action by or in the right of the
Corporation: (1) no indemnification shall be made in respect of any
claim, issue or matter as to which the person seeking indemnification
shall have been adjudged to be liable for negligence or misconduct in
the performance of his duty to the corporation unless and only to the
extent that the Court of Chancery of the State of Delaware or the court
in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chanceery or
such other court shall deem proper; and (2) indemnification shall
extend only to reasonable expenses, including reasonable counsel's fees
and disbursements.
(d) The right to indemnification shall extend to any person
otherwise entitled to it under this by-law whether or not that person
continues to be a director, officer or employee of this corporation or
such other corporations at the time such liability or expense shall be
incurred. The right of indemnification shall extend to the legal
representative and heirs of any person otherwise entitled to
indemnification. If a person meets the requirements of this by-law with
respect to some matters in a claim, action, suit or proceeding, but not
with respect to others, he shall be entitled to indemnification as the
former. Advances against liability and expenses may be made by the
corporation on terms fixed by the board of directors subject to an
obligation to repay if indemnification proves unwarranted.
(e) This by-law shall not exclude any other rights of
indemnification or other rights to which any director, officer or
employee may be entitled to be contract, vote of stockholders or as a
matter of law. If any clause, provision or application of this section
shall be determined to be invalid, the other clauses, provisions or
<PAGE>
applications of this section shall not be affected but shall remain in
full force and effect. The provisions of this by-law shall be
applicable to claims, actions, suits or proceedings made or commenced
after the adoption hereof, whether arising from acts or omissions to
act occurring before or after the adoption hereof.
(f) Nothing contained in this by-law shall be construed to
protect any director or officer of the corporation against any
liability to the corporation or its security holders to which he would
otherwise by subject by reason of wilful malfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his office.
Item 16. EXHIBITS
(1) Underwriting Agreement *
(3) (a) Certificate of Incorporation *
(b) By-laws *
(4) (a) Single Payment Deferred Fixed Individual Annuity Contract **
(b) Single Payment Deferred Fixed Group Annuity Contract **
(c) Certificate to be used in connection with Contract filed as
Exhibit 4(b) **
(5) Opinion re Legality ***
(23) Independent Auditor's Consent ****
(24) Powers of Attorney ****
* Incorporated by reference from Post-Effective Amendment No. 1 to the
Registration Statement of the Registrant on Form S-2, File
No. 333-45923.
** Incorporated by reference from Registration Statement of the
Registrant on Form S-2, File No. 333-62837.
*** Incorporated by reference from Post-Effective Amendment No. 1 to the
Registration Statement of the Registrant on Form S-2, File
No. 333-62837.
**** Filed herewith.
Item 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement
(or the most recent post-effective amendment thereof),
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement;
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the registration statement is
on Form S-3 or Form S-8, and the information required to
be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the
registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
<PAGE>
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding, is asserted by such
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Item 18. FINANCIAL STATEMENTS AND SCHEDULES
The following Financial Statements are included in the Registration Statement:
Included in Part I:
Financial Statements of the Depositor:
1. Statutory Statements of Admitted Assets, Liabilities and Capital
Stock and Surplus, Years Ended December 31, 1998 and 1997;
2. Statutory Statements of Operations, Years Ended December 31,
1998, 1997 and 1996;
3. Statutory Statements of Changes in Capital Stock and Surplus,
Years Ended December 31, 1998, 1997 and 1996;
4. Statutory Statements of Cash Flow, Years Ended December 31, 1998,
1997 and 1996;
5. Notes to Financial Statements; and
6. Independent Auditors' Report.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, Sun Life Assurance Company of Canada (U.S.), certifies that it
has reasonable grounds to believe that it meets all of the requirements for
filing on Form S-2 and has duly caused this Post-Effective Amendment No. 2 to
its Registration Statement on Form S-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Wellesley Hills,
Commonwealth of Massachusetts, on the 12th day of April, 1999.
Sun Life Assurance Company of Canada (U.S.)
(Registrant)
By: /s/ C. JAMES PRIEUR
-----------------------
C. James Prieur
President
Attest:/s/ EDWARD M. SHEA
--------------------
Edward M. Shea
Assistant Vice President and Senior Counsel
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Form S-2 Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ C. JAMES PRIEUR President and Director April 12, 1999
- ------------------------- (Principal Executive Officer)
C. James Prieur
/s/ ROBERT P. VROLYK Vice President, Finance April 12, 1999
- ------------------------- and Actuary (Principal Financial
Robert P. Vrolyk and Accounting Officer)
* /s/ DONALD A. STEWART Chairman and Director April 12, 1999
- -------------------------
Donald A. Stewart
* /s/ RICHARD B. BAILEY Director April 12, 1999
- -------------------------
Richard B. Bailey
* /s/ M. COLYER CRUM Director April 12, 1999
- -------------------------
M. Colyer Crum
* /s/ DAVID D. HORN Director April 12, 1999
- -------------------------
David D. Horn
* /s/ JOHN S. LANE Director April 12, 1999
- -------------------------
John S. Lane
* /s/ ANGUS A. MACNAUGHTON Director April 12, 1999
- -------------------------
Angus A. MacNaughton
</TABLE>
- ------------
* By Edward M. Shea pursuant to Power of Attorney filed herewith.
<PAGE>
<TABLE>
<S> <C> <C>
* /s/ JOHN D. MCNEIL Director April 12, 1999
- -------------------------
John D. McNeil
* /s/ S. CAESAR RABOY Director April 12, 1999
- -------------------------
S. Caesar Raboy
</TABLE>
- ------------
* By Edward M. Shea pursuant to Power of Attorney filed herewith.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Post-Effective Amendment No. 2 to the Registration
Statement on Form S-2 of Sun Life Assurance Company of Canada (U.S.)
(Reg. No. 333-62837) of our report dated February 5, 1999
accompanying the financial statements of Sun Life Assurance Company of Canada
(U.S.) appearing in the Prospectus, which is part of such Registration
Statement, and to the incorporation by reference of our reports dated
February 5, 1999 appearing on the Annual Report on Form 10-K of Sun Life
Assurance Company of Canada (U.S.) for the year ended December 31, 1998.
We also consent to the reference to us under the heading "Accountants"
appearing in such Prospectus.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 12, 1999
<PAGE>
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 Edward M. Shea, Ellen B. King, Peter
F. Demuth, and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life of Canada (U.S.) (File No.
333-62837), 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
February 4, 1999
<PAGE>
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 Edward M. Shea, Ellen B. King, Peter
F. Demuth, and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life of Canada (U.S.) (File No.
333-62837), 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
February 4, 1999
<PAGE>
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 Edward M. Shea, Ellen B. King, Peter
F. Demuth, and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life of Canada (U.S.) (File No.
333-62837), 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
February 4, 1999
<PAGE>
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 Edward M. Shea, Ellen B. King, Peter
F. Demuth, and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life of Canada (U.S.) (File No.
333-62837), 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
February 4, 1999
<PAGE>
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 Edward M. Shea, Ellen B. King, Peter
F. Demuth, and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life of Canada (U.S.) (File No.
333-62837), 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
February 4, 1999
<PAGE>
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 Edward M. Shea, Ellen B. King, Peter
F. Demuth, and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life of Canada (U.S.) (File No.
333-62837), 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
February 4, 1999
