<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT 0F 1934
For the Quarterly Period Ended June 30, 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 August 13,1999
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
PAGE
NUMBER
PART I: Financial Information
Item 1: Financial Statements (Unaudited):*
Statutory Statements of Admitted Assets, Liabilities
and Capital Stock and Surplus -
June 30, 1999 and December 31, 1998 3
Statutory Statements of Operations -
Six Months Ended
June 30, 1999 and June 30, 1998 4
Statutory Statements of Operations -
Three Months Ended
June 30, 1999 and June 30, 1998 5
Statutory Statements of Changes in Capital Stock
and Surplus -
Six Months Ended
June 30, 1999 and June 30,1998 6
Statutory Statements of Cash Flow
Six Months Ended
June 30,1999 and June 30, 1998 7
Notes to Unaudited Statutory Financial Statements 8
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
PART II: Other Information
Item 6: Exhibits and Reports on Form 8-K 23
*The Statutory Statements of Admitted Assets, Liabilities and Capital Stock
and Surplus at December 31, 1998 has been taken from the audited statutory
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
(Unaudited)
<TABLE>
<CAPTION>
(IN 000'S)
JUNE 30, DECEMBER 31,
ADMITTED ASSETS 1999 1998
-------------------- ---------------------
<S> <C> <C>
Bonds $ 1,335,349 $ 1,763,468
Common stocks 88,456 128,445
Mortgage loans on real estate 616,325 535,003
Properties acquired in satisfaction of debt 17,019 17,207
Investment real estate 77,136 78,021
Policy loans 43,232 41,944
Cash & short-term investments 279,160 265,226
Other invested assets 65,753 64,177
Investment income due and accrued 28,486 35,706
Federal income tax recoverable and interest
thereon 3,510 1,110
Other assets 18,529 1,928
-------------------- ---------------------
General account assets 2,572,955 2,932,235
Separate account assets
Unitized 12,994,455 11,774,745
Non-unitized 2,245,335 2,195,641
-------------------- ---------------------
TOTAL ADMITTED ASSETS $ 17,812,745 $ 16,902,621
-------------------- ---------------------
-------------------- ---------------------
LIABILITIES
Aggregate reserve for life policies and
contracts $ 1,207,664 $ 1,216,107
Supplementary contracts 2,093 1,885
Policy and contract claims 772 369
Liability for premium and other deposit
funds 733,194 1,000,875
Surrender values on cancelled policies 537 5
Interest maintenance reserve 42,782 40,490
Commissions to agents due or accrued 2,490 2,615
General expenses due or accrued 6,807 5,932
Transfers from Separate Accounts due or
accrued (436,782) (361,863)
Taxes, licenses and fees due or accrued,
excluding FIT 686 401
Federal income taxes due or accrued 46,013 25,019
Unearned investment income 65 23
Amounts withheld or retained by company
as agent or trustee 694 529
Remittances and items not allocated 14,778 5,176
Asset valuation reserve 47,386 44,392
Payable to parent, subsidiaries, and
affiliates 23,327 30,381
Payable for securities 6,158 428
Other liabilities 11,817 9,770
-------------------- ---------------------
General account liabilities 1,710,481 2,022,534
Separate account liabilities
Unitized 12,994,210 11,774,522
Non-unitized 2,245,335 2,195,641
-------------------- ---------------------
TOTAL LIABILITIES 16,950,026 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 92,464 139,669
-------------------- ---------------------
Surplus 856,819 904,024
-------------------- ---------------------
Total common capital stock and surplus 862,719 909,924
-------------------- ---------------------
TOTAL LIABILITIES, CAPITAL STOCK
AND SURPLUS $ 17,812,745 $ 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
(Unaudited)
<TABLE>
<CAPTION>
(IN 000'S)
SIX MONTHS ENDED JUNE 30,
INCOME 1999 1998
-------------------- ---------------------
<S> <C> <C>
Premiums and annuity considerations $ 34,121 $ 136,155
Deposit-type funds 1,344,238 996,025
Considerations for supplementary contracts
without life contingencies and dividend
accumulations 1,042 1,144
Net investment income 80,636 99,731
Amortization of interest maintenance reserve 1,815 923
Net gain from operations from Separate
Accounts Statement 0 3
Income from fees associated with investment
management, administration and contract
guarantees from Separate Accounts 82,776 68,136
Other income 12,052 53,379
-------------------- ---------------------
Total 1,556,680 1,355,496
-------------------- ---------------------
BENEFITS AND EXPENSES
Death benefits 1,189 15,833
Annuity benefits 74,947 73,077
Disability benefits and benefits under
accident and health policies 0 22
Surrender benefits and other fund withdrawals 1,215,489 988,182
Interest on policy or contract funds 185 262
Payments on supplementary contracts
without life contingencies and of
dividend accumulations 925 1,199
Increase (decrease) in aggregate reserves
for life and accident and health policies
and contracts (8,444) 58,249
Decrease in liability for premium and other
deposit funds (267,681) (281,439)
Increase in reserve for supplementary
contracts without life contingencies
and for dividend and coupon accumulations 208 (14)
-------------------- ---------------------
Total 1,016,818 855,371
Commissions on premiums and annuity
considerations (direct business only) 79,768 66,615
Commissions and expense allowances on
reinsurance assumed 0 8,226
General insurance expenses 31,186 29,784
Insurance taxes, licenses and fees,
excluding federal income taxes 4,822 3,730
Decrease in loading on and cost of
collection in excess of loading on
deferred and uncollected premiums 0 (234)
Net transfers to Separate Accounts 377,059 325,455
-------------------- ---------------------
Total 1,509,653 1,288,947
-------------------- ---------------------
NET GAIN FROM OPERATIONS BEFORE DIVIDENDS
TO POLICYHOLDERS AND FIT 47,027 66,549
Dividends to policyholders 0 19,908
-------------------- ---------------------
NET GAIN FROM OPERATIONS AFTER DIVIDENDS
TO POLICYHOLDERS AND BEFORE FIT 47,027 46,641
Federal income tax expense (excluding
tax on capital gains) 12,921 12,394
-------------------- ---------------------
NET GAIN FROM OPERATIONS AFTER DIVIDENDS
TO POLICYHOLDERS AND FIT AND BEFORE
REALIZED CAPITAL GAINS 34,106 34,247
Net realized capital gains less capital
gains tax and transferred to the IMR 7,245 955
-------------------- ---------------------
NET INCOME $ 41,351 $ 35,202
-------------------- ---------------------
-------------------- ---------------------
</TABLE>
See notes to unaudited statutory financial statements.
4
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
STATUTORY STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(IN 000'S)
THREE MONTHS ENDED JUNE 30,
INCOME 1999 1998
-------------------- ---------------------
<S> <C> <C>
Premiums and annuity considerations $ 16,911 $ 72,364
Deposit-type funds 717,868 520,420
Considerations for supplementary contracts
without life contingencies and dividend
accumulations 776 846
Net investment income 34,049 50,128
Amortization of interest maintenance reserve 904 352
Net gain from operations from Separate
Accounts Statement 0 2
Income from fees associated with investment
management, administration and contract
guarantees from Separate Accounts 42,323 35,925
Other income 6,401 27,377
-------------------- ---------------------
Total 819,232 707,414
-------------------- ---------------------
BENEFITS AND EXPENSES
Death benefits 376 7,890
Annuity benefits 37,464 38,039
Disability benefits and benefits
under accident and health policies 0 0
Surrender benefits and other fund
withdrawals 648,670 531,101
Interest on policy or contract funds 85 195
Payments on supplementary contracts
without life contingencies and of
dividend accumulations 596 947
Increase (decrease) in aggregate
reserves for life and accident and
health policies and contracts (3,564) 29,179
Decrease in liability for premium and
other deposit funds (142,025) (164,218)
Increase in reserve for supplementary
contracts without life contingencies
and for dividend and coupon accumulations 197 (82)
-------------------- ---------------------
Total 541,799 443,051
Commissions on premiums and annuity
considerations (direct business only) 41,387 36,837
Commissions and expense allowances on
reinsurance assumed 0 3,984
General insurance expenses 17,118 17,770
Insurance taxes, licenses and fees,
excluding federal income taxes 2,569 1,577
Decrease in loading on and cost of
collection in excess of loading on
deferred and uncollected premiums 0 (184)
Net transfers to Separate Accounts 208,603 169,850
-------------------- ---------------------
Total 811,476 672,885
-------------------- ---------------------
NET GAIN FROM OPERATIONS BEFORE
DIVIDENDS TO POLICYHOLDERS AND FIT 7,756 34,529
Dividends to policyholders 0 10,118
-------------------- ---------------------
NET GAIN FROM OPERATIONS AFTER DIVIDENDS
TO POLICYHOLDERS AND BEFORE FIT 7,756 24,411
Federal income tax expense
(excluding tax on capital gains) 5,028 4,872
-------------------- ---------------------
NET GAIN FROM OPERATIONS AFTER DIVIDENDS
TO POLICYHOLDERS AND FIT AND BEFORE
REALIZED CAPITAL GAINS 2,728 19,539
Net realized capital gains less capital
gains tax and transferred to the IMR 967 738
-------------------- ---------------------
NET INCOME $ 3,695 $ 20,277
-------------------- ---------------------
-------------------- ---------------------
</TABLE>
See notes to unaudited statutory financial statements.
5
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
(IN 000's) -------------------- ---------------------
<S> <C> <C>
CAPITAL AND SURPLUS, BEGINNING OF PERIOD $ 909,924 $ 832,695
-------------------- ---------------------
Net income 41,351 35,202
Change in net unrealized capital gains (11,831) (1,755)
Change in non-admitted assets and related items 1,284 (441)
Change in asset valuation reserve (2,995) 1,380
Surplus (contributed to) withdrawn from Separate
Accounts during period (35) 48
Other changes in surplus in Separate Accounts Statement 21 0
Dividends to stockholders (75,000) (50,000)
-------------------- ---------------------
Net change in capital and surplus for the period (47,205) (15,566)
-------------------- ---------------------
CAPITAL AND SURPLUS, END OF PERIOD $ 862,719 $ 817,129
-------------------- ---------------------
-------------------- ---------------------
</TABLE>
See notes to unaudited statutory financial statements.
6
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
<TABLE>
<CAPTION>
STATUTORY STATEMENTS OF CASH FLOW
(Unaudited)
(IN 000'S) SIX MONTHS ENDED JUNE 30,
1999 1998
-------------------- ---------------------
<S> <C> <C>
CASH PROVIDED
Premiums, annuity considerations and deposit
funds received $ 1,378,359 $ 1,133,357
Considerations for supplementary contracts
and dividend accumulations received 1,042 1,144
Net investment income received 110,543 125,061
Other income received 94,828 55,654
-------------------- ---------------------
Total receipts 1,584,772 1,315,216
-------------------- ---------------------
Benefits paid (other than dividends) 1,291,617 1,077,801
Insurance expenses and taxes paid (other than
federal income and capital gains taxes) 114,741 109,174
Net cash transfers to Separate Accounts 451,978 313,788
Dividends paid to policyholders 0 16,908
Federal income tax (recoveries) payments
(excluding tax on capital gains) (8,073) 13,264
Other - net 185 0
-------------------- ---------------------
Total payments 1,850,448 1,530,935
-------------------- ---------------------
Net cash from operations (265,676) (215,719)
-------------------- ---------------------
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) 609,423 757,517
Issuance (repayment) of surplus notes 0 0
Other cash provided 29,887 (43,091)
-------------------- ---------------------
Total cash provided 639,310 714,446
-------------------- ---------------------
CASH APPLIED
Cost of long-term investments acquired 231,739 710,436
Other cash applied 127,961 134,319
-------------------- ---------------------
Total cash applied 359,700 844,755
-------------------- ---------------------
NET CHANGE IN CASH AND SHORT-TERM INVESTMENTS 13,934 (346,028)
CASH AND SHORT-TERM INVESTMENTS:
BEGINNING OF PERIOD 265,226 544,418
-------------------- ---------------------
END OF PERIOD $ 279,160 $ 198,390
-------------------- ---------------------
-------------------- ---------------------
</TABLE>
See notes to unaudited statutory financial statements.
7
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) GENERAL
In management's opinion all adjustments, which include only normal recurring
adjustments, necessary for a fair presentation of the financial statements have
been made.
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 $8,048,561 and
$14,591,646, respectively, for the three and six month periods in 1999 and
$6,401,000 and $10,685,000 for the same periods in 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 six month period amounted to approximately $3,504,000.
(3) INVESTMENTS IN SUBSIDIARIES
The following is combined unaudited summarized financial information of the
subsidiaries as of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(000's) 1999 1998
<S> <C> <C>
Assets $ 1,092,339 $ 1,315,317
Liabilities (1,001,879) (1,186,872)
----------- -----------
Total equity $ 90,460 $ 128,445
----------- -----------
----------- -----------
</TABLE>
In determining the equity of subsidiaries for the periods, the Company has
excluded approximately $2,004,000 for the six month period in 1999 and $566,000
for the year ended December 1998 representing deferred taxes.
8
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
(000's) 1999 1998
<S> <C> <C>
Total revenue $ 53,081 $ 126,152
Operating expenses (55,192) (124,389)
Income tax benefit(expense) 207 (1,795)
----------- -----------
Net loss $ (1,904) $ (32)
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
(000's) 1999 1998
<S> <C> <C>
Total revenue $ 26,890 $ 63,685
Operating expenses (28,530) (64,453)
Income tax benefit(expense) 612 (730)
----------- -----------
Net loss $ (1,028) $ (1,498)
----------- -----------
----------- -----------
</TABLE>
In determining the equity in income of subsidiaries for the periods, the Company
has excluded expenses of approximately $460,000 and $493,000 for the three and
six month periods in 1999 and $868,000 and $1,973,000 for the same periods 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.
Pending sale of subsidiary
In April 1999, the Company announced plans to sell its wholly owned subsidiary,
New London Trust F.S.B. (`NLT'). The Company anticipates that certain assets
will first be sold to banks in Connecticut and New Hampshire and that the stock
of NLT will then be acquired by a subsidiary of Phoenix Home Life Mutual
Insurance Company. The Company anticipates that the sale will be completed in
the fourth quarter of 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.
9
<PAGE>
(4) INVESTMENT INCOME
Net investment income consisted of:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
(000's) 1999 1998
<S> <C> <C>
Interest income from bonds $68,259 $88,078
Income from investment in common stocks of
affiliates 6,500 3,000
Interest income from mortgage loans 25,398 27,885
Real estate investment income 7,788 7,881
Interest income from policy loans 1,458 1,392
Other investment income (loss) (806) 242
-------- --------
Gross investment income 108,597 128,478
Interest on surplus notes and other (21,633) (23,271)
Investment expenses (6,328) (5,476)
-------- --------
Net investment income $80,636 $99,731
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
(000's) 1999 1998
<S> <C> <C>
Interest income from bonds $31,465 $41,555
Income from investment in common stocks of
affiliates 0 3,000
Interest income from mortgage loans 13,365 13,505
Real estate investment income 3,880 3,914
Interest income from policy loans 463 858
Other investment income (loss) (1,015) 433
-------- --------
Gross investment income 48,158 63,265
Interest on surplus notes and other (10,817) (10,817)
Investment expenses (3,292) (2,320)
-------- --------
Net investment income $34,049 $50,128
-------- --------
-------- --------
</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 Protection 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. This
segment was formerly referred to as the "Individual Insurance" segment; no
changes have been made to the composition of this segment.
The Wealth Management 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. This segment was formerly referred to as the "Retirement Products
and Services" segment; no changes have been made to the composition of this
segment.
10
<PAGE>
<TABLE>
<CAPTION>
Six Months Total Total Pre-Tax Income
Ended June 30, Revenues Expenditures Income Taxes
- --------------- ---------- ------------ --------- -------
<S> <C> <C> <C> <C>
1999
Protection $ 18,871 $ 20,031 $ (1,160) $ (229)
Wealth Management 1,531,742 1,487,402 44,340 15,491
Corporate 6,067 2,220 3,847 (2,341)
---------- ---------- --------- -------
Total $1,556,680 $1,509,653 47,027 $ 12,921
---------- ---------- --------- -------
---------- ---------- --------- -------
1998
Protection $ 152,566 $ 144,560 $ 8,006 $ 4,340
Wealth Management 1,194,096 1,161,617 32,479 8,106
Corporate 8,834 2,678 6,156 (52)
---------- ---------- --------- -------
Total $1,355,496 $1,308,855 $ 46,641 $ 12,394
---------- ---------- --------- -------
---------- ---------- --------- -------
(000's)
Three Months Total Total Pre-Tax Income
Ended June 30, Revenues Expenditures Income Taxes
- --------------- ---------- ------------ --------- -------
1999
Protection $ 8,552 $ 9,984 $ (1,432) $ (224)
Wealth Management 811,951 799,123 12,828 5,605
Corporate (1,271) 2,368 (3,639) (353)
---------- ---------- --------- -------
Total $ 819,232 $ 811,475 $ 7,757 $ 5,028
---------- ---------- --------- -------
---------- ---------- --------- -------
1998
Protection $ 81,654 $ 77,650 $ 4,004 $ 2,646
Wealth Management 620,110 603,631 16,479 4,185
Corporate 5,650 1,722 3,928 (1,959)
---------- ---------- --------- -------
Total $ 707,414 $ 683,003 $ 24,411 $ 4,872
---------- ---------- --------- -------
---------- ---------- --------- -------
</TABLE>
11
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION - JUNE 30, 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:
- - 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
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
NET INCOME.
Net income increased by $6.1 million to $41.3 million in the first six months of
1999 as compared to the same period in 1998. This change mainly reflected an
increase in net realized gains of $6.3 million, most of which resulted from the
Company's sale, in February 1999, of its subsidiary, Massachusetts Casualty
Insurance Company. Income from operations of $34.1 million for the first six
months of 1999 was essentially unchanged from the same period in 1998. 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." That income from operations remained essentially
unchanged reflects the following factors, which, taken together, effectively
offset each other:
- - Income from operations from the Company's Wealth Management segment
increased by $4.5 million to $28.8 million for the first six months of
1999. (This increase is discussed in the "Wealth Management Segment"
section below.)
- - The Company's termination of certain reinsurance agreements with its
ultimate parent in the fourth quarter of 1998 affected income from
operations for the Protection segment. Active reinsurance agreements in
the first six months of 1998 had the effect of decreasing income from
operations by $.5 million in that period; those still active in the
first half of 1999 had the effect of reducing income from operations by
$0.4 million in that period. Other activity in the Protection Segment
resulted in a decrease to income from operations of $4.5 million in the
first half of 1999 compared to the same period in 1998.
12
<PAGE>
INCOME FROM OPERATIONS BY SEGMENT
The Company's income from operations reflects the operations of its three
business segments: the Wealth Management segment, the Protection segment and the
Corporate segment. The following table provides a summary.
<TABLE>
<CAPTION>
INCOME FROM OPERATIONS
BEFORE NET REALIZED CAPITAL GAINS OR LOSSES
SIX MONTHS ENDED JUNE 30,
($ IN MILLIONS) 1999 1998 % CHANGE
<S> <C> <C> <C>
Wealth Management $ 28.8 $ 24.4 18.0%
Protection (0.9) 3.7 -124.3%
Corporate 6.2 6.2 -
----------------------------------
$ 34.1 $ 34.3 -0.6%
----------------------------------
----------------------------------
</TABLE>
Wealth Management Segment
The Wealth Management 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 Massachusetts Financial
Services ("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.
13
<PAGE>
Following are the major factors affecting the Wealth Management segment results
in the first six months of 1999 as compared to the same period in the prior
year.
Deposit-type funds, which primarily comprised annuity deposits, increased by
$348.2 million, or 35% to $1,344.2 million in the first six months of 1999
compared to the same period in 1998. Fixed annuity account deposits were
higher by approximately $430 million in the first six months of 1999 compared
to the same period in 1998 mainly as a result of the success of Company's
introduction, during the fourth quarter of 1998, of a higher Dollar Cost
Averaging (`DCA') rate and a new six-month DCA program. 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.
Deposits directly into variable accounts declined by approximately 16% in the
first six months of 1999 compared to the same period in 1998. The Company's
management believes this decline was a consequence of the heightened interest in
the DCA programs in 1999.
Sales of the Futurity line of products, introduced in February 1998, represented
approximately 12% of total annuity deposits for the first six months of 1999.
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 $14.5 million, or 22% in the first six months 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 six months of 1999, net investment income for
the Wealth Management segment decreased by $22.5 million, or 27%, compared to
the same period in 1998. This decline in average general account assets
mainly reflects the Company's decision in 1997 to no longer market group
pension and GIC products. It also reflects the shift in deposits in recent
years from the fixed account to variable accounts.
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 six months of 1999
as compared to the same period 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, which include general insurance expenses and insurance
taxes, licenses and fees, excluding federal income taxes, decreased by
approximately $1.2 million, or 4 %, in the first six months of 1999 compared to
the same period in 1998. This decrease mainly reflected the fact that
operational expenses during the second quarter of 1998 included certain
non-recurring costs associated with the Company's decision to no longer market
its group pension products. If these non-recurring costs were excluded from the
comparison, then operational expenses would have shown an increase in the first
six months of 1999 compared to the same period in 1998. This increase would have
reflected such factors as higher volumes of annuity business, requiring greater
administrative support; ongoing improvements to the computer systems and
technology that support the growth of the Company's in-force business,
particularly its combination fixed/variable annuities; and costs associated with
the product design, implementation, and distribution of the new Futurity
multi-manager annuity product.
14
<PAGE>
Protection Segment
The Protection 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 six
months 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's management
expects its variable life business to grow and become more significant in the
future. It is developing a new variable universal life product that it expects
to launch later in 1999. During the first half of 1999, expenses involved with
the development of this product had the effect of reducing income from
operations for the Protection segment in comparison with the same period in
1998.
Corporate Segment
This segment includes the capital of the Company, its investments in
subsidiaries and items not otherwise attributable to either the Wealth
Management or the Protection segments. In the first six months of 1999, income
from operations for this segment remained nearly unchanged at approximately $6.2
million, as compared to the same period in 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
NET INCOME
Net income decreased by $16.6 million to $3.7 million for the quarter ended June
30, 1999 as compared to the same quarter in 1998. This change primarily
reflected a decrease of $16.8 million in income from operations, to $2.7 million
for the second quarter of 1999 as further discussed below. It also reflected an
increase of $ 0.2 million in net realized capital gains.
15
<PAGE>
INCOME FROM OPERATIONS BY SEGMENT
The following table provides a summary of income from operations by business
segment:
<TABLE>
<CAPTION>
INCOME FROM OPERATIONS
BEFORE NET REALIZED CAPITAL GAINS OR LOSSES
THREE MONTHS ENDED JUNE 30,
($ IN MILLIONS) 1999 1998 % CHANGE
<S> <C> <C> <C>
Wealth Management $ 7.2 $ 12.3 -41.3%
Protection (1.2) 1.4 -189.0%
Corporate (3.3) 5.9 -155.8%
----------------------------------
$ 2.7 $ 19.5 -86.0%
----------------------------------
----------------------------------
</TABLE>
Wealth Management Segment
Following are the major factors affecting the Wealth Management segment results
in the second quarter of 1999 as compared to the same period in 1998. Most of
the factors had the effect of increasing income from operations; however,
increased policyholder benefit costs and lower net investment income, both
discussed below, resulted in the overall decline in income from operations in
the second quarter of 1999 as compared to the same quarter in 1998.
Deposit-type funds, which primarily comprise annuity deposits, increased by
$197.4 million, or 38% to $717.9 million in the second quarter of 1999 compared
to the same 1998 quarter. Fixed annuity account deposits were higher by
approximately $250 million in the second quarter of 1999 compared to the same
1998 quarter, mainly as a result of the success of the dollar cost averaging
(DCA) programs. Deposits directly into variable accounts declined by
approximately 24% in the second quarter of 1999 compared to the same quarter in
1998. The Company's management believes this decline was a consequence of the
heightened interest in the DCA programs in 1999. Sales of the Futurity line of
products, introduced in February 1998, represented approximately 14% of total
annuity deposits in the second quarter of 1999, a slightly higher percentage
than in the first quarter of 1999.
Fee income increased as a result of higher variable annuity account balances.
Fee income was higher by $6.67 million, or 19% in the second quarter of 1999
compared to the same quarter in 1998. The main factors driving this growth in
account balances were 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.
In the second quarter of 1999, net investment income for the Wealth Management
segment decreased by $11.0 million, or 27%, compared to the same period in 1998.
This decline in average general account assets mainly reflects the Company's
decision in 1997 to no longer market group pension and GIC products; it also
reflects the shift in deposits in recent years from the fixed account to
variable accounts.
16
<PAGE>
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 second 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 has established a conservation program with the aim of improving
asset retention.
Operational expenses decreased by approximately $2.6 million, or 15 %, in
second quarter of 1999 compared to the same quarter in 1998. This decrease
mainly reflected the fact that operational expenses during the second quarter
of 1998 included certain non-recurring costs associated with the Company's
decision to no longer market its group pension products. If these
non-recurring costs were excluded from the comparison, then operational
expenses would have shown an increase in the second quarter of 1999 compared
to the same period in 1998. This increase would have reflected such factors
as higher volumes of annuity business, requiring greater administrative
support; ongoing improvements to the computer systems and technology that
support the growth of the Company's in-force business, particularly its
combination fixed/variable annuities; and costs associated with the product
design, implementation, and distribution of the new Futurity multi-manager
annuity product.
Protection Segment
The Protection segment comprises two main elements, internal reinsurance and
variable life products.
As noted above, the Company has had various reinsurance agreements with its
ultimate parent, SLOC. Active reinsurance agreements in the second quarter of
1998 had the effect of decreasing income from operations by $.8 million in that
period; those still active in the second quarter of 1999 had the effect of
reducing income from operations by $0.5 million in that period. Other activity
in the Protection segment resulted in a decrease to income from operations of
$2.3 million.
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's management
expects its variable life business to grow and become more significant in the
future. It is developing a new variable universal life product that it expects
to launch later in 1999. During the first half of 1999, expenses involved with
the development of this product had the effect of reducing income from
operations for the Protection segment in comparison with the same period in
1998.
Corporate Segment
This segment includes the capital of the Company, its investments in
subsidiaries and items not otherwise attributable to either the Wealth
Management or the Protection segments. In the second quarter of 1999, income
from operations for this segment decreased by $9.1 million, as compared to the
same period in 1998. There were three main factors causing this change.
- - Dividends from subsidiaries were lower by approximately $3 million in
the second quarter of 1999 compared to the same 1998 quarter.
- - Investment income was lower in the second quarter of 1999 compared to
the same period in 1998, because dividend payments to policyholders, of
$45 million in 1998 and $70 million in April 1999, reduced the average
invested asset balance in this segment.
- - Higher expenses for the segment contributed to the decline in income
from operations for this segment in the second quarter of 1999 as
compared to the second quarter of 1998.
17
<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 both at June 30, 1999 and
December 31, 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 six months of 1999. The changes are discussed below.
<TABLE>
<CAPTION>
ASSETS
($ IN MILLIONS) 6/30/99 12/31/98 % CHANGE
<S> <C> <C> <C>
General Account assets $ 2,573.0 $ 2,932.2 -12.3%
Fixed Separate Account assets 2,245.3 2,195.6 2.3%
--------------------------------------
4,818.3 5,127.8 -6.0%
Variable Separate Account assets 12,994.5 11,774.7 10.4%
--------------------------------------
Total assets $ 17,812.8 $ 16,902.5 5.4%
--------------------------------------
--------------------------------------
</TABLE>
18
<PAGE>
General account and fixed separate account assets, taken together, decreased by
6% in the first six months of 1999. Variable separate account assets increased
by 10%, during that period. In management's vie, these changes are consistent
overall with 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
six months of 1999 mainly reflected strong deposits into the Company's DCA
programs, which management believes is largely the result of the Company's
enhancements to these programs in late 1998. It also reflected market
appreciation of approximately $840 million for separate account assets during
this period. The company is investigating other strategies for growing general
account assets.
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's 1997 decision to discontinue selling group pension and GIC contracts
and to focus its marketing efforts on its combination fixed/variable annuity
products had the effect of reducing general account liabilities.
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 both at June 30,
1999 and December 31, 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. 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.
19
<PAGE>
OTHER MATTERS
DEMUTUALIZATION
On January 27, 1998, SLOC announced that its Board of Directors had requested
that management develop a plan to demutualize, which would involve converting
from a mutual structure, with ownership by policyholders, to a shareholder-owned
company. The process of demutualization would provide that the ownership
interest currently held by policyholders be distributed to them in the form of
shares, without affecting their interests as policyholders. In June 1999, the
SLOC Board of Directors approved the demutualization timetable recommended by
management. Later in 1999, the SLOC Board of Directors will be asked to review
and approve the plan for demutualization. The Company expects to be able to
complete its demutualization in the first half of the year 2000. 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. 98% of the components
have been remediated and tested and, based on those tests, have been certified
as Year 2000 compliant. 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 their
representation that the products and services provided will not have a Year 2000
issue. Where appropriate, vendor testing has been conducted. 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 business during and after the Year 2000.
Non-IT applications, including building security, HVAC systems, and other such
systems, as well as IT applications have been tested. Compliant client server
and mainframe environments were used to 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 to have addressed Year 2000 issues it has found
with its systems before the end of 1999, there can be no assurance that these
issues will not impact the Company's operations. 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 systems being affected by the Year 2000. Such a scenario could
result in 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 an impact on the Company's results of operations and
financial position.
20
<PAGE>
In order to mitigate the risks to the Company of material adverse operational or
financial impacts from the Year 2000 problem, 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.
Each business area has identified its critical business processes, developed
alternative plans of action where possible, and is in the process of refining
and testing those alternatives. 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, of which approximately $ 0.5 million was incurred in the
six months ended June 30, 1999.
PENDING SALE OF SUBSIDIARY
In April 1999, the Company announced plans to sell its wholly owned subsidiary,
New London Trust F.S.B. (`NLT'). The Company anticipates that certain assets
will first be sold to banks in Connecticut and New Hampshire and that the stock
of NLT will then be acquired by a subsidiary of Phoenix Home Life Mutual
Insurance Company. The Company anticipates that the sale will be completed in
the fourth quarter of 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.
CHANGE OF RATINGS
The Company's financial condition is assessed by four independent rating
agencies. These ratings provide an important source of information for
customers, investors and other users of financial and operating data. The
Company currently holds these ratings from the following agencies:
- A.M. Best -- On June 7, 1999, A.M. Best affirmed the A++ financial
strength rating (its highest rating) it has assigned to the Company.
- Duff & Phelps -- On August 10, 1999, Duff & Phelps reaffirmed the AAA
claims paying ability rating (its highest rating) it has assigned to
the Company. At the same time, it issued a negative outlook for the
rating, indicating that it could be lowered at some future point.
- Moody's Investors Service -- On August 10, 1999, Moody's confirmed the
Aa2 financial strength rating (its third highest rating) it has assigned
to the Company. At the same time, it issued a negative outlook for the
rating, indicating that it could be lowered at some future point.
- Standard & Poor's -- On August 6, 1999, S&P lowered the Company's
financial strength rating from AAA (its highest rating) to AA+ (its
second highest rating). At the same time, it changed its outlook for
the rating from negative to stable, indicating that it is unlikely to
change the rating in the immediate future.
The latter three agencies all took their recent actions in response to the
loss cited in the parent company's second quarter earnings statement, a loss
triggered by provisions taken with respect to pension compensation in the
parent company's United Kingdom operations. They also cited the parent
company's challenge with respect to reinsurance.
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.
TYPES OF MARKET RISKS
The Company's management believes that 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.
21
<PAGE>
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.
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 June 30, 1999 had a fair value of $1,246.9 million. Fixed
income investments supporting these and other general account liabilities had a
fair value of $2,290.9 million at that date. The Company performed a sensitivity
analysis on these interest-sensitive liabilities and assets at June 30, 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 $37.7 million and the corresponding assets would show a net decrease of $90.4
million.
22
<PAGE>
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's management 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.
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are incorporated by reference unless otherwise
indicated:
EXHIBIT NO.
- -----------
27 FINANCIAL DATA SCHEDULE (filed herewith)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sun Life Assurance Company of Canada (U.S.)
(Registrant)
Date August 13, 1999 /s/ Robert F. Leach
--------------------------------
Robert F. Leach
Vice-President, Finance and
Product
Date August 13, 1999 /s/ Robert P. Vrolyk
-------------------------------
Robert P. Vrolyk
Vice President, Finance, Actuary
and Treasurer
23
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 1,335,349
<DEBT-MARKET-VALUE> 1,388,174
<EQUITIES> 88,456
<MORTGAGE> 616,325
<REAL-ESTATE> 94,155
<TOTAL-INVEST> 2,200,038
<CASH> 279,160
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 17,812,745
<POLICY-LOSSES> 1,209,757
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 1,309
<POLICY-HOLDER-FUNDS> 733,194
<NOTES-PAYABLE> 0
0
0
<COMMON> 5,900
<OTHER-SE> 862,719
<TOTAL-LIABILITY-AND-EQUITY> 17,812,745
1,379,401
<INVESTMENT-INCOME> 82,451
<INVESTMENT-GAINS> 7,245
<OTHER-INCOME> 94,828
<BENEFITS> 1,393,877
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 115,776
<INCOME-PRETAX> 54,272
<INCOME-TAX> 12,921
<INCOME-CONTINUING> 41,351
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,351
<EPS-BASIC> 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>
