<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT 0F 1934
For the Quarterly Period Ended March 31, 1999 Commission File Numbers
-------------- 33-31711, 33-41858, 333-77041,
333-45923, 333-62837, 333-11699
-------------------------------
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Exact name of registrant as specified in its charter)
Delaware 04-2461439
- --------------------------------------- ---------------------------------------
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
One Sun Life Executive Park, Wellesley Hills, MA 02481
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (781) 237-6030
NONE
- -------------------------------------------------------------------------------
Former name, former address, and former fiscal year, if changed since last
report.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes |X| No |_|
(2) Yes |X| No |_|
Registrant has no voting stock outstanding held by non-affiliates.
Registrant has 5,900 shares of common stock outstanding on May 14,1999
all of which are owned by Sun Life of Canada (U.S.) Holdings, Inc.
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I: Financial Information
Item 1: Financial Statements:*
Balance Sheets -
March 31, 1999 and December 31, 1998 3
Statements of Operations -
Three Months Ended
March 31, 1999 and March 31, 1998 4
Statements of Capital Stock and Surplus -
Three Months Ended
March 31, 1999 and March 31, 1998 5
Statements of Cash Flows -
Three Months Ended
March 31, 1999 and March 31,1998 6
Notes to Unaudited Financial Statements 7
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
PART II: Other Information
Item 4: Submission of Matters to a Vote of Security Holders 20
Item 6: Exhibits and Reports on Form 8-K 20
</TABLE>
*The balance sheet at December 31, 1998 has been taken from the
audited financial statements at that date. All other statements
are unaudited.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
<TABLE>
<CAPTION>
(in 000's)
MARCH 31, DECEMBER 31,
ADMITTED ASSETS 1999 1998
--------------- -----------------
<S> <C> <C>
Bonds $ 1,572,715 $ 1,763,468
Common stocks 83,972 128,445
Mortgage loans on real estate 609,535 535,003
Properties acquired in satisfaction of debt 17,126 17,207
Investment real estate 77,590 78,021
Policy loans 42,673 41,944
Cash & short-term investments 292,317 265,226
Other invested assets 65,147 64,177
Investment income due and accrued 35,185 35,706
Federal income tax recoverable and interest thereon 2,183 1,110
Other assets 0 1,928
--------------- -----------------
General account assets 2,798,443 2,932,235
Separate account assets
Unitized 12,084,019 11,774,745
Non-unitized 2,262,722 2,195,641
--------------- -----------------
TOTAL ADMITTED ASSETS $ 17,145,184 $ 16,902,621
--------------- -----------------
--------------- -----------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 1,211,227 $ 1,216,107
Supplementary contracts 1,896 1,885
Policy and contract claims 1,670 369
Liability for premium and other deposit funds 875,219 1,000,875
Surrender values on cancelled policies 71 5
Interest maintenance reserve 41,373 40,490
Commissions to agents due or accrued 2,281 2,615
General expenses due or accrued 6,371 5,932
Transfers from Separate Accounts due or accrued (402,407) (361,863)
Taxes, licenses and fees due or accrued, excluding FIT 438 401
Federal income taxes due or accrued 25,260 25,019
Unearned investment income 43 23
Amounts withheld or retained by company as agent or trustee 1,293 529
Remittances and items not allocated 3,177 5,176
Asset valuation reserve 43,663 44,392
Payable to parent, subsidiaries, and affiliates 13,703 30,381
Payable for securities 10,376 428
Dividends to stockholders declared and unpaid 75,000 0
Other liabilities 24,217 9,770
--------------- -----------------
General account liabilities 1,934,871 2,022,534
Separate account liabilities
Unitized 12,083,808 11,774,522
Non-unitized 2,262,722 2,195,641
--------------- -----------------
TOTAL LIABILITIES 16,281,401 15,992,697
--------------- -----------------
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 93,528 139,669
--------------- -----------------
Surplus 857,883 904,024
--------------- -----------------
Total common capital stock and surplus 863,783 909,924
--------------- -----------------
TOTAL LIABILITIES, CAPITAL STOCK AND SURPLUS $ 17,145,184 $ 16,902,621
--------------- -----------------
--------------- -----------------
</TABLE>
See notes to unaudited statutory financial statements.
3
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
STATUTORY STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(in 000's)
THREE MONTHS ENDED MARCH 31,
INCOME 1999 1998
-------------- -------------
<S> <C> <C>
Premiums and annuity considerations $ 17,210 $ 63,791
Deposit-type funds 626,370 475,605
Considerations for supplementary contracts
without life contingencies and dividend accumulations 266 298
Net investment income 46,587 49,602
Amortization of interest maintenance reserve 911 571
Net gain from operations from Separate Accounts Statement 0 1
Income from fees associated with investment management administration and contract
guarantees from Separate Account 40,453 32,211
Other income 5,651 26,002
-------------- -------------
Total 737,448 648,081
-------------- -------------
BENEFITS AND EXPENSES
Death benefits 813 7,943
Annuity benefits 37,483 35,038
Disability benefits and benefits under accident and health policies 0 22
Surrender benefits and other fund withdrawals 566,820 457,081
Interest on policy or contract funds 100 67
Payments on supplementary contracts
without life contingencies and of dividend accumulations 329 252
Increase (decrease) in aggregate reserves for life and accident and health policies and contracts (4,880) 29,070
Decrease in liability for premium and other deposit funds (125,656) (117,221)
Increase in reserve for supplementary contracts
without life contingencies and for dividend and coupon accumulations 11 68
-------------- -------------
Total 475,020 412,320
Commissions on premiums and annuity considerations (direct business only) 38,381 29,778
Commissions and expense allowances on reinsurance assumed 0 4,242
General insurance expenses 14,068 12,013
Insurance taxes, licenses and fees, excluding federal income taxes 2,253 2,153
Decrease in loading on and cost of collection in excess of loading
on deferred and uncollected premiums 0 (50)
Net transfers to Separate Accounts 168,456 155,605
-------------- -------------
Total 698,178 616,061
-------------- -------------
NET GAIN FROM OPERATIONS BEFORE DIVIDENDS TO POLICYHOLDERS AND FIT 39,270 32,020
Dividends to policyholders 0 9,790
-------------- -------------
NET GAIN FROM OPERATIONS AFTER DIVIDENDS TO POLICYHOLDERS AND BEFORE FIT 39,270 22,230
Federal income tax expense (excluding tax on capital gains) 7,893 7,522
-------------- -------------
NET GAIN FROM OPERATIONS AFTER DIVIDENDS TO POLICYHOLDERS AND FIT
AND BEFORE REALIZED CAPITAL GAINS 31,377 14,708
Net realized capital gains less capital gains tax and transferred to the IMR 6,278 217
-------------- -------------
NET INCOME $ 37,655 $ 14,925
-------------- -------------
-------------- -------------
</TABLE>
See notes to unaudited statutory financial statements.
4
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
<TABLE>
<CAPTION>
(IN 000'S) THREE MONTHS ENDED MARCH 31,
1999 1998
------------- -------------
<S> <C> <C>
CAPITAL AND SURPLUS, BEGINNING OF PERIOD $ 909,924 $ 832,695
------------- -------------
Net income 37,655 14,925
Change in net unrealized capital gains (9,736) 396
Change in non-admitted assets and related items 261 447
Change in asset valuation reserve 729 733
Surplus (contributed to) withdrawn from Separate Accounts during period (35) 48
Other changes in surplus in Separate Accounts Statement (14) 0
Dividends to stockholder (75,000) 0
------------- -------------
Net change in capital and surplus for the period (46,140) 16,549
------------- -------------
CAPITAL AND SURPLUS, END OF PERIOD $ 863,784 $ 849,244
------------- -------------
------------- -------------
</TABLE>
See notes to unaudited statutory financial statements.
5
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
STATUTORY STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
(IN 000'S) THREE MONTHS ENDED MARCH 31,
1999 1998
-------------- --------------
<S> <C> <C>
CASH PROVIDED
Premiums, annuity considerations and deposit funds received $ 643,579 $ 539,684
Considerations for supplementary contracts and dividend
accumulations received 266 298
Net investment income received 58,505 60,680
Other income received 46,105 28,973
-------------- --------------
Total receipts 748,455 629,635
-------------- --------------
Benefits paid (other than dividends) 604,079 499,732
Insurance expenses and taxes paid (other than federal income and
capital gains taxes) 54,560 49,495
Net cash transfers to Separate Accounts 209,000 146,539
Dividends paid to policyholders 0 8,290
Federal income tax (recoveries) payments (excluding tax on capital gains) (3,169) 4,098
Other - net 99 67
-------------- --------------
Total payments 864,569 708,221
-------------- --------------
Net cash from operations (116,114) (78,586)
-------------- --------------
Proceeds from long-term investments sold, matured or repaid
(after deducting taxes on capital gains of $965,960 for 1999,
$1,797,495 for 1998) 293,812 370,476
Other cash provided 30,844 87,052
-------------- --------------
Total cash provided 324,656 457,528
-------------- --------------
CASH APPLIED
Cost of long-term investments acquired 149,814 428,604
Other cash applied 31,637 158,122
-------------- --------------
Total cash applied 181,451 586,726
-------------- --------------
NET CHANGE IN CASH AND SHORT-TERM INVESTMENTS 27,091 (207,784)
CASH AND SHORT-TERM INVESTMENTS:
BEGINNING OF PERIOD 265,226 544,418
-------------- --------------
END OF PERIOD $ 292,317 $ 336,634
-------------- --------------
-------------- --------------
</TABLE>
See notes to unaudited statutory financial statements.
6
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) GENERAL
In management's opinion all adjustments, which include only normal recurring
adjustments, necessary for a fair presentation of the financial statements
have been made.
The accompanying unaudited financial statements should be read in conjunction
with the audited financial statements for the year ended December 31, 1998.
(2) TRANSACTIONS WITH AFFILIATES
The Company has an agreement with its ultimate parent, Sun Life Assurance
Company of Canada ('SLOC') which provides that SLOC will furnish, as
requested, personnel as well as certain services and facilities on a
cost-reimbursement basis. Expenses under this agreement amounted to
approximately $4,487,000 and $4,284,000, respectively, for the three month
period ending March 31 in 1999 and 1998.
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 the three month period amounted to approximately
$1,762,000.
(3) INVESTMENTS IN SUBSIDIARIES
The following is combined unaudited summarized financial information of the
subsidiaries as of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(000's) 1999 1998
<S> <C> <C>
Assets $ 1,073,226 $ 1,315,317
Liabilities (987,268) (1,186,872)
----------- -----------
Total equity $ 85,958 $ 128,445
----------- -----------
----------- -----------
</TABLE>
In determining the equity of subsidiaries for the periods, the Company has
excluded approximately $1,986,000 for the three month period in 1999 and
$566,000 for the year ended December 1998 representing deferred taxes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
(000's) 1999 1998
<S> <C> <C>
Total revenue $ 26,191 $ 62,467
Operating expenses (26,662) (59,936)
Income tax expense (405) ( 1,065)
----------- -----------
Net income $ (876) $ 1,466
----------- -----------
----------- -----------
</TABLE>
7
<PAGE>
In determining the equity in income of subsidiaries for the periods, the
Company has excluded expenses of approximately $33,000 for the three month
period in 1999 and $1,105,000 for the same period in 1998, representing
payables to the Company in lieu of federal income taxes.
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 ongoing operations of the Company.
(4) INVESTMENT INCOME
Net investment income consisted of:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
(000's) 1999 1998
<S> <C> <C>
Interest income from bonds $36,794 $46,523
Income from investment in common stocks of
affiliates 6,409 0
Interest income from mortgage loans 12,033 14,380
Real estate investment income 3,908 3,967
Interest income from policy loans 995 534
Other investment income (loss) 300 (192)
-------- --------
Gross investment income 60,439 65,212
Interest on surplus notes (10,816) (12,454)
Investment expenses (3,036) (3,156)
-------- --------
Net investment income $46,587 $49,602
-------- --------
-------- --------
</TABLE>
(5) SEGMENT INFORMATION
The Company currently offers financial products and services such as fixed
and variable annuities, and life insurance on an individual basis including
corporate owned life insurance. 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 in force products include whole life, universal life and
variable life.
8
<PAGE>
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.
<TABLE>
(000's)
<CAPTION>
Federal
Three Months Total Total PreTax Income
Ended March 31, Revenues Expenditures Income Taxes
- --------------- ---------- ------------ --------- -------
<S> <C> <C> <C> <C>
1999
Individual Ins. $ 10,319 $ 10,047 $ 272 $ (6)
RPS 719,791 688,279 31,512 9,887
Corporate 7,338 (148) 7,486 (1,988)
---------- ---------- --------- -------
Total $ 737,448 $ 698,178 $ 39,270 $ 7,893
---------- ---------- --------- -------
---------- ---------- --------- -------
1998
Individual Ins. $ 70,912 $ 66,910 $ 4,002 $ 1,694
RPS 573,985 557,985 16,000 3,921
Corporate 3,184 956 2,228 1,907
---------- ---------- --------- -------
Total $ 648,081 $ 625,851 $ 22,230 $ 7,522
---------- ---------- --------- -------
---------- ---------- --------- -------
</TABLE>
SUBSEQUENT EVENT
In April 1999, the Company announced plans to sell its wholly owned subsidiary,
New London trust F.S.B., to Phoenix Home Life Mutual Insurance Company. The
Company anticipates that the sale will be completed in late 1999, subject to
state and federal regulatory approvals. This transaction is not expected to have
a significant effect on the ongoing operations of the Company.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION - MARCH 31, 1999
CAUTIONARY STATEMENT
This Form 10-Q includes forward looking statements by the Company under the
Private Securities Litigation Reform Act of 1995. These statements are not
matters of historical fact but rather of current expectations relating 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:
9
<PAGE>
- - 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
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
NET INCOME Net income increased by $22.7 million to $37.7 million in the
first quarter of 1999 as compared to the same period in 1998, reflecting an
increase of $16.7 million in income from operations and an increase in net
realized gains of $6.0 million. "Income from operations," which 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", increased from $14.7 million in the first quarter of 1998 to $31.4
million in the first quarter of 1999, mainly as a result of the following
factors:
- - A $9.5 million increase, to $21.6 million in the first quarter of 1999, 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 having terminated certain reinsurance agreements with the
Company's ultimate parent in the 4th quarter of 1998. Active reinsurance
agreements had the effect of increasing income from operations by $1.5
million in the first quarter of 1998 compared to $ 0.1 million in the same
period in 1999.
- - An increase of $9.2 million in income from operations from the Corporate
segment for the first quarter of 1999 compared to the same period in 1998.
This increase mainly reflected the timing of dividends received from
subsidiaries of $6.5 million in the first quarter of 1999 as compared to
none in the first quarter of 1998.
INCOME FROM OPERATIONS BY SEGMENT
The Company's income from operations reflects the operations of its three
business segments: the Retirement Products and Services segment, the Individual
Insurance segment and the Corporate segment. The following table provides a
summary.
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
Income from Operations* 1999 1998 % Change
($ in millions) ------ ------- --------
<S> <C> <C> <C>
Individual Insurance $ 0.3 $ 2.3 (88.0%)
Retirement Products and Services 21.6 12.1 79.0%
Corporate 9.5 0.3 --%
------ ------- ------
$ 31.4 $ 14.7 122.7%
*BEFORE CAPITAL GAINS ------ ------- ------
------ ------- ------
</TABLE>
Retirement Products and Services Segment
The Retirement Products and Services segment focuses on the savings and
retirement needs of those preparing for retirement or those who have already
retired. It primarily markets to upscale consumers in the U.S., selling
individual and group fixed and variable annuities. Its major product lines,
"Regatta" and "Futurity," are combination fixed/variable annuities. In these
combination annuities, contract holders have the choice of allocating payments
either to a fixed account, which provides a guaranteed rate of return, or to
variable accounts. Withdrawals from the fixed account are subject to market
value adjustment. In the variable accounts, the contract holder can choose from
a range of investment options and styles. The return depends upon investment
performance of the options selected. Investment funds available under Regatta
are managed by MFS, an affiliate of the Company. Investment funds available
under Futurity products are managed by several investment managers, including
MFS and Sun Capital Advisers, Inc., a subsidiary of the Company.
The Company distributes these annuity products through a variety of channels.
For the Regatta products, about half are sold through securities brokers; a
further one-fourth through financial institutions, and the remainder through
insurance agents and financial planners. The Futurity products, introduced in
February 1998, are distributed by Sun Life of Canada (US) Distributors, Inc.,
through a dedicated wholesaler network and 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 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 in the first quarter of 1999 as compared to the same period in
the prior year.
- - Deposit-type funds, which primarily comprised annuity deposits, increased
by $150.8 million, or 32% to $626.4 million in the first quarter of 1999
compared to the same quarter in 1998. Fixed annuity account deposits were
higher by approximately $180 million in the first quarter of 1999 as a
result of the success of the dollar cost averaging program (see below);
deposits into variable annuity accounts, meanwhile, declined slightly in
comparison to the first quarter of 1998.
11
<PAGE>
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 were higher in the first quarter of 1999 compared to the same
quarter in 1998. This increase reflected the Company's introduction,
during the 4th quarter of 1998, of a higher DCA rate and a new six-month
DCA program.
This slight decline in variable account deposits appeared mainly to
reflect the relative conditions in equity and bond markets during those
quarters.
The Company introduced its Futurity line of products in February
1998. 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.
Fee income increased as a result of higher variable annuity account
balances. Fee income was higher by $8.2 million, or 26% in the first
quarter of 1999 compared to the same period in 1998. 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.
- - There has been a shift to variable account products from the general
account products. As a consequence, there has been a decline in average
general account invested assets and, in turn, net investment income has
declined. Net investment income reflects only income earned on invested
assets of the general account. In the first quarter of 1999, net
investment income for the Retirement Products and Services segment
decreased by $11.5 million, or 26%, compared to the same period in 1998.
This decline in average general account assets mainly reflected the shift
in deposits in recent years from the fixed account to variable accounts
as well as the Company's decision in 1997 to no longer market group
pension and GIC products.
- - Policyholder benefits (the major elements of which are surrenders and
withdrawals, changes in the liability for premium and other deposit
funds, and related separate account transfers) were higher in the first
quarter of 1999 as compared to the same quarter in 1998, mainly as a
result of higher variable annuity surrenders. 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 periods
had expired. The company expects that as the separate account block of
business continues to grow and as increasing amounts are no longer
subject to surrender charges, surrenders will tend to increase. The
Company is establishing a conservation program with the aim of improving
asset retention.
- - Operational expenses increased by approximately $1.4 million, or 11%, in
the first quarter of 1999 compared to the same period in 1998. These
increases reflected:
12
<PAGE>
- Higher volumes of annuity business, requiring greater administrative
support. The Company expects that increases in the volume of its
annuity business will continue to have a similar effect on expenses in
the near term.
- Improvements to the computer systems and technology that support the
annuity business. These improvements involved information systems
supporting the growth of the Company's in-force business, particularly
its combination fixed/variable annuities. The Company expects to
continue to invest in its systems and technology in the future. The
extent and nature of these investments will depend on the Company's
assessments of the relative costs and benefits of given projects.
- Costs associated with the product design, implementation, and
distribution 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.
Individual Insurance Segment
The Individual Insurance segment comprises two main elements, internal
reinsurance and variable life products.
In recent years, the Company has had various reinsurance agreements with its
ultimate parent, SLOC. In some of these arrangements, SLOC has reinsured the
mortality risks in excess of the Company's retention of individual life
policies sold in prior years by the Company. These agreements, in the
aggregate, had an immaterial effect on net income in both 1998 and 1999. In
another agreement, which became effective January 1, 1991 and terminated
October 1, 1998, the Company reinsured certain individual life insurance
contracts issued by SLOC. This latter agreement had a significant effect on
net income in the first quarter of 1998 but not in 1999.
The Company's primary individual variable life insurance product is its
variable universal life product marketed to the company-owned life insurance
("COLI") market. This product was introduced in late 1997. The Company
expects its 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 or the Individual Insurance segments. In the first
quarter of 1999, income from operations for this segment increased by $9.3
million to $9.5 million, as compared to the same period in 1998. This
increase reflected a dividend received from its subsidiary, Sun Life New
York, of $6.5 million in 1999. Lower expenses and income taxes also
benefited 1999 results.
13
<PAGE>
FINANCIAL CONDITION & LIQUIDITY
ASSETS
The Company's total assets are held in either its general account or its
separate accounts.
General account assets are carried at book value and 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 nearly 100% of general account assets at year-end 1998. Major
types of invested asset holdings included bonds, mortgages, real estate and
common stock.
Separate accounts and their assets are carried at market value and are of two
main types:
- - Those assets held in a "fixed" (or "non-unitized") 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"
(or "unitized") 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
the first quarter of 1999. The changes are discussed below.
<TABLE>
<CAPTION>
Assets
($ in millions)
3/31/99 12/31/98 % Change
--------- ---------- --------
<S> <C> <C> <C>
General Account assets $ 2,798.4 $ 2,932.2 (4.6%)
Fixed separate account assets 2,262.7 2,195.6 3.1%
--------- ---------- --------
$ 5,061.1 $ 5,127.8 (1.3%)
Variable separate account assets $ 12,084.0 $ 11,774.8 2.6%
--------- ---------- --------
Total assets $ 17,145.1 $ 16,902.6 1.4%
--------- ---------- --------
--------- ---------- --------
</TABLE>
General account and fixed separate account assets, taken together, decreased
by 1% in the first quarter of 1999. Variable separate account assets
increased modestly, by 3%, during that period. These modest changes differ
from broader trends seen both in the Company and in the industry in recent
years, as variable accounts have shown rapid growth while fixed accounts have
tended to grow more slowly or even decline. The pattern shown in the first
quarter of 1999 mainly reflected strong deposits into the Company's DCA
programs in the first quarter of 1999, largely as a result of the Company's
enhancements to these programs in late 1998.
14
<PAGE>
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. 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.
During the first quarter of 1999, the Company declared a stockholder dividend
of $75 million.
CAPITAL MARKETS RISK MANAGEMENT
See Item 3. "Quantitative and Qualitative Disclosures About Market Risk," in
this Quarterly Report on Form 10-Q for a discussion of the Company's capital
markets risk management.
CAPITAL RESOURCES
CAPITAL ADEQUACY
The National Association of Insurance Commissioners ("NAIC") adopted
regulations at the end of 1993 that established minimum capitalization
requirements for insurance companies, based on risk-based capital ("RBC")
formulas. These requirements are intended to identify undercapitalized
companies, so that specific regulatory actions can be taken on a timely basis.
The RBC formula for life insurance companies sets capital requirements related
to asset, insurance, interest rate, and business risks. According to the RBC
calculation, the Company's capital was well in excess of its required capital at
year-end 1998.
LIQUIDITY
The Company's liquidity requirements are generally met by funds from operations.
The Company's main uses of funds are to pay out death benefits and other
maturing insurance and annuity contract obligations; to make pay-outs on
contract terminations; to purchase new investments; to fund new business
ventures; and to pay normal operating expenditures and taxes. The Company's main
sources of funds are premiums and deposits on insurance and annuity products;
proceeds from the sale of investments; income from investments; and repayments
of investment principal. 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.
15
<PAGE>
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%. Based on its ongoing liquidity analyses, the Company believes
that its available liquidity is more than sufficient to meet its liquidity
needs.
OTHER MATTERS
DEMUTUALIZATION
On January 27, 1998, SLOC announced that its Board of Directors requested
management world-wide to develop a plan to convert from a mutual life insurance
company into a publicly traded stock company through demutualization worldwide.
Management has put in place a full time task force which, together with a
worldwide team of actuarial, financial and legal advisers, has begun work. The
Board will decide later this year whether to proceed with demutualization,
following the completion of the plan. Demutualization would require regulatory
and policyholder approval. Based on information known to date, the potential
demutualization of SLOC is not expected to have any significant impact on the
Company.
YEAR 2000 COMPLIANCE
The statements in this section include "Year 2000 Readiness Disclosures"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
During the fourth quarter of 1996, the Company, its ultimate parent and
affiliates began a comprehensive analysis of its information technology
("IT") and non-IT systems, including its hardware, software, data, data feed
products, and internal and external supporting services, to address the
ability of these systems to correctly process date calculations through the
year 2000 and beyond. The Company created a full-time Year 2000 project team
in early 1997 to manage this endeavor across the Company. This team, which
works with dedicated personnel from all business units and with the legal and
audit departments, reports directly to the Company's senior management on a
monthly basis. In addition, the Company's Year 2000 project is periodically
reviewed by internal and external auditors.
To date, relevant systems have been identified and their components inventoried,
needed resolutions have been documented, timelines and project plans have been
developed, and remediation and testing are in process. Over 90% of the
components have been remediated, tested and are certified as Year 2000
compliant. The majority of the remaining components are in the testing phase and
are expected to be certified over the course of this year.
In mid-1997, the project team contacted all key vendors to obtain either their
certification for the products and services provided or their plan to make those
products and services compliant. Approximately 95% of these vendors have
responded and the project team has reviewed the responses and validated and
conducted tests with the vendors where appropriate. In addition, the project
team continues to work with critical business partners, such as third-party
administrators, investment property managers, investment mortgage
correspondents, and others, with the goal that these partners will continue to
be able to support the Company's objective of assuring Year 2000 compliance.
16
<PAGE>
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 potential consequences, depending on their nature and
duration, could have a material impact on the Company's results of operations
and financial position.
In order to mitigate the risks to the Company of material adverse operational or
financial impacts from failure to achieve planned Year 2000 compliance, the
Company has established contingency planning at the business unit and corporate
levels. Each business unit has ranked its applications as being of high, medium
or low business risk to ensure that the most critical are addressed first. The
business units also have developed alternate plans of action where possible, and
established dates for the alternate plans to be enacted. On the corporate level,
the Company is in the process of enhancing its business continuation plan, by
identifying minimum requirements for facilities, computing, staffing, and other
factors and it is developing a plan to support those requirements.
As of year-end 1998, the Company expended, cumulatively, approximately $4.2
million on its Year 2000 effort, and it expects to incur a further $1.3 million
on this effort in 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This discussion covers market risks associated with investment portfolios that
support the Company's general account liabilities. This discussion does not
cover market risks associated with those investment portfolios that support
separate account products. For these products, the policyholder, rather than the
Company, assumes these market risks.
GENERAL
The assets of the general account are available to support general account
liabilities. For purposes of managing these assets in relation to these
liabilities, the company notionally segments these assets by product or by
groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. The policy covers
the segment's liability characteristics and liquidity requirements, provides
cash flow estimates, and sets targets for asset mix, duration, and quality. Each
quarter, investment and business unit managers review these policies to ensure
that the policies remain appropriate, taking into account each segment's
liability characteristics.
17
<PAGE>
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. 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 diversification guidelines. In portfolios
backing interest-sensitive liabilities, the Company's policy is to limit MBS
holdings to less than 10% of total portfolio assets. In all portfolios, the
Company restricts MBS investments to pass-through securities issued by U.S.
government agencies and to collateralized mortgage obligations, which are
expected to exhibit relatively low volatility. The Company does not engage in
leveraged transactions and it does not invest in the more speculative forms of
these instruments such as the interest-only, principal-only, inverse floater, or
residual tranches.
Changes in the level of domestic interest rates affect the market value of fixed
interest assets and liabilities. Segments whose liabilities mainly arise from
the sale of products containing interest rate guarantees for certain terms are
sensitive to changes in interest rates. In these segments, the Company uses
"immunization" strategies, which are specifically designed to minimize the loss
from wide fluctuations in interest rates. The Company supports these strategies
using analytical and modeling software acquired from outside vendors.
Significant features of the Company's immunization models include:
- - an economic or market value basis for both assets and liabilities;
- - an option pricing methodology;
- - the use of effective duration and convexity to measure interest rate
sensitivity;
- - the use of "key rate durations" to estimate interest rate exposure at
different parts of the yield curve and to estimate the exposure to
non-parallel shifts in the yield curve.
The Company's Interest Rate Risk Committee meets monthly. After reviewing
duration analyses, market conditions and forecasts, the Committee develops
specific asset management strategies for the interest-sensitive portfolios.
These strategies may involve managing to achieve small intentional mismatches,
either in terms of total effective duration or for certain key rate durations,
between the liabilities and related assets of particular segments. The Company
manages these mismatches to a tolerance range of plus or minus 0.5.
18
<PAGE>
Asset strategies may include the use of Treasury futures or interest rate swaps
to adjust the duration profiles for particular portfolios. All derivative
transactions are conducted under written operating guidelines and are marked to
market. Total positions and exposures are reported to the Board of Directors on
a monthly basis. The counterparties to hedging transactions are major highly
rated financial institutions, with respect to which the risk of the Company's
incurring losses related to credit exposures is considered remote.
Liabilities categorized as financial instruments and held in the Company's
general account at March 31, 1999 had a fair value of $1,406.2 million.
Fixed income investments supporting these and other general account
liabilities had a fair value of $2,818.5 million at that date. The Company
performed a sensitivity analysis on these interest-sensitive liabilities and
assets at March 31, 1999. 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 $42.3 million and the corresponding
assets would show a net decrease of $106.2 million.
By comparison, 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 these and other general
account 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.
The Company produced these estimates using computer models. Since these
models reflect assumptions about the future, they contain an element of
uncertainty. For example, the models contain assumptions about future
policyholder behavior and asset cash flows. Actual policyholder behavior and
asset cash flows could differ from what the models show. As a result, the
models' estimates of duration and market values may not reflect what actually
will occur. The models are further limited by the fact that they do not
provide for the possibility that management action could be taken to mitigate
adverse results. The Company believes that this limitation is one of
conservatism; that is, it will tend to cause the models to produce estimates
that are generally worse than one might actually expect, all other things
being equal.
Based on its processes for analyzing and managing interest rate risk, the
Company believes its exposure to interest rate changes will not materially
affect its near-term financial position, results of operations, or cash flows.
19
<PAGE>
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders of the Company was held on
February 4, 1999.
(b) The following directors of the Company were re-elected at the annual
meeting.
C. James Prieur
John D. McNeil
Donald A. Stewart
S. Caesar Raboy
David D. Horn
Richard B. Bailey
M. Colyer Crum
John S. Lane
Angus A. MacNaughton
(c) The directors of the Company were each re-elected unanimously.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are incorporated by reference unless otherwise
indicated:
EXHIBIT NO.
- -----------
27 FINANCIAL DATA SCHEDULE (filed herewith)
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sun Life Assurance Company of Canada (U.S.)
(Registrant)
Date May 14, 1999 /s/ Ellen B. King
--------------------------------
Ellen B. King
Secretary
Date May 14, 1999 /s/ Robert P. Vrolyk
-------------------------------
Robert P. Vrolyk
Vice President, Finance and Actuary
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet and Statement of Operations found on pages 3 and 4 of the Company's form
10-Q for the year-to-date.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 1,572,715
<DEBT-MARKET-VALUE> 1,892,186
<EQUITIES> 83,972
<MORTGAGE> 609,535
<REAL-ESTATE> 94,716
<TOTAL-INVEST> 2,426,085
<CASH> 292,317
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 17,145,184
<POLICY-LOSSES> 1,213,123
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 1,741
<POLICY-HOLDER-FUNDS> 875,219
<NOTES-PAYABLE> 0
0
0
<COMMON> 5,900
<OTHER-SE> 857,883
<TOTAL-LIABILITY-AND-EQUITY> 17,145,184
643,846
<INVESTMENT-INCOME> 47,498
<INVESTMENT-GAINS> 6,278
<OTHER-INCOME> 46,104
<BENEFITS> 643,476
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 54,702
<INCOME-PRETAX> 45,548
<INCOME-TAX> 7,893
<INCOME-CONTINUING> 37,655
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,655
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
