<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT 0F 1934
For the Quarterly Period Ended Commission File Number 33-31711,
September 30, 1999 33-41858, 333-77041, 333-45923,
333-62837, 333-11699, 002-99959
------------ ------------
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Exact name of registrant as specified in its charter)
Delaware 04-2461439
- --------------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
One Sun Life Executive Park, Wellesley Hills, MA 02481
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(781) 237-6030
- ----------------------------------------------------
(Registrant's telephone number, including area code)
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 November 12, 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
September 30, 1999 and December 31, 1998 3
Statutory Statements of Operations -
Nine Months Ended
September 30, 1999 and September 30, 1998 4
Statutory Statements of Operations -
Three Months Ended
September 30, 1999 and September 30, 1998 5
Statutory Statements of Capital Stock and Surplus -
Nine Months Ended
September 30, 1999 and September 30, 1998 6
Statutory Statements of Cash Flows -
Nine Months Ended
September 30, 1999 and September 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 24
PART II: Other Information
Item 6: Exhibits and Reports on Form 8-K 27
*The Statutory Statements of Admitted Assets, Liabilities and Capital Stock
and Surplus at December 31, 1998 have been taken from the audited statutory
financial statements at that date. All other statements are unaudited.
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
(IN 000'S)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ADMITTED ASSETS 1999 1998
---------------- ----------------
<S> <C> <C>
Bonds $ 1,263,078 $ 1,763,468
Common stocks 97,146 128,445
Mortgage loans on real estate 586,908 535,003
Properties acquired in satisfaction of debt 15,647 17,207
Investment real estate 76,832 78,021
Policy loans 42,908 41,944
Cash & short-term investments 291,935 265,226
Other invested assets 65,107 64,177
Investment income due and accrued 30,729 35,706
Federal income tax recoverable and interest thereon 4,999 1,110
Other assets 9,082 1,928
---------------- ----------------
General account assets 2,484,371 2,932,235
Separate account assets
Unitized 12,686,015 11,774,745
Non-unitized 2,193,122 2,195,641
---------------- ----------------
TOTAL ADMITTED ASSETS $ 17,363,508 $ 16,902,621
---------------- ----------------
---------------- ----------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 1,206,869 $ 1,216,107
Supplementary contracts 2,995 1,885
Policy and contract claims 625 369
Liability for premium and other deposit funds 602,532 1,000,875
Surrender values on cancelled policies 100 5
Interest maintenance reserve 43,077 40,490
Commissions to agents due or accrued 1,456 2,615
General expenses due or accrued 9,110 5,932
Transfers from Separate Accounts due or accrued (440,620) (361,863)
Taxes, licenses and fees due or accrued, excluding FIT 5,282 401
Federal income taxes due or accrued 49,697 25,019
Unearned investment income 60 23
Amounts withheld or retained by company as agent or trustee 1,426 529
Remittances and items not allocated 1,567 5,176
Asset valuation reserve 42,809 44,392
Payable to parent, subsidiaries, and affiliates 30,120 30,381
Payable for securities 4,161 428
Other liabilities 63,508 9,770
---------------- ----------------
General account liabilities 1,624,774 2,022,534
Separate account liabilities
Unitized 12,685,744 11,774,522
Non-unitized 2,193,122 2,195,641
---------------- ----------------
TOTAL LIABILITIES 16,503,640 15,992,696
---------------- ----------------
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 89,613 139,669
---------------- ----------------
Surplus 853,968 904,024
---------------- ----------------
Total common capital stock and surplus 859,868 909,924
---------------- ----------------
TOTAL LIABILITIES, CAPITAL STOCK AND SURPLUS $ 17,363,508 $ 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)
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
----------------- ---------------
<S> <C> <C>
INCOME
Premiums and annuity considerations $ 49,581 $ 203,852
Deposit-type funds 2,034,034 1,564,472
Considerations for supplementary contracts
without life contingencies and dividend accumulations 2,727 1,424
Net investment income 116,209 144,129
Amortization of interest maintenance reserve 2,747 1,504
Net gain from operations from Separate Accounts Statement 0 1
Income from fees associated with investment management administration
and contract guarantees from Separate Account 126,605 104,281
Other income 18,302 80,779
----------------- ---------------
Total 2,350,205 2,100,442
----------------- ---------------
BENEFITS AND EXPENSES
Death benefits 2,476 17,892
Annuity benefits 115,526 113,713
Disability benefits and benefits under accident and health policies 0 0
Surrender benefits and other fund withdrawals 1,769,835 1,466,827
Interest on policy or contract funds 253 461
Payments on supplementary contracts
without life contingencies and of dividend accumulations 1,745 1,946
Increase (decrease) in aggregate reserves for life and accident and
health policies and contracts (9,238) 95,083
Decrease in liability for premium and other deposit funds (344,673) (369,825)
Increase (decrease) in reserve for supplementary contracts
without life contingencies and for dividend and coupon accumulations 1,110 (461)
----------------- ---------------
Total 1,537,034 1,325,636
Commissions on premiums and annuity considerations (direct business only) 119,220 102,544
Commissions and expense allowances on reinsurance assumed 0 13,032
General insurance expenses 50,149 42,787
Insurance taxes, licenses and fees, excluding federal income taxes 6,596 5,213
Decrease in loading on and cost of collection in excess of loading
on deferred and uncollected premiums 0 (331)
Net transfers to Separate Accounts 592,385 500,444
----------------- ---------------
Total 2,305,384 1,989,325
----------------- ---------------
NET GAIN FROM OPERATIONS BEFORE DIVIDENDS TO POLICYHOLDERS AND FIT 44,821 111,117
Dividends to policyholders 0 31,019
----------------- ---------------
NET GAIN FROM OPERATIONS AFTER DIVIDENDS TO POLICYHOLDERS AND BEFORE FIT 44,821 80,098
Federal income tax expense (excluding tax on capital gains) 14,721 28,931
----------------- ---------------
NET GAIN FROM OPERATIONS AFTER DIVIDENDS TO POLICYHOLDERS AND FIT
AND BEFORE REALIZED CAPITAL GAINS 30,100 51,167
Net realized capital gains (losses) less capital gains tax and transferred
to the IMR 1,446 1,532
----------------- ---------------
NET INCOME $ 31,546 $ 52,699
================= ===============
</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
<TABLE>
<CAPTION>
(IN 000'S)
THREE MONTHS ENDED SEPTEMBER 30,
1999 1998
--------------- ----------------
<S> <C> <C>
INCOME
Premiums and annuity considerations $ 15,460 $ 67,719
Deposit-type funds 689,796 568,447
Considerations for supplementary contracts
without life contingencies and dividend accumulations 1,685 280
Net investment income 35,573 44,398
Amortization of interest maintenance reserve 932 581
Net gain from operations from Separate Accounts Statement 0 (2)
Income from fees associated with investment management administration
and contract guarantees from Separate Account 43,829 36,145
Other income 6,250 27,400
--------------- ----------------
Total 793,525 744,968
--------------- ----------------
BENEFITS AND EXPENSES
Death benefits 1,287 2,059
Annuity benefits 40,579 40,636
Surrender benefits and other fund withdrawals 554,346 478,645
Interest on policy or contract funds 68 199
Payments on supplementary contracts 0
without life contingencies and of dividend accumulations 820 747
Increase (decrease) in aggregate reserves for life and accident and
health policies and contracts (794) 36,834
Decrease in liability for premium and other deposit funds (76,993) (88,386)
Increase (decrease) in reserve for supplementary contracts
without life contingencies and for dividend and coupon accumulations 902 (447)
--------------- ----------------
Total 520,215 470,287
Commissions on premiums and annuity considerations (direct business only) 39,452 35,929
Commissions and expense allowances on reinsurance assumed 0 4,806
General insurance expenses 18,963 13,003
Insurance taxes, licenses and fees, excluding federal income taxes 1,774 1,483
Decrease in loading on and cost of collection in excess of loading 0
on deferred and uncollected premiums 0 (98)
Net transfers to Separate Accounts 215,326 174,990
--------------- ----------------
Total 795,730 700,400
--------------- ----------------
NET GAIN FROM OPERATIONS BEFORE DIVIDENDS TO POLICYHOLDERS AND FIT (2,205) 44,568
Dividends to policyholders 0 11,111
--------------- ----------------
NET GAIN FROM OPERATIONS AFTER DIVIDENDS TO POLICYHOLDERS AND BEFORE FIT (2,205) 33,457
Federal income tax expense (excluding tax on capital gains) 1,800 16,537
--------------- ----------------
NET GAIN FROM OPERATIONS AFTER DIVIDENDS TO POLICYHOLDERS AND FIT
AND BEFORE REALIZED CAPITAL GAINS (4,005) 16,920
Net realized capital gains (losses) less capital gains tax and transferred
to the IMR (5,799) 577
--------------- ----------------
NET INCOME $ (9,804) $ 17,497
=============== ================
</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
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
-------------- --------------
<S> <C> <C>
CAPITAL AND SURPLUS, BEGINNING OF PERIOD $ 909,924 $ 832,695
-------------- --------------
Net income 31,544 52,697
Change in net unrealized capital gains (10,167) (1,421)
Change in non-admitted assets and related items 1,937 (1,544)
Change in asset valuation reserve 1,583 4,246
Other changes in surplus in Separate Accounts Statement 47 48
Dividends to stockholders (75,000) (50,000)
-------------- --------------
Net change in capital and surplus for the year (50,056) 4,026
-------------- --------------
CAPITAL AND SURPLUS, END OF PERIOD $ 859,868 $ 836,721
============== ==============
</TABLE>
See notes to unaudited statutory financial statements.
6
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
STATUTORY STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
--------------------- ---------------------
<S> <C> <C>
CASH PROVIDED
Premiums, annuity considerations and deposit funds received $ 2,083,615 $ 1,770,069
Considerations for supplementary contracts and dividend
accumulations received 2,727 1,424
Net investment income received 133,719 182,263
Other income received 144,906 82,206
--------------------- ---------------------
Total receipts 2,364,967 2,035,962
--------------------- ---------------------
Benefits paid (other than dividends) 1,889,232 1,599,475
Insurance expenses and taxes paid (other than federal income
and capital gains taxes) 169,065 166,425
Net cash transfers to Separate Accounts 671,142 491,151
Dividends paid to policyholders 0 26,519
Federal income tax (recoveries) payments (excluding
tax on capital gains) (9,956) 28,224
Other-net 253 481
--------------------- ---------------------
Total payments 2,719,736 2,312,255
--------------------- ---------------------
Net cash from operations (354,769) (276,293)
Proceeds from long-term investments sold, matured or repaid
(after deducting tax expense (benefit) on capital gain
(loss) of ($10,310) for 1999, $428 for 1998) 755,697 1,075,039
Other cash provided 37,498 (50,530)
--------------------- ---------------------
Total cash provided 793,195 1,024,509
--------------------- ---------------------
Cash Applied
Cost of long-term investments acquired 286,118 919,918
Other cash applied 125,599 175,174
--------------------- ---------------------
Total cash applied 411,717 1,095,092
--------------------- ---------------------
Net change in cash and short-term investments 26,709 (346,876)
Cash and short-term investments:
Beginning of period 265,226 544,418
--------------------- ---------------------
End of period $ 291,935 $ 197,542
===================== =====================
</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 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 $ 5,823,585 and
$20,415,231 for the three and nine month periods in 1999 and $ 3,538,610 and
$14,802,906 for the same periods in 1998.
The Company leases office space to SLOC under lease agreements with terms
expiring in September, 2004 and options to extend the terms for each of twelve
successive five-year terms at fair market rental not to exceed 125% of the fixed
rent for the term, which is ending in 2004. Rent received by the Company under
the leases for the nine-month period amounted to approximately $5,093,326.
(3) INVESTMENTS IN SUBSIDIARIES
The following is combined unaudited summarized financial information of the
subsidiaries as of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(000's) 1999 1998
<S> <C> <C>
Other assets $ 1,067,829 $ 1,315,317
Liabilities (970,683) (1,186,872)
----------- -----------
Total net assets $ 97,146 $ 128,445
----------- -----------
----------- -----------
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
(000's) 1999 1998
Total revenue $ 80,112 $ 175,856
Operating expenses (82,140) (173,093)
Income tax expense (60) (1,710)
----------- -----------
Net income $ (2,088) $ 1,053
----------- -----------
----------- -----------
</TABLE>
8
<PAGE>
The following is combined unaudited summarized financial information of the
subsidiaries as of:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
<S> <C> <C>
(000's) 1999 1998
Total revenue $ 27,031 $ 49,704
Operating expenses (26,948) (48,704)
Income tax expense (267) 85
---------- ------------
Net income $ (184) $ 1,085
---------- ------------
---------- ------------
</TABLE>
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 did not have a significant effect on the ongoing
operations of the Company.
Subsequent Event
In October 1999, the Company completed the sale of its wholly-owned subsidiary,
New London Trust F.S.B. (`NLT'), to a consortium consisting of Phoenix Home Life
Mutual Insurance Company (`Phoenix') and three community banks in New Hampshire
and Connecticut, for approximately $49.1 million. Phoenix is retaining the trust
operations of NLT, while the assets, liabilities, and banking offices of NLT's
retail banking operations have been split among Lake Sunapee Bank, fsb of
Newport, NH, Mascoma Savings Bank of Lebanon, NH and Cargill Bank of Putnam, CT.
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>
NINE MONTHS ENDED SEPTEMBER 30,
(000's) 1999 1998
<S> <C> <C>
Interest income from bonds $99,192 $128,687
Income from investment in common stocks of
affiliates 6,500 3,000
Interest income from mortgage loans 38,466 41,025
Real estate investment income 11,715 11,729
Interest income from policy loans 2,571 2,115
Other (357) (264)
-------- --------
Gross investment income 158,087 186,292
Interest on surplus notes and borrowed money 32,449 34,087
Investment expenses 9,429 8,076
-------- --------
$116,209 $144,129
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
(000's) 1999 1998
<S> <C> <C>
Interest income from bonds $30,932 $40,609
Income from investment in common stocks of
affiliates 0 0
Interest income from mortgage loans 13,068 13,140
Real estate investment income 3,927 3,848
Interest income from policy loans 1,114 723
Other 449 (506)
------- -------
Gross investment income 49,490 57,814
Interest on surplus notes and borrowed money 10,816 10,816
Investment expenses 3,101 2,600
------- -------
$35,573 $44,398
------- -------
------- -------
</TABLE>
10
<PAGE>
(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
company-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 operating segments and to engage in other
financing related activities.
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.
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.
<TABLE>
<CAPTION>
(000's)
Nine Months Total Total Pre-Tax Income
Ended SEPTEMBER 30, Revenues Expenditures Income Taxes
- ------------------- ---------- ------------ --------- -------
1999
<S> <C> <C> <C> <C>
Wealth Management 2,316,687 2,272,892 43,795 14,479
Protection $ 25,987 $ 30,320 $ (4,333) $ (1,241)
Corporate 7,531 2,172 5,359 1,483
---------- ---------- ---------- ----------
Total $2,350,205 $2,305,384 $ 44,821 $ 14,721
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
1998
Wealth Management 1,855,652 1,805,325 50,327 16,996
Protection $ 234,548 $ 212,857 $ 21,691 $ 9,089
Corporate 10,242 2,162 8,080 2,846
---------- ---------- ---------- ----------
Total $2,100,442 $2,020,344 $ 80,098 $ 28,931
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
(000's)
Three Months Total Total Pre-Tax Income
Ended September 30, Revenues Expenditures Income Taxes
- --------------- ---------- ------------ --------- -------
1999
<S> <C> <C> <C> <C>
Wealth Management 784,945 785,490 (545) (1,013)
Protection $ 7,116 $ 10,289 $ (3,173) $ (1,011)
Corporate 1,464 (49) 1,513 3,824
--------- --------- --------- ---------
Total $ 793,525 $ 795,730 $ (2,205) $ 1,800
--------- --------- --------- ---------
--------- --------- --------- ---------
1998
Wealth Management 661,555 643,707 17,848 8,890
Protection $ 81,982 $ 68,296 $ 13,686 $ 4,749
Corporate 1,431 (492) 1,923 2,897
--------- --------- --------- ---------
Total $ 744,968 $ 711,511 $ 33,457 $ 16,537
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION - SEPTEMBER 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.
12
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NET INCOME
Net income decreased by $21.1 million to $31.5 million in the first nine months
of 1999 as compared to the same period in 1998. The change mainly reflects lower
income from operations, which decreased by $21.1 million to $30.1 million for
the first nine months of 1999. 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." The
decrease in income from operations reflects the following factors:
- - Income from operations from the Company's Wealth Management segment
decreased by $4.0 million to $29.3 million for the first nine
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 from the Protection segment. Active reinsurance agreements
in the first nine months of 1998 had the effect of increasing income
from operations by $8.5 million in that period; those still active in
the first nine months of 1999 had the effect of reducing income from
operations by $0.8 million in that period. Other activity in the
Protection segment resulted in a decrease to income from operations of
$2.4 million in the first nine months of 1999 compared to an increase
of $4.0 million for the same period in 1998. (These items are discussed
in the "Protection Segment" section below.)
- - Income from operations from the Company's Corporate segment decreased
by $1.4 million to $3.9 million for the first nine months of 1999.
(This increase is discussed in the "Corporate Segment" section below.)
INCOME FROM OPERATIONS BY SEGMENT
The Company's income from operations reflects the operations of its three
business segments: the Wealth Management segment, the Protection segment and the
Corporate segment. The following table provides a summary.
13
<PAGE>
<TABLE>
<CAPTION>
INCOME FROM OPERATIONS *
($ IN MILLIONS)
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 % CHANGE
<S> <C> <C> <C>
Wealth Management $ 29.3 $ 33.3 -12.0%
Protection (3.1) 12.6 -124.6%
Corporate 3.9 5.3 -26.4%
--------------------------------------------
$ 30.1 $ 51.2 -41.2%
--------------------------------------------
--------------------------------------------
</TABLE>
* BEFORE NET REALIZED CAPITAL GAINS OR LOSSES
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 Company ('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 (U.S.) Distributors, Inc.,
a subsidiary of the Company, 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.
14
<PAGE>
Following are the major factors affecting the Wealth Management segment results
in the first nine months of 1999 as compared to the same period in the prior
year.
Deposit-type funds, which primarily comprised annuity deposits, increased by
$469.6 million, or 30%, to $2,034.0 million in the first nine months of 1999
compared to the same period in 1998. Fixed annuity account deposits were higher
by approximately $630 million in the first nine months of 1999 compared to the
same period in 1998 which management believes is mainly the result of the
success of the 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. While fixed annuity account deposits increased, deposits directly
into variable accounts declined by approximately 19% in the first nine 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 the
first nine months of 1999.
Sales of the Futurity line of products, introduced in February 1998, represented
approximately 12% of total annuity deposits for the first nine months of 1999.
The Company expects that sales for the Futurity product will continue to
increase in the future, based on management's 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 $22.1 million, or 22%, in the first nine 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 nine months of 1999, net investment income for the Wealth Management
segment decreased by $33.4 million to $90.0 million 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
and as a consequence, the scheduled liquidation of maturing GICS. It also
reflects the shift in deposits in recent years from the fixed account to
variable accounts.
15
<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 by approximately $450 million in
the first nine 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 implementing 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, increased by $1.0
million, or 2%, in the first nine months of 1999 compared to the same period in
1998. This increase reflected costs associated with operations and technology
improvements to support the growth of the Company's in-force business and costs
related to the product design, implementation, and distribution of the new
Futurity multi-manager annuity product. Commissions of $118.0 million were
higher by $17.0 million in the third quarter of 1999 than in the same quarter in
1998, mainly as a result of higher sales.
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 nine
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 has developed a new variable universal life product as part of the
Futurity product portfolio, which it introduced in September 1999. During the
first nine months 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.
16
<PAGE>
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. For the first nine months of 1999,
income from operations for this segment declined by $1.4 million to $3.9
million as compared to the same period in 1998. This decline mainly reflected
lower net investment income. Investment income was lower in the third 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NET INCOME
There was a net loss of $9.8 million in the third quarter of 1999 as compared
to net income of $17.5 million in the same quarter in 1998. This $27.3
million change primarily reflected a decrease of $20.9 million in income from
operations, to a net loss of $4.0 million for the third quarter of 1999, as
discussed further below. It also reflected $5.8 million in net realized
capital losses in the third quarter of 1999 as compared to $0.6 million in
net realized capital gains in the same period in 1998.
INCOME FROM OPERATIONS BY SEGMENT
The following table provides a summary of income from operations by business
segment:
<TABLE>
<CAPTION>
INCOME FROM OPERATIONS*
($ IN MILLIONS)
THREE MONTHS ENDED SEPTEMBER 30,
1999 1998 % CHANGE
<S> <C> <C> <C>
Wealth Management $ 0.5 $ 9.0 -94.4%
Protection (2.2) 8.9 -124.7%
Corporate (2.3) (1.0) -120.0%
---------------------------------------------
$ (4.0) $ 16.9 -123.7%
---------------------------------------------
---------------------------------------------
</TABLE>
*BEFORE NET REALIZED CAPITAL GAINS OR LOSSES
17
<PAGE>
Wealth Management Segment
Following are the major factors affecting the Wealth Management segment results
in the third quarter of 1999 as compared to the same period in 1998. As
discussed below, most of the factors had the effect of increasing income from
operations; however, increased policyholder benefit costs and lower net
investment income resulted in the overall decline in income from operations in
the third quarter of 1999 as compared to the same quarter in 1998.
Deposit-type funds, which primarily comprise annuity deposits, increased by
$121.3 million, or 21%, to $689.8 million in the third quarter of 1999 compared
to the same 1998 quarter. Fixed annuity account deposits were higher by
approximately $200 million in the third quarter of 1999 compared to the same
1998 quarter, mainly as a result of the success of the Dollar Cost Averaging
('DCA') programs. However, deposits directly into variable accounts declined by
approximately 25% in the third 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 13% of total
annuity deposits in the third quarter of 1999.
Fee income increased as a result of higher variable annuity account balances.
Fee income of $43.2 million was higher by $7.7 million, or 21%, in the third
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 third quarter of 1999, net investment income for the Wealth Management
segment decreased by $10.9 million to $28.1 million, or 28%, 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 by approximately $136 million in
the third 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 implementing a conservation program with the
aim of improving asset retention.
18
<PAGE>
Operational expenses, which include general insurance expenses and insurance
taxes, licenses and fees, excluding federal income taxes, increased by $2.2
million to $16.6 million in the third quarter of 1999 compared to the same
quarter in 1998. This increase reflected costs associated with operations and
technology improvements to support the growth of the Company's in-force business
and costs related to the product design, implementation, and distribution of the
new Futurity multi-manager annuity product. Commissions of $39.2 million were
higher by $3.5 million in the third quarter of 1999 as compared to the same
quarter in 1998 as a result of higher sales. Also included in income from
operations in the third quarter of 1999 were federal income tax benefits of $1.0
million as compared to federal income tax expenses of $8.9 million in the same
quarter of 1998.
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 third quarter of
1998 had the effect of increasing income from operations by $9.2 million in that
period; those still active in the third quarter of 1999 had the effect of
reducing income from operations by $0.3 million in that period.
Other activity in the Protection segment resulted in a decrease to income from
operations of $1.8 million in the third quarter of 1999 as compared to a
decrease of $0.2 million in the third quarter of 1998. This activity related to
the Company's primary individual variable life insurance product, which is a
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 has developed a new variable universal life
product as part of the Futurity product portfolio, which it introduced in
September 1999. During the third quarter 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
The Corporate 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 third quarter of 1999, there were
net losses from operations of $2.3 million as compared to a net loss of $1
million in the same period in 1998. This change reflected higher expenses for
the segment in the third quarter of 1999 as compared to the same period in 1998.
19
<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 September 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 nine months of 1999. The changes are discussed below.
<TABLE>
<CAPTION>
ASSETS
($ IN MILLIONS)
9/30/99 12/31/98 % CHANGE
<S> <C> <C> <C>
General account assets $ 2,479.40 $ 2,932.20 -15.4%
Fixed separate account assets 2,193.10 2,195.60 -0.1%
----------------------------------------------
4,673.10 5,127.80 -8.9%
Variable separate account assets 12,686.00 11,774.80 7.7%
----------------------------------------------
Total assets $ 17,358.50 $ 16,902.60 2.7%
----------------------------------------------
----------------------------------------------
</TABLE>
20
<PAGE>
General account and fixed separate account assets, taken together, decreased by
9% in the first nine months of 1999. Variable separate account assets increased
by 8% during that period. In management's view, 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
nine 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 $317.7 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 September
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
21
<PAGE>
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.
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. On September 28, 1999, the SLOC Board of Directors approved SLOC's
demutualization plan. SLOC 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.
22
<PAGE>
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. Of the nearly 2000
systems used by the Company, all of its mission critical systems have been
assessed, fixed where necessary, tested, and, based on those tests, are
considered to be Year 2000 compliant. The Company regards Year 2000 compliance
as meaning that its business systems will have passed tests that indicate they
will operate accurately before, during, and after January 1, 2000 with respect
to Year 2000 issues. The Company defines mission critical systems as those
systems that cannot be unavailable for more than 48 hours without causing major
disruption to the business.
In mid-1997, the Company's Year 2000 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 issue. 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.
23
<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 unit has identified its critical business processes, developed
alternative plans of action where possible, and has conducted walkthroughs of
those plans. On the corporate level, the Company has enhanced its business
continuation plan by identifying minimum requirements for facilities, computing,
staffing, and other factors and has developed a plan to support those
requirements.
As of year-end 1998, the Company expended, cumulatively, approximately $4.2
million on its Year 2000 effort. The Company expects to expend a further $1.5
million on this effort in 1999, of which approximately $ 1 million was expended
in the nine month period ending September 30, 1999.
SALE OF SUBSIDIARY
In October 1999, the Company completed the sale of its wholly-owned subsidiary,
New London Trust F.S.B. ('NLT'), to a consortium consisting of Phoenix Home Life
Mutual Insurance Company ('Phoenix') and three community banks in New Hampshire
and Connecticut, for approximately $49.1 million. Phoenix is retaining the trust
operations of NLT, while the assets, liabilities, and banking offices of NLT's
retail banking operations have been split among Lake Sunapee Bank, fsb of
Newport, NH, Mascoma Savings Bank of Lebanon, NH and Cargill Bank of Putnam, CT.
This transaction is not expected to have a significant effect on the ongoing
operations of the Company.
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.
24
<PAGE>
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.
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 rate 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.
25
<PAGE>
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 September 30, 1999 had a fair value of $1,147.1 million.
Fixed income investments supporting these and other general account liabilities
had a fair value of $2,184.1 million at that date. The Company performed a
sensitivity analysis on these interest-sensitive liabilities and assets at
September 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 $36.6 million and the corresponding assets would show a
net decrease of $84.5 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'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.
26
<PAGE>
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.
- -----------
3 Certificate of Incorporation and by-laws (filed as Exhibit 6 to the
Registration Statement on Form N-4 (Registration No. 333-37903), filed
October 14, 1997.
27 FINANCIAL DATA SCHEDULE (filed herewith)
27
<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 November 12, 1999 /s/ Robert K. Leach
--------------------------------
Robert K. Leach
Vice President, Finance and Product,
Retirement Products and Services
Date November 12, 1999 /s/ Davey S. Scoon
-------------------------------
- --------
Davey S. Scoon
Vice President, Finance
and Treasurer
<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 QUARTERLY REPORT ON FORM 10-Q FOR THE YEAR TO DATE.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 1,263,078
<DEBT-MARKET-VALUE> 1,291,436
<EQUITIES> 97,143
<MORTGAGE> 586,908
<REAL-ESTATE> 92,479
<TOTAL-INVEST> 2,104,715
<CASH> 291,935
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 17,363,508
<POLICY-LOSSES> 1,209,864
<UNEARNED-PREMIUMS> 0
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0
0
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2,086,342
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