<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 Commission File Numbers:
Ended September 30, 2000 2-99959, 33-29851,
33-31711, 33-41858,
33-43008, 33-58853
and 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 November 14, 2000,
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:
Consolidated Statements of Income (unaudited) --
Nine Months Ended
September 30, 2000 and September 30, 1999 1
Consolidated Statements of Income (unaudited) --
Three Months Ended
September 30, 2000 and September 30, 1999 2
Consolidated Balance Sheets --
September 30, 2000 (unaudited) and December 31, 1999
(audited) 3
Consolidated Statements of Comprehensive Income
(unaudited) --
Nine Months Ended
September 30, 2000 and September 30, 1999 4
Consolidated Statements of Changes in Stockholder's
Equity (unaudited) --
Nine Months Ended
September 30, 2000 and September 30, 1999 5
Consolidated Statements of Cash Flows (unaudited) --
Nine Months Ended
September 30, 2000 and September 30,1999 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 33
PART II: Other Information
Item 6: Exhibits and Reports on Form 8-K 36
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
2000 1999
---- ----
<S> <C> <C>
Revenues
Premiums and annuity considerations $ 33.9 $ 34.3
Net investment income 225.1 278.2
Net realized investment gains (losses) (4.1) 4.7
Other income 213.8 160.8
------- -------
Total revenues 468.7 478.0
------- -------
Benefits and expenses
Policyowner benefits 246.5 252.9
Underwriting, acquisition and other operating expenses 105.3 72.8
Amortization of deferred policy acquisition costs 70.1 69.3
------- -------
Total benefits and expenses 421.9 395.0
------- -------
Income from operations 46.8 83.0
Interest expense 32.4 32.4
------- -------
Income before income tax expense and discontinued operations 14.4 50.6
Income tax expense (benefit) (0.9) 17.0
------- -------
Net income from continuing operations 15.3 33.6
Net loss on disposal of subsidiary, after tax -- (24.8)
Net income from discontinued operations -- 1.3
------- -------
Net income $ 15.3 $ 10.1
======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
1
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
2000 1999
---- ----
<S> <C> <C>
Revenues
Premiums and annuity considerations $ 9.4 $ 10.3
Net investment income 66.6 89.1
Net realized investment losses (1.4) (2.6)
Other income 69.6 57.0
------- -------
Total revenues 144.2 153.8
------- -------
Benefits and expenses
Policyowner benefits 86.0 82.2
Underwriting, acquisition and other operating expenses 38.2 26.3
Amortization of deferred policy acquisition costs 30.6 18.4
------- -------
Total benefits and expenses 154.8 126.9
------- -------
Income (loss) from operations (10.6) 26.9
Interest expense 10.8 10.8
------- -------
Income (loss) before income tax expense and discontinued operations (21.4) 16.1
Income tax expense (benefit) (12.3) 8.7
------- -------
Net income (loss) from continuing operations (9.1) 7.4
Net loss on disposal of subsidiary, after tax -- 0.6
Net income from discontinued operations -- 0.4
------- -------
Net income (loss) $ (9.1) $ 8.4
======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
2
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
UNAUDITED AUDITED
ASSETS SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Investments
Fixed maturities available-for-sale at fair value (amortized cost of
$2,499.4 and $2,685.4 in 2000 and 1999, respectively) $ 2,495.9 $ 2,677.3
Trading fixed maturities at fair value (amortized cost of $516.4 and
$1.0 in 2000 and 1999, respectively) 521.2 1.0
Short-term investments 145.7 177.2
Mortgage loans 891.3 931.4
Real estate 96.3 95.1
Policy loans 41.5 40.7
Other invested assets 75.5 67.9
---------- ----------
Total investments 4,267.4 3,990.6
Cash and cash equivalents 321.7 550.3
Accrued investment income 55.9 50.5
Deferred policy acquisition costs 762.5 686.3
Outstanding premiums 1.4 2.7
Other assets 48.8 81.2
Separate account assets 18,297.5 16,123.3
---------- ----------
TOTAL ASSETS $ 23,755.2 $ 21,484.9
========== ==========
LIABILITIES
Future contract and policy benefits $ 719.2 $ 729.3
Contractholder deposit funds and other policy liabilities 3,270.8 3,144.8
Unearned revenue 10.4 7.1
Accrued expenses and taxes 73.2 98.8
Deferred federal income taxes 56.9 77.7
Long-term debt payable to affiliates 565.0 565.0
Other liabilities 77.2 67.7
Separate account liabilities 18,297.5 16,123.3
---------- ----------
Total liabilities 23,070.2 20,813.7
---------- ----------
STOCKHOLDER'S EQUITY
Common stock, $1,000 par value -- 10,000 shares authorized;
5,900 shares issued and outstanding 5.9 5.9
Additional paid-in capital 199.4 199.4
Accumulated other comprehensive income 10.6 7.1
Retained earnings 469.1 458.8
---------- ----------
Total stockholder's equity 685.0 671.2
---------- ----------
Total liabilities and stockholder's equity $ 23,755.2 $ 21,484.9
========== ==========
</TABLE>
3
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN MILLIONS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
2000 1999
---- ----
<S> <C> <C>
Net income $ 15.3 $ 10.1
Other comprehensive income:
Net change in unrealized holding gains and losses on
available-for-sale securities, net of tax 3.3 51.7
Other 0.2 --
------- -------
Other comprehensive income: 3.5 51.7
------- -------
Comprehensive income $ 18.8 $ 61.8
======= =======
</TABLE>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
2000 1999
---- ----
<S> <C> <C>
Net income $ (9.1) $ 8.4
Other comprehensive income:
Net change in unrealized holding gains and losses on
available-for-sale securities, net of tax 7.5 20.1
Other .1 --
------- -------
Other comprehensive income: 7.6 20.1
------- -------
Comprehensive income $ (1.5) $ 28.5
======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN MILLIONS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDER'S
STOCK CAPITAL INCOME EARNINGS EQUITY
------ ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 5.9 $ 199.4 $ 75.9 $ 496.4 $ 777.6
Comprehensive income:
Net income 10.1 10.1
Other comprehensive income 51.7 51.7
Dividends to stockholder (75.0) (75.0)
------ -------- -------- -------- --------
Balance at September 30, 1999 $ 5.9 $ 199.4 $ 127.6 $ 431.5 $ 764.4
====== ======== ======== ======== ========
Balance at December 31, 1999 $ 5.9 $ 199.4 $ 7.1 $ 458.8 $ 671.2
Comprehensive income:
Net income 15.3 15.3
Other comprehensive income 3.5 3.5
Dividends to stockholder (5.0) (5.0)
------ -------- -------- -------- --------
Balance at September 30, 2000 $ 5.9 $ 199.4 $ 10.6 $ 469.1 $ 685.0
====== ======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income from continuing operations $ 15.3 $ 33.6
Adjustments to reconcile net income from continuing operations to net cash
provided by operating activities:
Amortization of discount and premiums (0.8) (0.4)
Depreciation and amortization 1.8 1.6
Net realized (gains) losses on investments 3.8 (4.7)
Net unrealized (gains) losses on trading securities (4.8) --
Tax benefit on disposal of subsidiary -- 15.4
Interest credited to contractholder deposits 143.3 155.7
Deferred federal income taxes (22.4) 1.7
Changes in assets and liabilities:
Deferred acquisition costs (76.1) (48.1)
Accrued investment income (5.4) 4.8
Other assets 21.4 (77.0)
Future contract and policy benefits 2.3 (5.3)
Other, net 18.2 68.9
--------- ---------
Net cash provided by operating activities 96.6 146.2
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, maturities and repayments of:
Available-for-sale fixed maturities 887.0 1,038.9
Subsidiary -- 29.5
Mortgage loans 119.8 146.0
Real estate 9.8 2.0
Purchases of:
Available-for-sale fixed maturities (708.7) (488.4)
Trading fixed maturities (515.9) --
Other invested assets (2.2) (0.9)
Mortgage loans (81.5) (192.8)
Real estate (11.3) --
Changes in other investing activities, net 0.6 2.8
Net change in policy loans (0.8) (1.0)
Net change in short term investments (0.5) (149.6)
--------- ---------
Net cash provided by (used in) investing activities (303.7) 386.5
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits to contractholder deposit funds 1,506.1 1,171.4
Withdrawals from contractholder deposit funds (1,522.6) (1,674.2)
Dividends paid to stockholder (5.0) (75.0)
--------- ---------
Net cash used in financing activities (21.5) (577.8)
--------- ---------
Net change in cash and cash equivalents (228.6) (45.1)
Cash and cash equivalents, beginning of period 550.3 264.7
Cash and cash equivalents, end of period $ 321.7 $ 219.6
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid, net of refunds 65.4 (14.0)
Interest paid 21.6 21.6
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.
6
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Sun Life Assurance Company of Canada (U.S.) (the "Company") was
incorporated in 1970 as a life insurance company domiciled in the state
of Delaware. The Company and its subsidiaries are licensed in 49 states
and certain other territories and are engaged in the sale of individual
variable life insurance, individual fixed and variable annuities, group
fixed and variable annuities, group pension contracts, guaranteed
investment contracts, group life and disability insurance, and other
asset management services.
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc. ("Life Holdco"), which is an indirect wholly-owned
subsidiary of Sun Life Assurance Company of Canada ("SLOC"), the
Company's ultimate parent as of December 31, 1999. SLOC is a life
insurance company domiciled in Canada which reorganized from a mutual
life insurance company to a stock life insurance company on March 22,
2000. As a result of the demutualization, a new holding company, Sun
Life Financial Services of Canada Inc. ("SLF"), is now the ultimate
parent of SLOC and the Company.
Basis of Presentation
For the year ended December 31, 1999, the Company filed its Annual
Report on Form 10-K using audited statutory financial statements. The
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of
Delaware, which is a comprehensive basis of accounting other than
generally accepted accounting principles. The Company changed its
basis of accounting to generally accepted accounting principles
("GAAP") and has restated the financial statements for the prior
year ended December 31, 1999 (Consolidated Balance Sheet) and for
the period ended September 30, 1999 (Consolidated Statement of
Income, Consolidated Statement of Comprehensive Income,
Consolidated Statement of Changes in Stockholder's Equity, and
Consolidated Statement of Cash Flows) to conform with GAAP. See
Note 5 for a reconciliation of statutory surplus to GAAP equity
and statutory net income to GAAP net income.
The consolidated financial statements include the accounts of the
Company and its subsidiaries. The Company owns all of the outstanding
shares of Sun Life Insurance and Annuity Company of New York ("Sun
Life (N.Y.)"), Sun Life of Canada (U.S.) Distributors, Inc.
("Sundisco"), Sun Life Financial Services Limited ("SLFSL"), Sun
Benefit Services Company, Inc. ("Sunbesco"), Sun Capital Advisers,
Inc. ("Sun Capital"), Sun Life Finance Corporation ("Sunfinco"), Sun
Financial Group Advisers, Inc. ("Sunad"), Sun Life of Canada (U.S.)
SPE 97-1, Inc.
7
<PAGE>
("SPE 97-1"), and Clarendon Insurance Agency, Inc.
("Clarendon"). The results are also consolidated with Sun Life of
Canada Funding, LLC ("Sun Life Funding"), which is owned by a trust
capitalized by the Company. All significant intercompany transactions
have been eliminated in consolidation.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable
annuity contracts and group life and disability insurance contracts in
its state of domicile, New York. Sundisco is a registered investment
adviser and broker-dealer. SLFSL serves as the marketing administrator
for the distribution of the offshore products of Sun Life Assurance
Company of Canada (Bermuda), an affiliate. Sun Capital is a registered
investment adviser. SPE 97-1 was organized for the purpose of engaging
in activities incidental to securitizing mortgage loans. Clarendon is a
registered broker-dealer that acts as the general distributor of
certain annuity and life insurance contracts issued by the Company and
its affiliates. Sun Life Funding was organized in connection with the
issuance of guaranteed investment contracts to unrelated third parties
in overseas markets. Sunbesco, Sunfinco and Sunad are currently
inactive.
In June, 2000, the Company transferred all of the outstanding shares
of Sun Life Information Services Ireland, Limited ("SLIRL") to SLOC.
SLIRL provides information systems development services to SLOC and
its subsidiaries.
During 1999, the Company sold two of its subsidiaries, Massachusetts
Casualty Insurance Company ("MCIC") (sold February, 1999) and New
London Trust F.S.B. ("NLT")(sold October, 1999). MCIC is a life
insurance company which issues only individual disability income
policies. NLT is a federally chartered savings bank, which grants
commercial, residential real estate and installment loans. The results
of operations of NLT are reported as discontinued operations.
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. The most significant estimates are those used in
determining deferred policy acquisition costs, investment allowances,
and the liabilities for future policyholder benefits. Actual results
could differ from those estimates.
Financial Instruments
In the normal course of business, the Company enters into transactions
involving various types of financial instruments, including cash and
cash equivalents, investments such as fixed maturities, mortgage loans
and equity securities, off balance sheet financial instruments, debt,
loan commitments and financial guarantees. These instruments involve
credit risk and also may be subject to risk of loss due to interest
rate fluctuation. The Company evaluates and monitors each financial
instrument individually and, when appropriate, obtains collateral or
other security to minimize losses.
8
<PAGE>
Cash and Cash Equivalents
Cash and cash equivalents primarily include cash, commercial paper,
money market investments, and short term bank participations. All such
investments have maturities of three months or less and are considered
cash equivalents for purposes of reporting cash flows.
Investments
The Company accounts for its investments in accordance with Statement
of Financial Accounting Standards No. 115, Accounting for Certain
Investments of Debt and Equity Securities. At the time of purchase,
fixed maturity securities are classified based on intent, as
held-to-maturity, available-for-sale, or trading. In order for the
security to be classified as held-to-maturity, the Company must have
positive intent and ability to hold the securities to maturity.
Securities held-to-maturity are stated at cost, adjusted for
amortization of premiums, and accretion of discounts. Trading
securities are carried at estimated fair value with changes in
unrealized gains or losses reported as a component of net investment
income. Securities that do not meet this criterion are classified
as available-for-sale. Available-for-sale securities are carried
at estimated fair value with changes in unrealized gains or losses
reported net of taxes in a separate component of stockholder's
equity. Fair values are obtained from external market quotations.
All securities transactions are recorded on a trade date basis.
Mortgage loans are stated at unpaid principle balances, net of
provisions for estimated losses. Mortgage loans acquired at a premium
or discount are carried at amortized values net of provisions for
estimated losses. Loans, which include primarily commercial first
mortgages, and real estate are diversified by property type and
geographic area throughout the United States. Mortgage loans are
collateralized by the related properties and generally are no more than
75% of the properties' value at the time that the original loan is
made.
A loan is recognized as impaired when it is probable that the principal
or interest is not collectible in accordance with the contractual terms
of the loan. Measurement of impairment is based on the present value of
expected future cash flows discounted at the loan's effective interest
rate, or at the loan's observable market price. A specific valuation
allowance is established if the fair value of the impaired loan is less
than the recorded amount. Loans are also charged against the allowance
when determined to be uncollectible. The allowance is based on a
continuing review of the loan portfolio, past loss experience and
current economic conditions, which may affect the borrower's ability to
pay. While management believes that it uses the best information
available to establish the allowance, future adjustments to the
allowance may become necessary if economic conditions differ from the
assumptions used in making the evaluation.
Real estate investments are held for the production of income or
held-for-sale. Real estate investments held for the production of
9
<PAGE>
income are carried at the lower of cost adjusted for accumulated
depreciation or fair value. Real estate investments held-for-sale are
primarily acquired through foreclosure of mortgage loans. The cost of
real estate that has been acquired through foreclosure is the estimated
fair value at the time of foreclosure. Depreciation of buildings and
improvements is calculated using the straight-line method over the
estimated useful life of the property, generally 40 to 50 years.
Policy loans are carried at the amount of outstanding principal balance
not in excess of net cash surrender values of the related insurance
policies.
Other invested assets consist primarily of leveraged leases and tax
credit partnerships.
The Company uses derivative financial instruments including
financial futures contracts, equity options, interest rate swaps,
foreign currency swaps and forward spread lock contracts as a means
of hedging exposure to interest rate, currency and equity price
risk. To qualify for hedge accounting, the changes in fair value of
the derivative must be expected to substantially offset the changes
in the value of the hedged item. Hedges are monitored to ensure that
there is a correlation between the derivative instrument and the
hedged investment. Derivative instruments qualifying for hedge
accounting treatment are marked to market and the related changes in
fair value are included in a separate component of stockholder's
equity. To the extent that the correlation of the derivative
instrument and hedged item is not established, the derivative
instrument is marked to market and the related change in fair value
is recognized in the statement of operations as a component of net
investment income. The Company does not currently utilize hedge
accounting for any of its derivatvies.
Investment income is recognized on an accrual basis. Realized gains and
losses on the sales of investments are recognized in operations at the
date of sale and are determined using the specific cost identification
method. When an impairment of a specific investment or a group of
investments is determined to be other than temporary, a realized
investment loss is recorded. Changes in the provision for estimated
losses on mortgage loans and real estate are included in net realized
investment gains and losses.
Interest income on loans is recorded on the accrual basis. Loans are
placed in a non-accrual status when management believes that the
borrower's financial condition, after giving consideration to economic
and business conditions and collection efforts, is such that collection
of principal and interest is doubtful. When a loan is placed in
non-accrual status, all interest previously accrued is reversed against
current period interest income. Interest accruals are resumed on such
loans only when they are brought fully current with respect to
principal and interest, have performed on a sustained basis for a
reasonable period of time, and when, in the judgment of management, the
loans are estimated to be fully collectible as to both principal and
interest.
10
<PAGE>
Deferred Policy Acquisition Costs
Acquisition costs consist of commissions, underwriting and other costs
which vary with and are primarily related to the production of
revenues. Acquisition costs related to investment-type contracts,
primarily deferred annuity and guaranteed investment contracts, and
universal and variable life products are deferred and amortized with
interest in proportion to the present value of estimated gross profits
to be realized over the estimated lives of the contracts. Estimated
gross profits are composed of net investment income, net realized
investment gains and losses, life and variable annuity fees, surrender
charges and direct variable administrative expenses. This amortization
is reviewed annually and adjusted retrospectively by a cumulative
charge or credit to current operations when the Company revises its
estimate of current or future gross profits to be realized from this
group of products, including realized and unrealized gains and losses
from investments. Acquisition costs related to fixed annuities and
other life insurance products are deferred and amortized, generally in
proportion to the ratio of annual revenue to the estimated total
revenues over the contract periods based upon the same assumptions used
in estimating the liability for future policy benefits.
Deferred acquisition costs for each life product are reviewed to
determine if they are recoverable from future income, including
investment income. If such costs are determined to be unrecoverable,
they are expensed at the time of determination. Although realization of
deferred policy acquisition costs is not assured, the Company believes
it is more likely than not that all of these costs will be realized.
The amount of deferred policy acquisition costs considered realizable,
however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in
the near term if any of the estimates discussed above are revised.
Other Assets
Property, equipment, leasehold improvements, and capitalized software
costs, which are included in other assets, are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided
using the straight-line or accelerated method over the estimated useful
lives of the related assets, which generally range from 3 to 30 years.
Amortization of leasehold improvements is provided using the
straight-line method over the lesser of the term of the leases or the
estimated useful life of the improvements. Reinsurance receivables from
reinsurance ceded are also included in other assets.
11
<PAGE>
Policy Liabilities and Accruals
Future contract and policy benefits are liabilities for life, health
and annuity products. Such liabilities are established in amounts
adequate to meet the estimated future obligations of policies in force.
Future policy benefits for individual life insurance and annuity
policies are computed using interest rates ranging from 4.5% to 5.5%
for life insurance and 6% to 11.25% for annuities. The liabilities
associated with traditional life insurance, annuity and disability
insurance products are computed using the net level premium method
based on assumptions about future investment yields, mortality,
morbidity and persistency. The assumptions used are based upon both the
Company's and its affiliates' experience and industry standards.
Estimated liabilities are established for group life and health
policies that contain experience rating provisions.
Policyholder contract deposits consist of policy values that accrue to
the holders of universal life-type contracts and investment-related
products such as deferred annuities and guaranteed investment
contracts. The liabilities are determined using the retrospective
deposit method and consist of net deposits and investment earnings less
administrative charges. The liability is before the deduction of any
applicable surrender charges.
Other policy liabilities include liabilities for policy and contract
claims. These amounts consist of the estimated amount payable for
claims reported but not yet settled and an estimate of claims incurred
but not reported. The amount reported is based upon historical
experience, adjusted for trends and current circumstances. Management
believes that the recorded liability is sufficient to provide for the
associated claims adjustment expenses. Revisions to these estimates are
included in operations in the year such refinements are made.
Revenue and Expenses
Premiums for traditional individual life and annuity products are
considered revenue when due. Premiums related to group life and group
disability insurance are recognized as revenue pro-rata over the
contract period. The unexpired portion of these premiums is recorded as
unearned premiums. Revenue from universal life-type products and
investment-related products includes charges for cost of insurance
(mortality), initiation and administration of the policy and surrender
charges. Revenue is recognized when the charges are assessed except
that any portion of an assessment that relates to services to be
provided in future years is deferred and recognized over the period
during which the services are provided.
Benefits and expenses, other than deferred policy acquisition costs,
related to traditional life, annuity, and disability contracts,
including group policies, are recognized when incurred in a manner
designed to match them with related premium revenue and spread income
recognition over expected policy lives. For universal life-type and
investment-type contracts, benefits include interest credited to
policyholders' accounts and death benefits in excess of account values,
which are recognized as incurred.
12
<PAGE>
Income Taxes
The Company and its subsidiaries participate in a consolidated federal
income tax return with Sun Life Assurance Company of Canada - U.S.
Operations Holdings, Inc., a direct wholly-owned subsidiary of SLOC and
parent company of Life Holdco and other affiliates. Deferred income
taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes,
and for other temporary taxable and deductible differences as defined
by Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. These differences result primarily from policy reserves,
policy acquisition expenses and unrealized gains or losses on
investments.
Separate Accounts
The Company has established separate accounts applicable to various
classes of contracts providing for variable benefits. Contracts for
which funds are invested in separate accounts include variable life
insurance and individual and group qualified and non-qualified variable
annuity contracts. Assets and liabilities of the separate accounts,
representing net deposits and accumulated net investment earnings less
fees, held primarily for the benefit of contract holders, are shown as
separate captions in the financial statements. Assets held in the
separate accounts are carried at market value and the investment risk
of such securities is retained by the policyholder.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which
establishes accounting and reporting standards for derivative
instruments. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities at fair value in the
balance sheet and establishes special accounting for the following
three types of hedges: fair value hedges, cash flow hedges, and hedges
of foreign currency exposures of net investments in foreign operations.
In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137 ("SFAS No. 137"), "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB SFAS No. 133." SFAS No. 137 delays the effective date of SFAS No.
133 for all fiscal quarters until fiscal years beginning after June
15, 2000. In accordance with SFAS 133, the Company currently measures
its derivative instruments at fair value and the changes in the fair
values are recognized in current period earnings. Some of the
Company's insurance contracts contain embedded derivative instruments
as defined be SFAS 133. The Company is in the process of developing
systems and methods to value these embedded instruments. Until such
systems and methods are developed during the fourth quarter of 2000,
management cannot estimate the full impact of adopting SFAS 133.
13
<PAGE>
On January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants ("AICPA") Statement of Position 97-3
("SOP 97-3"), "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." This statement provides guidance on
when an insurance or other enterprise should recognize a liability for
guaranty fund and other assessments and on how to measure such
liability. The adoption of SOP 97-3 had no material impact on the
financial position or results of operations of the Company.
In September 2000, the FASB issued SFAS 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities"
which replaces SFAS No. 125, "Accounting for Transfers and Services of
Financial Assets and Extinguishments of Liabilities". This standard
revises the methods for accounting for securitizations and other
transfers of financial assets and collateral as outlined in SFAS No.
125, and requires certain additional disclosures. For transfers and
servicing of financial assets and extinguishments of liabilities, this
standard will be effective for the Company's June 30, 2001 financial
statements. However, for disclosures regarding securitizations and
collateral, as well as recognition and reclassification of collateral,
this standard will be effective for the Company's December 31, 2000
financial statements. The Company is currently evaluating the impact
of the adoption of this standard, however, it does not expect the
adoption of this standard to have a material effect on its financial
position or results of operations.
On January 1, 1999, the Company adopted AICPA Statement of Position
98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 provides guidance
for determining whether costs of software developed or obtained for
internal use should be capitalized or expensed as incurred. In the
past, the Company has expensed such costs as they were incurred.
(2) TRANSACTIONS WITH AFFILIATES
The Company has an agreement with SLOC which provides that SLOC will
furnish, as requested, personnel as well as certain services and
facilities on a cost-reimbursement basis. Expenses under this
agreement amounted to approximately $11,195,000 and $28,037,000 for
the three and nine month periods in 2000 and $6,751,000 and
$22,057,000 for the same periods in 1999.
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. Rent
received by the Company under the leases for the three and nine month
periods in 2000 amounted to approximately $1,994,000 and $5,982,000,
respectively. The rent received for the same periods in 1999 was
$1,762,000 and $5,286,000, respectively.
14
<PAGE>
During January 2000, the Company purchased $200 million of term notes
issued by an affiliate, Massachusetts Financial Services Company,
maturing in 2003 and 2004.
(3) SEGMENT INFORMATION
The Company offers financial products and services such as fixed and
variable annuities, guaranteed investment contracts, retirement plan
services, and life insurance on an individual and group basis, as well
as disability insurance on a group basis. Within these areas, the
Company conducts business principally in four operating segments and
maintains a corporate segment to provide for the capital needs of the
four operating segments and to engage in other financing related
activities.
The Individual Protection segment markets and administers a variety of
life insurance products sold to individuals and corporate owners of
individual life insurance. The products include whole life, universal
life and variable life products.
The Group Protection segment markets and administers group life and
long-term disability insurance to small and mid-size employers in the
State of New York.
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. The company began offering guaranteed
investment contracts to unrelated third parties in overseas markets
during the second quarter of 2000. These contracts may contain any of
a number of features including variable or fixed interest rates and
equity index options and may be denominated in foreign currencies. The
Company uses derivative instruments to manage the risks inherent in
the contract options.
15
<PAGE>
Summarized unaudited financial information by segment is provided in
the tables below:
<TABLE>
<CAPTION>
(IN MILLIONS)
NINE MONTHS ENDED SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------------------------ ------------------
TOTAL TOTAL PRETAX NET TOTAL
REVENUES EXPENDITURES INCOME INCOME ASSETS
-------- ------------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Individual Protection $ 23.3 $ 25.0 $(1.7) $ (1.1) $ 906.9
Group Protection 13.1 11.8 1.3 .9 30.1
Wealth Management 415.7 381.9 33.8 27.0 22,638.7
Corporate 16.6 35.6 (19.0) (11.5) 179.5
-------- ------------ -------- -------- ---------
Total $468.7 $454.3 $14.4 $ 15.3 $23,755.2
-------- ------------ -------- -------- ---------
-------- ------------ -------- -------- ---------
NINE MONTHS ENDED SEPTEMBER 30, 1999 DECEMBER 31, 1999
------------------------------------------------------------ ------------------
Individual Protection $ 11.5 $ 15.7 $ (4.2) $ (2.6) $ 291.5
Group Protection 12.6 11.2 1.4 0.9 20.0
Wealth Management 431.1 363.8 67.3 47.8 20,534.2
Corporate 22.8 36.7 (13.9) (12.5) 639.2
-------- ------------ -------- -------- ---------
Total $478.0 $427.4 $ 50.6 $ 33.6 $21,484.9
-------- ------------ -------- -------- ---------
-------- ------------ -------- -------- ---------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
(IN MILLIONS)
THREE MONTHS ENDED SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------------------------------------------------------ ------------------
TOTAL TOTAL PRETAX NET TOTAL
REVENUES EXPENDITURES INCOME INCOME ASSETS
-------- ------------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Individual Protection $ 3.9 $ 2.8 $1.1 $ 0.7 $ 906.9
Group Protection 4.4 4.1 0.3 .2 30.1
Wealth Management 134.7 147.3 (12.6) (7.1) 22,638.7
Corporate 1.2 11.4 (10.2) ( 2.9) 179.5
------- --------- ------- -------- ----------
Total $144.2 $165.6 $(21.4) $ (9.1) $23,755.2
------- --------- ------- -------- ----------
------- --------- ------- -------- ----------
THREE MONTHS ENDED SEPTEMBER 30, 1999 DECEMBER 31, 1999
--------------------------------------------------------------------- -----------------
Individual Protection $ 3.8 $ 6.3 $(2.5) $(1.6) $ 291.5
Group Protection 4.2 3.4 0.8 0.6 20.0
Wealth Management 138.1 116.7 21.4 15.7 20,534.2
Corporate 7.7 11.3 (3.6) (7.3) 639.2
------ ------ ----- ----- ---------
Total $153.8 $137.7 $16.1 $ 7.4 $21,484.9
------ ------ ----- ----- ---------
------ ------ ----- ----- ---------
</TABLE>
(4) DISCONTINUED OPERATIONS
In February 1999, the Company completed the sale of its wholly-owned
subsidiary, MCIC, for approximately $34,000,000 million. The Company
realized a loss of $25,600,000 on the sale.
In October 1999, the Company completed the sale of its wholly-owned
subsidiary, NLT.
A summary of the results of these discontinued operations follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(in millions) SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------ -------------------
<S> <C> <C>
Revenue $ 6.9 $ 21.7
Expenses 6.3 19.3
Provision for income taxes 0.2 1.1
------------------ -------------------
Income from discontinued operations $ 0.4 $ 1.3
------------------ -------------------
------------------ -------------------
</TABLE>
17
<PAGE>
(5) STATUTORY FINANCIAL INFORMATION
For the year ended December 31, 1999, the Company filed its Annual
Report on Form 10-K using audited statutory financial statements. The
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of
Delaware, which is a comprehensive basis of accounting other than GAAP.
The Company changed its basis of accounting to GAAP and has restated
the financial statements for the prior year ended December 31, 1999
(Consolidated Balance Sheet) and for the period ended September 30,
1999 (Consolidated Statement of Income, Consolidated Statement of
Comprehensive Income, Consolidated Statement of Changes in
Stockholder's Equity, and Consolidated Statement of Cash Flows) to
conform with GAAP. The Statutory Balance Sheet filed as part of the
1999 Annual Report on Form 10K is shown below:
18
<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
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------
<S> <C>
ADMITTED ASSETS
Bonds $ 1,221,970
Common stocks 75,283
Mortgage loans on real estate 528,911
Properties acquired in satisfaction of debt 15,641
Investment real estate 79,182
Policy loans 40,095
Cash and short-term investments 316,971
Other invested assets 67,938
Investment income due and accrued 25,303
Other assets 5,807
------------------
General account assets 2,377,101
Separate account assets
Unitized 15,490,328
Non-unitized 2,080,726
TOTAL ADMITTED ASSETS $ 19,948,155
------------------
------------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 1,153,642
Supplementary contracts 3,182
Policy and contract claims 962
Liability for premium and other deposit funds 564,820
Surrender values on cancelled policies 16
Interest maintenance reserve 41,771
Commissions to agents due or accrued 3,253
General expenses due or accrued 14,055
Transfers from Separate Accounts due or accrued (467,619)
Taxes, licenses and fees due or accrued, excluding FIT 379
Federal income taxes due or accrued 89,031
Unearned investment income 22
Amounts withheld or retained by company as agent or trustee (442)
Remittances and items not allocated 1,078
Asset valuation reserve 44,071
Payable to parent, subsidiaries, and affiliates 26,284
Other liabilities 16,674
------------------
General account liabilities 1,491,179
Separate account liabilities:
Unitized 15,489,908
Non-unitized 2,080,726
------------------
TOTAL LIABILITIES 19,061,813
------------------
------------------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
CAPITAL STOCK AND SURPLUS
Common capital stock 5,900
------------------
Surplus notes 565,000
Gross paid in and contributed surplus 199,355
Unassigned funds 116,087
------------------
Surplus 880,442
Total common capital stock and surplus 886,342
------------------
TOTAL LIABILITIES, CAPITAL STOCK AND SURPLUS $ 19,948,155
------------------
------------------
</TABLE>
The following information reconciles statutory net income and
statutory surplus with net income and equity on a GAAP basis:
<TABLE>
<CAPTION>
(in millions) NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
---- -----
<S> <C> <C>
Statutory net income $ 27.7 $ 31.5
Adjustments to GAAP for life insurance companies:
Statutory interest maintenance reserve 5.2 (1.6)
Investment income and realized gains(losses) (32.6) 21.1
Policyowner benefits (103.6) (100.2)
Deferred policy acquisition costs 67.1 56.4
Deferred income taxes 31.4 (3.5)
Other, net 20.1 6.4
------- -------
GAAP net income (loss) $ 15.3 $ 10.1
------- -------
------- -------
(in millions) THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
------- -------
Statutory net income $ (7.9) $ (9.8)
Adjustments to GAAP for life insurance companies:
Statutory interest maintenance reserve 6.8 0.2
Investment income and realized gains(losses) (24.4) 16.4
Policyowner benefits (36.8) (18.0)
Deferred policy acquisition costs 21.3 24.0
Deferred income taxes 24.5 (7.4)
Other, net 7.4 3.0
------- -------
GAAP net income (loss) $ (9.1) $ 8.4
------- -------
------- -------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
----------------- ----------------
<S> <C> <C>
Statutory surplus $ 908.8 $ 886.3
Adjustments to GAAP for life insurance companies:
Valuation of investments 4.6 3.7
Deferred policy acquisition costs 762.5 686.3
Future policy benefits and
Contractholder deposit funds (460.0) (350.2)
Deferred income taxes (58.3) (86.1)
Statutory interest maintenance reserve 37.4 42.3
Statutory asset valuation reserve 42.4 45.3
Surplus notes (565.0) (565.0)
Capitalized software costs 5.7 6.2
Other, net 6.9 2.4
--------- ---------
GAAP equity $ 685.0 $ 671.2
--------- ---------
--------- ---------
</TABLE>
The National Association of Insurance Commissioners has codified
statutory accounting practices, which are expected to constitute
the only source of prescribed statutory accounting practices and
are effective in 2001. Codification will change prescribed
statutory accounting practices and may result in changes to the
accounting practices that insurance enterprises use to prepare
their statutory financial statements. The changes of codification
will not have a material impact on statutory surplus.
(6) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in pending and threatened litigation in the
normal course of its business in which claims for monetary and punitive
damages have been asserted. Although there can be no assurances, at the
present time the Company does not anticipate that the ultimate
liability arising from such pending or threatened litigation, after
consideration of provisions made for potential losses and costs of
defense, will have a material adverse effect on the financial condition
of operating results of the Company.
Under insurance guaranty fund laws in each state, the District of
Columbia and Puerto Rico, insurers licensed to do business can be
assessed by state insurance guaranty associations for certain
obligations of insolvent insurance companies to policyholders and
claimants. Recent regulatory actions against certain large life
insurers encountering financial difficulty have prompted various state
insurance guaranty associations to begin assessing life insurance
companies for the deemed losses. Most of these laws do provide,
however, that an assessment may be excused or deferred it would
threaten an insurer's solvency and further provide annual limits on
such assessments. Part of the assessments paid by the Company and its
subsidiaries pursuant to these laws may be used as credits for a
portion of the associated premium taxes.
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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; they relate to such topics as future product sales,
Year 2000 compliance, volume growth, market share, market risk and financial
goals. It is important to understand that these forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those that the statements anticipate. These risks and
uncertainties may concern, among other things:
-- 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.
-- The Company's ability to identify and address any remaining 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 any of their own remaining
Year 2000 issues in a timely manner.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999:
NET INCOME
Net income increased by $5.2 million to $15.3 million in the first nine months
of 2000, reflecting a decrease of $18.3 million in income from continuing
operations, a decrease of $1.3 million in income from discontinued operations,
and $24.8 million of after-tax loss from the sale of Massachusetts Casualty
Insurance Company ("MCIC") which occurred in February 1999.
NET INCOME FROM OPERATIONS BY SEGMENT
The Company's net income from operations reflects the operations of its four
business segments: the Wealth Management segment, the Individual Protection
segment, the Group Protection segment and the Corporate segment.
22
<PAGE>
The following table provides a summary of net income from operations by segment,
which is discussed more fully below.
<TABLE>
<CAPTION>
2000 1999 $ CHANGE
---- ---- ---------
<S> <C> <C> <C>
WEALTH MANAGEMENT $ 27.0 $ 47.8 $(20.8)
INDIVIDUAL PROTECTION (1.1) (2.6) 1.5
GROUP PROTECTION 0.9 0.9 -
CORPORATE (11.5) (12.5) 1.0
------ ------ --------
$ 15.3 $ 33.6 $(18.3)
------ ------ --------
------ ------ --------
</TABLE>
WEALTH MANAGEMENT SEGMENT
The Wealth Management segment focuses on the savings and retirement needs of
individuals preparing for retirement or who have already retired and on the
marketing of guaranteed investment contracts ("GICs") to unrelated third parties
in overseas markets. In the U.S. it primarily markets to upscale consumers,
selling individual and group fixed and variable annuities. Its major product
lines, "Regatta" and "Futurity," are combination fixed/variable annuities. In
these combination annuities, contractholders 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 contractholder 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 products 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 its 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 primarily distributed through a dedicated wholesaler network,
including Sun Life of Canada (U.S.) Distributors, Inc., a subsidiary.
Although new pension products are not currently sold in the U.S., there is a
substantial block of U.S. group retirement business in-force, including 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 in the U.S. Beginning in the second quarter of 2000, the Company began
marketing GICs to unrelated third parties in overseas markets.
Net income decreased by $20.8 million to $27.0 million in the nine months
ended September 30, 2000 versus the same period in 1999 primarily due to the
increased strain associated with the successful introduction of new products
which credit the policyholder with a bonus upon receipt of the deposit and
due to changes in the market values of derivatives used to manage Wealth
Management liabilities. The bonus credits on the new products are expensed
immediately as they are credited to the policyholders' account values. The
bonus credits totaled $19 million for the three month period. The changes in
market values of derivative instruments are included in investment income.
Following are the major factors affecting the Wealth Management segment's
results for the nine months ended September 30, 2000 as compared to the same
period in 1999.
-- Fee income increased primarily as a result of higher variable annuity
account balances. Fee income was higher by approximately $43.6 million in
the first
23
<PAGE>
nine months of 2000 compared to the same period in 1999. Market
appreciation and net deposit activity have been key factors in the growth
in the account balances. This growth has generated corresponding increases
in fee income, since fees are determined based on the average assets held
in these accounts. Variable annuity assets have increased by approximately
$6 billion since January 1, 1999. Net deposits of annuity products
increased by $350 million compared with 1999. The increase in net deposits
results primarily from the successful introduction of new products during
2000. As noted above, new products that credit the policyholder with a
bonus upon receipt have been introduced. Other new products that provide
policyholders with greater choices in the product features have also been
introduced. These new product introductions lead to significantly increased
gross and net sales. Annuity surrenders also increased in 2000 by $172
million, primarily due to older products which are no longer actively
marketed. The Company expects that as the separate account block of
business continues to grow, from both net deposits and asset appreciation,
and as an increasing number of accounts are no longer subject to surrender
charges, surrenders will tend to increase.
Total new deposits of fixed and variable annuities increased by $526
million to $2,625 million in the nine months ended September 30, 2000.
Deposits in the Futurity line of products represented $641 million of total
annuity deposits in the first nine months of 2000, an increase of $408
million from the same period in 1999. The Company expects that sales of the
Futurity product will continue to increase in the future, based on
management's beliefs: (i) that market demand is growing for multi-manager
variable annuity products; (ii) that the productivity of Futurity's
wholesale distribution network, established in 1998, will continue to grow;
and (iii) that the marketplace will continue to respond favorably to
introductions of new Futurity products and product enhancements.
-- There has been a shift in demand from general account annuity products to
variable account annuity 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. Net investment income and
realized gains for the Wealth Management segment decreased by $52 million
for the first nine months of 2000 as compared to the same period in 1999.
This decline in average general account assets primarily reflects the
Company's 1997 decision to no longer market group pension and GIC products
in the U.S. As a consequence, the block of in-force business declines as
U.S. issued GICs mature and are surrendered. The introduction of GIC
products marketed to unrelated third parties in overseas markets generated
$477 million of new deposits for the nine months ended September 30, 2000.
The Company expects the new GIC products to result in an increase in
general account assets in the future as additional deposits are received.
In addition to the decline in assets, the change in the value of the
various derivative instruments which the Company uses as part of its
asset-liability management programs decreased investment income by
approximately $29 million for the nine months ended September 30, 2000, as
compared to increasing earnings by approximately $14 million for the nine
months ended September 30, 1999.
-- Policyholder benefits (the major elements of which are interest credited to
contractholder deposits and annuity benefits) decreased by approximately
$6.8 million in the nine months ended September 30, 2000, as compared to
the same period in 1999. This is less than the decrease in investment
income as the surrenders of maturing GIC contracts on which the Company
earns a positive
24
<PAGE>
spread are being partially replaced by sales of annuities under
the Company's Dollar Cost Averaging ("DCA") programs. Under these
programs, 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. In addition, the bonus
payments credited to policyholder deposits totaled over $29 million during
the first nine months of 2000, representing one of the primary causes of
the decrease in earnings. Sales of the new GIC products increased benefits
by $3.4 million during 2000.
-- Underwriting, acquisition and other operating expenses increased by $12.9
million in the nine months ended September 30, 2000 as compared to the
same period in 1999, reflecting the increased volumes of both new business
and in-force business.
-- Amortization of deferred policy acquisition costs increased by $4.7 million
in the nine months ended September 30, 2000 as compared to the same period
in 1999, due primarily to increased gross profits on in-force business. The
business in-force at the beginning of the year has increased profits and
therefore increased amortization. The new business, which incurs a loss on
sale, has no amortization.
INDIVIDUAL PROTECTION SEGMENT
The Company currently markets individual variable life insurance products. These
products include variable universal life products marketed to the
corporate-owned life insurance ("COLI") market, which products were first
introduced in late 1997. In September 1999, the Company introduced a new
variable life product as part of the Futurity product portfolio. The Company's
management expects the variable life business to grow and become more
significant in the future.
The net loss from the Individual Protection segment decreased by $1.5 million
during the first nine months of 2000 as compared to the same period in 1999 due
primarily to increased investment income. During the second quarter of 2000 the
Company received a $500 million deposit to its new privately placed COLI
variable life product. This resulted in increased fee income of $11 million that
was offset by increased acquisition costs associated with the sale.
GROUP PROTECTION SEGMENT
The Group Protection segment focuses on providing life and disability insurance
to small and medium size employers as part of those companies' employee benefit
plans. This segment operates only in the state of New York through a subsidiary.
Net income from the Group Protection segment was unchanged for the nine months
ended September 30, 2000 as compared to the same period in 1999. The business
grew only slightly in 2000.
CORPORATE SEGMENT
The Corporate segment includes the unallocated capital of the Company, its debt
financing, and items not otherwise attributable to the other segments.
25
<PAGE>
The net loss decreased by $1.0 million to $11.5 million for the nine months
ended September 30, 2000. This reflects an increase in operating expenses being
offset by lower income taxes from increased permanent differences in taxable
income that are attributed to this segment.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999:
NET INCOME
Net income for the third quarter decreased by $17.5 million to a net loss of
$9.1 million in 2000, reflecting a decrease of $16.5 million in income from
continuing operations and a decrease of $.4 million in income from
discontinued operations and a purchase price adjustment of $.6 million to
the loss on disposal of MCIC in the third quarter of 1999.
NET INCOME FROM OPERATIONS BY SEGMENT
The following table provides a summary of net income from operations by segment,
which is discussed more fully below.
<TABLE>
<CAPTION>
2000 1999 $ CHANGE
---- ---- --------
<S> <C> <C> <C>
WEALTH MANAGEMENT $(7.1) $15.7 $(22.8)
INDIVIDUAL PROTECTION .7 (1.6) 2.3
GROUP PROTECTION .2 .6 (0.4)
CORPORATE (2.9) (7.3) 4.4
------- ------ --------
$(9.1) $7.4 $(16.5)
------- ------ --------
------- ------ --------
</TABLE>
WEALTH MANAGEMENT SEGMENT
Net income decreased by $22.8 million to a loss of $7.1 million in the third
quarter of 2000 as compared to 1999 primarily due to the strain associated
with the introduction of bonus credit products and the decline in market
value of derivatives used in managing the fixed annuity and GIC products. The
new products credit the policyholder's account with a bonus at the time the
deposit is received. The introduction of new GIC products marketed to foreign
investors also contributed to the loss for the quarter.
Following are the major factors affecting the Wealth Management segment's
results in the third quarter of 2000 as compared to the same period in 1999.
-- Fee income increased primarily as a result of higher variable annuity
account balances. Fee income was higher by approximately $17 million in the
third quarter of 2000 compared to the same period in 1999. Market
appreciation and net deposit activity have been key factors in the growth
in the account balances. This growth has generated corresponding increases
in fee income, since fees are determined based on the average assets held
in these accounts. Variable annuity assets have increased by almost $5.1
billion since September 30, 1999.
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<PAGE>
-- Net deposits of annuity products during the third quarter of 2000 increased
by $393 million compared with the third quarter of 1999. The increase in
net deposits results primarily from increases in variable annuity deposits
during the second quarter of 2000. The increase in net deposits results
primarily from the successful introduction of new products during 2000.
These products include the introduction of new Regatta and Futurity
products that credit the policyholder with a bonus upon receipt of the
deposit and other products that give the policyholder a wider range of
options from which to choose. All the new products have contributed to the
increase.
Surrenders of contractholder deposits have increased by $62 million during
the third quarter of 2000 as compared to 1999. This increase is due to
surrenders of variable annuity products.
Total new deposits to fixed and variable annuities increased by $456
million to $1,168 million during the third quarter of 2000. Sales of the
Futurity line of products represented $272 million of total annuity
deposits during the third quarter of 2000, an increase of $190 million from
the same three month period in 1999.
-- Net investment income and realized gains for the Wealth Management segment
decreased by $18 million for the third quarter of 2000 as compared to the
same period in 1999. This decline reflects primarily a loss of $22 million
in market value of derivatives for the third quarter of 2000 as compared to
an increase of $2 million in value in the third quarter of 1999. Unrealized
gains on fixed maturity trading securities totaled $3 million for the third
quarter of 2000. The introduction of new GIC products marketed to foreign
investors generated $300 million of new deposits for the third quarter of
2000 and resulted in a net increase of general account invested assets of
$275 million for the third quarter of 2000.
-- Policyholder benefits (the major elements of which are interest credited to
contractholder deposits and annuity benefits) increased by approximately
$4.7 million in the three months ended September 30, 2000 as compared to
the same period in 1999. This is in contrast to the decrease in investment
income. The declining older US issued GICs result in declining interest
credited to deposits. The bonus payments credited to policyholder deposits
totaled almost $19 million during the third quarter of 2000 and caused the
increase in benefits as well as contributed to the net loss for the
quarter.
-- Underwriting, acquisition and other operating expenses increased by $7.4
million for the three months ended September 30, 2000 as compared to the
same period in 1999, reflecting the significantly increased volumes of both
new business and in-force business.
-- Amortization of deferred policy acquisition costs increased by $16.0
million during the third quarter of 2000 as compared to 1999. Assumptions
regarding future profits have been revised based upon current market
conditions and result in increased amortization as well as increased
amortization from higher gross profits on existing business.
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<PAGE>
INDIVIDUAL PROTECTION SEGMENT
During the third quarter of 2000, net income from the Individual Protection
segment increased by $2.3 to net income of $0.7 million as compared to the same
period in 1999, due to a combination of factors including increased investment
income, decreased death benefits and lower reinsurance costs.
GROUP PROTECTION SEGMENT
Net income from the Group Protection segment during the third quarter of 2000
decreased by $.4 million from the same period in 1999, primarily due to
increased claims in both life and health products and increased operating
expenses.
CORPORATE SEGMENT
In the third quarter of 2000, the net loss from operations for the Corporate
segment decreased by $4.4 million to $2.9 million. This decrease reflected lower
income taxes from increased permanent differences in taxable income which are
allocated to this segment, which more than offset increased operating expenses.
FINANCIAL CONDITION & LIQUIDITY
ASSETS
The Company's total assets comprise those held in its general account and those
held in its separate accounts. General account assets support general account
liabilities. Separate accounts are investment vehicles for the Company's
variable life and annuity contracts. Policyholders may choose from among various
investment options offered under these contracts according to their individual
needs and preferences. Policyholders assume the investment risks associated with
these choices. Separate account assets are not available to fund the liabilities
of the general account.
The following table summarizes significant changes in asset balances during the
first nine months of 2000. The changes are discussed below.
<TABLE>
<CAPTION>
ASSETS
($ IN MILLIONS)
% CHANGE
SEPTEMBER 30, 2000 DECEMBER 31, 1999 2000/1999
------------------- ----------------- ----------
<S> <C> <C> <C>
GENERAL ACCOUNT ASSETS $ 5,457.7 $ 5,361.6 1.8
SEPARATE ACCOUNT ASSETS 18,297.5 16,123.3 13.5
----------- --------- --------
TOTAL ASSETS $ 23,755.2 $ 21,484.9 10.6
----------- --------- --------
----------- --------- --------
</TABLE>
General account assets increased by 1.8% in 2000, while variable separate
account assets increased by 13.5%. The growth in general account assets is due
to the introduction of new GIC products marketed to foreign investors which had
28
<PAGE>
net deposits of $477 million during the first nine months of 2000. The growth in
variable separate accounts as compared to the general account reflects two main
factors: appreciation of the funds held in the variable separate accounts has
exceeded that of the funds held in the general accounts; and deposits into
variable accounts, including transfers under the DCA programs, have increased,
while deposits into fixed annuity accounts have slowed. The Company believes
this pattern has reflected a shift in the preferences of policyholders, which is
largely attributable to the strong performance of equity markets in general and
of the Company's variable accounts funds in particular.
The assets of the general account are available to support general account
liabilities. For management purposes, it is the Company's practice to segment
its general account to facilitate the matching of assets and liabilities.
General account assets primarily comprise cash, invested assets, and deferred
policy acquisition costs, which represent essentially all of general account
assets at September 30, 2000. Major types of invested asset holdings included
fixed maturity securities, short-term investments, mortgages, real estate and
other invested assets. The Company's fixed maturity securities, totaling
$3,017.1 million, comprised 70.7% of the Company's portfolio of invested
assets at September 30, 2000, and included both public and private issues. It
is the Company's policy to acquire only investment-grade securities in the
general account. As a result, the overall quality of the fixed maturity
portfolio is high. At September 30, 2000, only 3.0% of the fixed maturity
portfolio was rated below-investment-grade. Short-term investments in fixed
maturity securities of $145.7 million represented 3.4% of the total
portfolio. The Company's mortgage holdings amounted to $891.3 million at
September 30, 2000 representing 20.9% of the total portfolio. All mortgage
holdings at September 30, 2000 were in good standing. The Company believes
that the high quality of its mortgage portfolio is largely attributable to
its stringent underwriting standards. At September 30, 2000, investment real
estate amounted to $96.3 million, representing about 2.2% of the total
portfolio. The Company invests in real estate to enhance yields and, because
of the long-term nature of these investments, the Company uses them for
purposes of matching with products having long-term liability durations.
Other invested assets amounted to $75.5 million, representing about 1.8% of
the portfolio. These holdings comprised mainly leveraged lease investments.
Policy loans represent the remaining 1% of invested 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 expects the declining proportional trend in general account liabilities
as compared to separate account liabilities to continue, because it believes
that net deposits to variable products will continue to exceed net deposits for
the fixed contracts associated with these liabilities. The introduction of the
new GIC products has resulted in an absolute dollar increase in 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.
29
<PAGE>
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 applied to
statutory surplus. 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 calculates capital requirements
related to asset, insurance, interest rate, and business risks. According to the
RBC calculation, the Company's capital was well in excess of its required
capital at September 30, 2000 and at year-end 1999.
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 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 liquid assets to its total demand liabilities. Liquid 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
The Company's ultimate parent as of December 31, 1999, SLOC, completed its
demutualization on March 22, 2000. As a result of the demutualization, a new
holding company, Sun Life Financial Services of Canada Inc. ("Sun Life
Financial"), is now the ultimate parent of SLOC and the Company. Sun Life
Financial, a corporation organized in Canada, is a reporting company under the
Securities Exchange Act of 1934, as amended, with common shares listed on the
Toronto, New York, London, and Manila stock exchanges.
30
<PAGE>
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, SLOC and affiliates began a
comprehensive analysis of information technology ("IT") and non-IT systems,
including 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 worked with dedicated personnel
from all business units and with the legal and audit departments, reported
directly to the Company's senior management on a monthly basis. In addition,
internal and external auditors periodically reviewed the Company's Year 2000
project.
Relevant systems were identified and their components inventoried, needed
resolutions were documented, timelines and project plans were developed, and
remediation and testing were completed. All of the Company's critical systems
were 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 have passed tests that indicate they have
operated accurately and will continue to operate accurately after January 1,
2000 with respect to Year 2000 issues.
In mid-1997, the Company's Year 2000 project team contacted all key vendors to
obtain their representation that the products and services provided would not
have a Year 2000 issue. Where appropriate, vendor testing was conducted. In
addition, the project team worked with critical business partners, such as
third-party administrators, investment property managers, investment mortgage
correspondents, and others, with the goal of verifying that these partners would
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, were 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 the Company's production environment.
The Company has completed an assessment of its systems, and has not identified
any material Year 2000 problems. No material problems were encountered on key
dates including December 31, 1999, January 1, 2000, January 31, 2000 and
February 28, 2000 through March 1, 2000. Although the Company continues to be
free of any material Year 2000 issues, the Company will continue to monitor its
systems over the coming months as part of its normal practices. The Company does
not currently anticipate that it will experience any material Year 2000
problems, however there can be no assurance that such an issue will not arise.
Factors giving rise to this uncertainty include loss of knowledgeable technical
resources, failure to identify all susceptible system processing, compliance
issues of third parties whose systems and operations affect the Company, and
other similar uncertainties. A possible worst-case scenario might include
identification of a material Year 2000 issue in one or more of the Company's
systems. Such a scenario could result in disruption to the Company's
31
<PAGE>
operations. Consequences of such disruption could include, among other
possibilities, the inability to update customers' accounts, process payments
and other financial transactions; and the inability to 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.
In order to mitigate the risks to the Company of material adverse operational
or financial impacts from the Year 2000 problem, the Company established
contingency planning at the business unit and corporate levels. Each business
unit ranked its applications as being of high, medium or low business risk,
identified its critical business processes, developed alternative plans of
action where possible, and conducted walkthroughs of those plans. On the
corporate level, the Company enhanced its business continuation plan by
identifying minimum requirements for facilities, computing, staffing, and
other factors and developed a plan to support those requirements.
As of September 30, 2000, the Company had expended, cumulatively,
approximately $5.5 million on its Year 2000 effort. The Company has budgeted
$200,000 in 2000 for post-project tasks such as document retention.
SALE OF SUBSIDIARIES
On June 1, 2000, the Company transferred all of the outstanding shares of Sun
Life Information Services Ireland Limited ("SLIRL") to SLOC. SLIRL provides
information systems development services to SLOC and its subsidiaries. The
Company realized a post-tax gain of approximately $293,000 on this transaction.
On February 5, 1999, the Company sold Massachusetts Casualty Insurance Company
("MCIC"), a disability insurance company. The net proceeds of this sale were $34
million and the Company realized a post-tax loss of $24.8 million.
On October 29, 1999, the Company sold New London Trust F.S.B. ("NLT") for
approximately $30 million and realized a post-tax gain of $13.2 million. The net
income of NLT for the period ended September 30, 1999 is reflected in net income
from discontinued operations.
32
<PAGE>
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. (At September 30, 2000, investment real estate holdings
represented approximately 2.2% of the Company's total general account
portfolio.) The management of interest rate risk exposure is discussed below.
33
<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 interest bearing
investments 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; and
-- the use of key rate durations to estimate interest rate exposure at
different parts of the yield curve and to estimate the exposure to
non-parallel shifts in the yield curve.
The Company's Interest Rate Risk Committee meets monthly. After reviewing
duration analyses, market conditions and forecasts, the Committee develops
specific asset management strategies for the interest-sensitive portfolios.
These strategies may involve managing to achieve small intentional
mismatches, either in terms of total effective duration or for certain key
rate durations, between the liabilities and related assets of particular
segments. The Company manages these mismatches to a tolerance range of plus
or minus 0.5.
Asset strategies may include the use of Treasury futures or interest rate
swaps to adjust the duration profiles for particular portfolios. All
derivative transactions are conducted under written operating guidelines and
are marked to market. Total positions and exposures are reported to the 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.
34
<PAGE>
Liabilities categorized as financial instruments and held in the Company's
general account at September 30, 2000 had a fair value of $3,217.4 million.
Fixed income investments supporting those liabilities had a fair value of
$4,387.8 million at that date. The Company performed a sensitivity analysis
on these interest-sensitive liabilities and assets on September 30, 2000. 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 $82.8 million and the corresponding assets would show a net
decrease of $129.0 million.
By comparison, liabilities categorized as financial instruments and held in
the Company's general account at December 31, 1999 had a fair value of
$3,634.4 million. Fixed income investments supporting those liabilities had a
fair value of $4,308.6 million at that date. The Company performed a
sensitivity analysis on these interest-sensitive liabilities and assets at
December 31, 1999. The analysis showed that if there were an immediate
increase of 100 basis points in interest rates, the fair value of the
liabilities would show a net decrease of $63.8 million and the corresponding
assets would show a net decrease of $118.0 million.
The Company produced these estimates using computer models. Since these
models reflect assumptions about the future, they contain an element of
uncertainty. For example, the models contain assumptions about future
policyholder behavior and asset cash flows. Actual policyholder behavior and
asset cash flows could differ from what the models show. As a result, the
models' estimates of duration and market values may not reflect what actually
will occur. The models are further limited by the fact that they do not
provide for the possibility that management action could be taken to mitigate
adverse results. The Company believes that this limitation is one of
conservatism; that is, it will tend to cause the models to produce estimates
that are generally worse than one might actually expect, all other things
being equal.
Based on its processes for analyzing and managing interest rate risk, the
Company's management believes its exposure to interest rate changes will not
materially affect its near-term financial position, results of operations, or
cash flows.
EQUITY AND FOREIGN CURRENCY EXCHANGE RISK
The Company's new GIC product introduced exposure to equity and foreign
currency exchange risk. This is in addition to the traditional interest rate
risk discussed previously. All of this exposure has been hedged via interest
rate, currency, and equity swaps. The terms of each GIC such as interest
rate, interest payment dates, maturity and redemption dates, and currency
denomination are identical to the terms of the swaps. The GIC (liability) is
swapped back to a US dollar fixed liability through the requisite derivative
contracts. All foreign currency is swapped back to fixed US dollars, all
floating rate payments are swapped to fixed rate payments, and any equity
returns that the Company is required to pay (receive) on the GIC are received
from (paid to) the swap over the life of the GIC. These interest rate, equity
linked and currency exchange swaps effectively hedge the Company's exposure
to interest, equity and foreign currency risks.
35
<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.
------------
27 Financial Data Schedule (filed herewith)
36
<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 14, 2000 /s/ Davey S. Scoon
-------------------------------
Davey S. Scoon
Vice President,
Finance and Treasurer
Date November 14, 2000 /s/ Michael K. Moran
--------------------------------
Michael K. Moran
Assistant Vice President Finance
37
