<PAGE>
As filed with the Securities and Exchange Commission on June 14, 2000
REGISTRATION NO. 333-
------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
--------------
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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE SUN LIFE EXECUTIVE PARK, WELLESLEY HILLS, MASSACHUSETTS 02481
(781) 237-6030
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
<TABLE>
<S> <C>
COPIES TO:
EDWARD M. SHEA, ASSISTANT VICE PRESIDENT JOAN BOROS, ESQ.
AND SENIOR COUNSEL JORDEN BURT BOROS CICCHETTI
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) BERENSON & JOHNSON LLP
RETIREMENT PRODUCTS AND SERVICES 1025 THOMAS JEFFERSON STREET, N.W.
ONE COPLEY PLACE SUITE 400E
BOSTON, MASSACHUSETTS 02116 WASHINGTON, D.C. 20007
(617) 348-9600
</TABLE>
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
--------------
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date hereof
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act, check the following box. /X/
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
-----------------------------------
Calculation of Registration Fee
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| |
Title of each class | Proposed Maximum | Amount of
of securities to be | Aggregate Offering | Registration
registered | Price | Fee
| |
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| |
Market Value Adjusted | |
Interests Under | $100,000,000.00 | $27,800.00
Deferred Annuity | |
Contracts | |
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(1) Pursuant to Rule 457(o) under the Securities Act of 1933, the
registration fee is calculated based on the maximum aggregate offering
price of the securities registered hereby.
------------------------------
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
Attached hereto and made a part hereof is a Prospectus dated June __, 2000 for
each of the following:
MFS Regatta Access Variable and Fixed Annuity
Futurity Focus II Variable and Fixed Annuity
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
JUNE __, 2000
PROFILE
MFS REGATTA ACCESS
VARIABLE AND FIXED
ANNUITY
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU
SHOULD KNOW AND CONSIDER BEFORE PURCHASING THE CONTRACT. THE CONTRACT IS MORE
FULLY DESCRIBED IN THE FULL PROSPECTUS WHICH ACCOMPANIES THIS PROFILE. PLEASE
READ THE PROSPECTUS CAREFULLY.
1. THE MFS REGATTA ACCESS ANNUITY
The MFS Regatta Access Annuity is a flexible payment deferred annuity
contract ("Contract") designed for use in connection with retirement and
deferred compensation plans, some of which may qualify for favorable federal
income tax treatment. The Contract is intended to help you achieve your
retirement savings or other long-term investment goals.
The Contract has two phases: an Accumulation Phase and an Income Phase.
During the Accumulation Phase, you make payments into the Contract; any
investment earnings under your Contract accumulate on a tax-deferred basis and
are taxed as income only when withdrawn. During the Income Phase, we make
annuity payments in amounts determined in part by the amount of money you have
accumulated under your Contract during the Accumulation Phase. You choose when
the Income Phase begins.
You may choose among 27 variable investment options and a range of fixed
interest options. For a variable investment return you choose one or more
Sub-Accounts in our Variable Account, each of which invests in shares of a
corresponding series of the MFS/Sun Life Series Trust (collectively, the
"Funds") listed in Section 4. The value of any portion of your Contract
allocated to the Sub-Accounts will fluctuate up or down depending on the
performance of the Funds you select, and you may experience losses. For a fixed
interest rate, you may choose one or more Guarantee Periods offered in our Fixed
Account, each of which earns its own Guaranteed Interest Rate if you keep your
money in that Guarantee Period for the specified length of time.
The Contract is designed to meet your need for investment flexibility.
Over the life of your Contract, you may allocate amounts among as many as 18 of
the available variable and fixed options. Until we begin making annuity payments
under your Contract, you can, subject to certain limitations, transfer money
between options up to 12 times each year without a transfer charge or adverse
tax consequences.
2. ANNUITY PAYMENTS (THE INCOME PHASE)
Just as you can elect to have your Contract value accumulate on either a
variable or fixed basis, or a combination of both, you can elect to receive
annuity payments on either a variable or fixed basis or both. If you choose to
have any part of your annuity payments come from the Sub-Accounts, the dollar
amount of your annuity payments may fluctuate.
The Contract offers a variety of annuity options. You can select from
among the following methods of receiving either variable or fixed annuity
payments under your Contract: (1) monthly payments continuing for your lifetime
(assuming you are the annuitant); (2) monthly payments for your lifetime, but
with payments continuing to your chosen beneficiary for a specified number of
years after your first payment if you die before the end of the period you have
selected; (3) monthly payments for your lifetime and the life of another person
(usually your spouse) you have chosen; and (4) monthly payments for a specified
number of years, with a cash-out option for variable payments. We may also agree
to other annuity options at our discretion.
Once the Income Phase begins, you cannot change your choice of annuity
payment method.
<PAGE>
3. PURCHASING A CONTRACT
You may purchase a Contract for $20,000 or more, under most circumstances.
You may increase the value of your investment by adding $1,000 or more at any
time during the Accumulation Phase. We may waive these limits. We will not
accept a purchase payment if your account value is over $2 million, or if the
purchase payment would cause your account value to exceed $2 million, unless we
have approved the payment in advance.
4. ALLOCATION OPTIONS
You can allocate your money among Sub-Accounts investing in the following
Funds of the MFS/ Sun Life Series Trust:
<TABLE>
<S> <C>
Bond Series Managed Sectors Series
Capital Appreciation Series Massachusetts Investors Growth Stock Series
Capital Opportunities Series Massachusetts Investors Trust Series
Emerging Growth Series Money Market Series
Emerging Markets Equity Series New Discovery Series
Equity Income Series Research Series
Global Asset Allocation Series Research Growth and Income Series
Global Governments Series Research International Series
Global Growth Series Strategic Growth Series
Global Total Return Series Strategic Income Series
Government Securities Series Technology Series
High Yield Series Total Return Series
International Growth Series Utilities Series
International Growth and Income Series
</TABLE>
Market conditions will determine the value of an investment in any Fund.
Each Fund is described in the prospectus of the MFS/Sun Life Series Trust.
In addition to these variable options, you may also allocate your money to
one or more of the Guarantee Periods we make available. For each Guarantee
Period, we offer a Guaranteed Interest Rate for the specified length of time.
5. EXPENSES
The charges under the Contracts are as follows:
If your account value is less than $100,000, we impose an annual Account
Fee equal to $50. We will not assess an Account Fee if your Contract is fully
invested in the Fixed Account during the entire Account Year. We will waive the
Account Fee if your Contract value was $100,000 or more on your Account
Anniversary, or if your Account was allocated only to the Fixed Account during
the applicable Account Year. In addition, during both the Accumulation Phase and
the Income Phase, we deduct insurance charges equal to 1.40% per year of the
average daily value of the Contract allocated among the Sub-Accounts. If your
initial purchase payment is greater than $1,000,000, we will decrease the
insurance charges to 1.15%.
If you elect one or more optional death benefit riders, we will deduct,
during the Accumulation Phase, an additional charge per year, depending upon the
number of riders you elect, as follows:
<TABLE>
<CAPTION>
NUMBER OF % OF AVERAGE
RIDERS YOU ELECT DAILY VALUE
---------------- ------------
<S> <C>
1 0.15%
2 0.25%
3 0.40%
</TABLE>
No optional death benefit is offered if you are 80 or older at issue. No
charges for optional death benefit riders are assessed during the Income Phase.
2
<PAGE>
There are no sales charges when you purchase your Contract. If you
withdraw money from your Contract, we impose no withdrawal charge.
If you withdraw, transfer, or annuitize money allocated to a Guarantee
Period more than 30 days before the expiration date of the Guarantee Period, the
amount will be subject to a Market Value Adjustment. This adjustment reflects
the relationship between our current Guaranteed Interest Rates and the
Guaranteed Interest Rate applicable to the amount being withdrawn. Generally, if
your Guaranteed Interest Rate is lower than the relevant current rate, then the
adjustment will decrease your Contract value. Conversely, if your Guaranteed
Interest Rate is higher than the relevant current rate, the adjustment will
increase your Contract value. The Market Value Adjustment will not apply to the
withdrawal of interest credited during the current Account Year, or to transfers
as part of our dollar-cost averaging program.
In addition to the charges we impose under the Contracts, there are
charges (which include management fees and operating expenses) imposed by each
Fund, which range from 0.57% to 1.60% of the average net assets of the Funds,
depending upon which Funds you have selected. The investment adviser has agreed
to waive or reimburse a portion of expenses for some of the Funds; without this
agreement, Fund expenses could be higher. Some of these agreements may be
terminated at any time.
The following chart is designed to help you understand the expenses you
will incur under your Contract, if you invest in one or more of the
Sub-Accounts. The column "Total Annual Expenses" shows the sum of the "Total
Annual Insurance Charges," as defined just above the chart, and the total
expenses (net of any applicable expense reimbursement and/or fee waiver) for
each Fund. The next two columns show two examples of the expenses, in dollars,
you would pay under a Contract. The examples assume that you invested $1,000 in
a Contract which earns 5% annually and that you withdraw your money (1) at the
end of one year or (2) at the end of 10 years. For the first year, the Total
Annual Expenses are deducted, as well as withdrawal charges. For year 10, the
example shows the aggregate of all of the annual expenses deducted for the 10
years, but there is no withdrawal charge.
During the Accumulation Phase, "Total Annual Insurance Charges" of 1.50%
as shown in the table below include insurance charges of 1.40% of your daily net
assets (1.25% for mortality and expense risks and 0.15% for administrative
expenses) plus an additional 0.10%, which is used to represent the $50 annual
Account Fee based on an assumed Contract value of $50,000. The actual impact of
the Account Fee may be greater or less than 0.10%, depending upon the value of
your Contract.
3
<PAGE>
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL TOTAL ANNUAL TOTAL TOTAL EXPENSES
INSURANCE SERIES ANNUAL AT END
FUND CHARGES EXPENSES EXPENSES 1 YEAR 10 YEARS
---- ------------ ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Bond Series 1.50% 0.72% 2.22% $23 $255
Capital Appreciation Series 1.50% 0.76% 2.26% $23 $260
Capital Opportunities Series 1.50% 0.84% 2.34% $24 $268
Emerging Growth Series 1.50% 0.75% 2.25% $23 $258
Emerging Markets Equity Series 1.50% 1.60% 3.10% $31 $341
Equity Income Series 1.50% 1.01% 2.51% $25 $276
Global Asset Allocation Series 1.50% 0.89% 2.39% $24 $273
Global Governments Series 1.50% 0.90% 2.40% $24 $274
Global Growth Series 1.50% 1.01% 2.51% $25 $285
Global Total Return Series 1.50% 0.89% 2.39% $24 $273
Government Securities Series 1.50% 0.61% 2.11% $21 $244
High Yield Series 1.50% 0.83% 2.33% $23 $265
International Growth Series 1.50% 1.23% 2.73% $28 $306
International Growth and Income Series 1.50% 1.16% 2.66% $27 $299
Managed Sectors Series 1.50% 0.79% 2.29% $23 $263
Massachusetts Investors Growth Stock Series 1.50% 0.83% 2.33% $24 $267
Massachusetts Investors Trust Series 1.50% 0.59% 2.09% $21 $242
Money Market Series 1.50% 0.57% 2.07% $21 $240
New Discovery Series 1.50% 1.06% 2.56% $26 $290
Research Series 1.50% 0.75% 2.25% $23 $258
Research Growth and Income Series 1.50% 0.86% 2.36% $24 $270
Research International Series 1.50% 1.50% 3.00% $28 $306
Strategic Growth Series 1.50% 1.08% 2.58% $25 $284
Strategic Income Series 1.50% 1.08% 2.58% $26 $291
Technology Series 1.50% 1.00% 2.50% $25 $284
Total Return Series 1.50% 0.69% 2.19% $22 $252
Utilities Series 1.50% 0.61% 2.31% $24 $266
</TABLE>
If your initial purchase payment is $1,000,000 or more, we will reduce
your insurance charges, during the Accumulation Phase, by 0.25%.
For more detailed information about Contract fees and expenses, please
refer to the fee table and discussion of Contract charges contained in the full
Prospectus which accompanies this Profile.
6. TAXES
Under current federal tax laws, your earnings are not taxed until you take
them out of your Contract. If you take money out, earnings come out first and
are taxed as income. If your Contract is funded with pre-tax or tax-deductible
dollars (such as with a pension or IRA contribution) -- we call this a Qualified
Contract -- your entire withdrawal will be taxable. If you are younger than
59 1/2 when you take money out, you may be charged a 10% federal penalty tax on
the earnings. Annuity payments during the Income Phase are considered in part a
return of your original investment. That portion of each payment is not taxable,
except under a Qualified Contract, in which case the entire payment will be
taxable. In all cases, you should consult with your tax adviser for specific tax
information.
Different laws apply if your Contract is issued in Puerto Rico. Under the
tax laws of Puerto Rico, when an annuity payment is made under your Contract,
your annuitant or any other payee is required to include as gross income the
portion of each annuity payment equal to 3% of the aggregate purchase payments
you made under the Contract. The amount if any, in excess of the included amount
is excluded from gross income. After an amount equal to the aggregate amount
excluded from gross income has been received, all of the annuity payments are
considered to be taxable income.
You should consult with your tax adviser for specific tax information.
7. ACCESS TO YOUR MONEY
You can withdraw or transfer money from your Contract at any time during
the Accumulation Phase without the imposition of the withdrawal charge.
Futhermore, no withdrawal charge is imposed
4
<PAGE>
upon annuitization. However, amounts you withdraw, transfer or annuitize from
the Fixed Account before your Guarantee Period has ended may be subject to a
Market Value Adjustment.
8. PERFORMANCE
If you invest in one or more Sub-Accounts, the value of your Contract will
increase or decrease depending upon the investment performance of the Funds you
choose. The Sub-Accounts have not been in operation for a full calendar year;
therefore no performance information is provided in this Profile.
9. DEATH BENEFIT
If you die before the Contract reaches the Income Phase, the beneficiary
will receive a death benefit. To calculate the death benefit, we use a "Death
Benefit Date," which is the earliest date we have both due proof of death and a
written request specifying the manner of payment.
BASIC DEATH BENEFIT
If you were 85 or younger when we issued your Contract, the death benefit
is the greatest of:
(1) the value of the Contract on the Death Benefit Date;
(2) the amount we would pay in the event of a full surrender of the
Contract on the Death Benefit Date; and
(3) your total purchase payments (adjusted for partial withdrawals)
calculated as of the Death Benefit Date.
If you were 86 or older when we issued your Contract, the death benefit is
equal to the amount set forth in (2) above. Because this amount will reflect any
applicable withdrawal charges and Market Value Adjustment, it may be less than
your account value.
OPTIONAL DEATH BENEFIT RIDERS
Subject to availability in your state, if you are 79 or younger when we
issue your Contract, you may enhance this basic death benefit by electing one or
more of the following optional death benefit riders: the Maximum Anniversary
Account Value Rider, the 5% Premium Roll-Up Rider, and the Earnings Enhancement
Rider.
MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER
If you elect the Maximum Anniversary Account Value Rider, the death
benefit is the greater of:
- any death benefit amounts payable under the "Basic Death
Benefit" (above), or
- your highest Contract value on any Account Anniversary before your 81st
birthday, adjusted for any subsequent purchase payments, partial
withdrawals, and charges made between that Account Anniversary and the
Death Benefit Date.
5% PREMIUM ROLL-UP RIDER
If you elect the 5% Premium Roll-Up Rider, the death benefit is the
greatest of:
- any death benefit amounts payable under the "Basic Death
Benefit" (above), or
- the sum of your total purchase payment plus interest accruals, adjusted
for partial withdrawals.
Under this rider, interest accrues at 5% per year on purchase payments and
transfers to the Variable Account while they remain in the Variable Account. The
5% accruals will continue until the earlier of:
5
<PAGE>
- first day of the month following your 80th birthday, or
- the day the death benefit amount under this rider equals twice the
total of the purchase payments and transferred amounts adjusted for
withdrawals.
Net Purchase Payments under this rider will be adjusted for all partial
withdrawals, as described in "Calculating the Death Benefit."
EARNINGS ENHANCEMENT RIDER
If you elect the Earnings Enhancement Rider and you are 69 or younger when
we issue your Contract, the death benefit is:
- the greatest of any death benefit amounts payable under the "Basic
Death Benefit" (above), plus
- 40% of the lesser of your net purchase payments or your Account Value
minus net purchase payments, calculated as of the Death Benefit Date.
If you elect the Earnings Enhancement Rider, and you are between the ages
of 70 and 79 when we issue your Contract, the death benefit is:
- the greatest of any death benefit amounts payable under the "Basic
Death Benefit" (above), plus
- 25% of the lesser of your net purchase payment or your Account Value
minus net purchase payments, calculated as of the Death Benefit Date.
SELECTING MULTIPLE DEATH BENEFIT RIDERS
If you elect more than one death benefit rider, the death benefit will be
calculated as follows:
1) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH 5% PREMIUM
ROLL-UP RIDER: The death benefit will equal the greater of the death
benefit under the Maximum Anniversary Account Value Rider or the death
benefit under the 5% Premium Roll-Up Rider.
2) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH EARNINGS
ENHANCEMENT RIDER: The death benefit will equal the death benefit under
the Maximum Anniversary Account Value Rider, PLUS the amount calculated
under the Earnings Enhancement Rider. The death benefit under the
Earnings Enhancement Rider is calculated using the Account Value before
the application of the Maximum Anniversary Account Rider.
3) EARNINGS ENHANCEMENT RIDER COMBINED WITH 5% PREMIUM ROLL-UP RIDER: The
death benefit will equal the death benefit under the 5% Premium Roll-Up
Rider, PLUS the amount calculated under the Earnings Enhancement Rider.
The death benefit under the Earnings Enhancement Rider is calculated
using the Account Value before the application of the 5% Premium Roll-Up
Rider.
4) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH BOTH THE 5%
PREMIUM ROLL-UP RIDER AND THE EARNINGS ENHANCEMENT RIDER: The death
benefit will equal the greater of the death benefit under the Maximum
Anniversary Account Value Rider or the death benefit under the 5%
Premium Roll-Up Rider, PLUS the amount calculated under the Earnings
Enhancement Rider. The death benefit under the Earnings Enhancement
Rider is calculated using the account value before the application of
the 5% Premium Roll-Up Rider and that of the Maximum Anniversary Account
Value Rider.
If your spouse is the sole beneficiary, your spouse may elect to continue
the Contract. The death benefit amount described above will be your new account
value as of the Death Benefit Date. For purposes of calculating future death
benefits, your spouse's age and the original issue date of the Contract will be
used to determine applicable expense and death benefit amounts.
6
<PAGE>
10. OTHER INFORMATION
FREE LOOK. Depending upon applicable state or federal law, if you cancel
your Contract within 10 days after receiving it we will send you the value of
your Contract as of the day we received your cancellation request (this may be
more or less than the original purchase payment) and we will not deduct a
withdrawal charge. However, based upon applicable state or federal law, we will
refund the full amount of any purchase payment(s) we receive and the "free look"
period may be greater than 10 days.
NO PROBATE. In most cases, when you die, the beneficiary will receive the
death benefit without going through probate. However, avoiding probate does not
mean that the beneficiary will not have a tax liability as a result of receiving
the death benefit.
WHO SHOULD PURCHASE A CONTRACT? The Contract is designed for those seeking
long-term tax-deferred accumulation of assets and annuity features, generally
for retirement or other long-term investment purposes. The tax-deferred feature
is most attractive to purchasers in high federal and state income tax brackets.
You should note that qualified retirement investments automatically provide tax
deferral regardless of whether or not the underlying contract is an annuity. You
should not buy a Contract if you are looking for a short-term investment or if
you do not wish to risk a decrease in the value of your investment.
CONFIRMATIONS AND QUARTERLY STATEMENTS. You will receive a confirmation or
an acknowledgment of transactions within your Contract, except for those
transactions which are part of an automated program, such as Dollar-Cost
Averaging, Asset Allocation, Systematic Withdrawal and/or Portfolio Rebalancing.
On a quarterly basis, you will receive a complete statement of your transactions
over the past quarter and a summary of your Account values at the end of that
period.
ADDITIONAL FEATURES. The Contract offers the following additional
convenient features, which you may choose at no extra charge. These features may
be started or discontinued at any time by either you or the Company; however, we
may require up to 30 days notice.
DOLLAR-COST AVERAGING -- This program lets you invest gradually in up to
12 Sub-Accounts.
ASSET ALLOCATION -- This program rebalances your Account balance based on
the terms of the program. Different asset allocation models may be available
over the lifetime of the Contract; however, only one program can be in effect at
any one time.
SYSTEMATIC WITHDRAWAL AND INTEREST OUT PROGRAMS -- These programs allow
you to receive monthly, quarterly, semi-annual or annual payments during the
Accumulation Phase.
PORTFOLIO REBALANCING PROGRAM -- Under this program, we automatically
reallocate your investments in the Sub-Accounts to maintain the proportions you
select. You can elect rebalancing on a quarterly, semi-annual or annual basis.
11. INQUIRIES
If you would like more information about buying a Contract, please contact
your broker or registered representative. If you have any other questions,
please contact us at:
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
TELEPHONE: TOLL FREE (800) 752-7215
7
<PAGE>
PROSPECTUS
JUNE __, 2000
MFS REGATTA ACCESS
Sun Life Assurance Company of Canada (U.S.) and Sun Life of Canada (U.S.)
Variable Account F offer the flexible payment deferred annuity contracts and
certificates described in this Prospectus to groups and individuals.
You may choose among 27 variable investment options and a range of fixed
options. The variable options are Sub-Accounts in the Variable Account, each of
which invests in one of the following series of the MFS/Sun Life Series Trust
(the "Funds"). The MFS/Sun Life Series Trust (the "Series Fund") is a mutual
fund advised by our affiliate, Massachusetts Financial Services Company:
<TABLE>
<S> <C>
Bond Series Managed Sectors Series
Capital Appreciation Series Massachusetts Investors Growth Stock Series
Capital Opportunities Series Massachusetts Investors Trust Series
Emerging Growth Series Money Market Series
Emerging Markets Equity Series New Discovery Series
Equity Income Series Research Series
Global Asset Allocation Series Research Growth and Income Series
Global Governments Series Research International Series
Global Growth Series Strategic Growth Series
Global Total Return Series Strategic Income Series
Government Securities Series Technology Series
High Yield Series Total Return Series
International Growth Series Utilities Series
International Growth and Income Series
</TABLE>
The fixed account options are available for specified time periods, called
Guarantee Periods, and pay interest at a guaranteed rate for each period.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE SERIES
FUND. PLEASE READ THIS PROSPECTUS AND THE SERIES FUND PROSPECTUS CAREFULLY
BEFORE INVESTING AND KEEP THEM FOR FUTURE REFERENCE. THEY CONTAIN IMPORTANT
INFORMATION ABOUT THE CONTRACTS AND THE FUNDS.
We have filed a Statement of Additional Information dated June __, 2000
(the "SAI") with the Securities and Exchange Commission (the "SEC"), which is
incorporated by reference in this Prospectus. The table of contents for the SAI
is on page 111 of this Prospectus. You may obtain a copy without charge by
writing to us at the address shown below (which we sometimes refer to as our
"Annuity Mailing Address") or by telephoning (800) 752-7215. In addition, the
SEC maintains a website (http:// www.sec.gov) that contains the SAI, material
incorporated by reference, and other information regarding companies that file
with the SEC.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY US MEANS RECEIPT AT THE FOLLOWING
ADDRESS:
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Special Terms 4
Expense Summary 4
Summary of Contract Expenses 4
Underlying Fund Annual Expenses 5
Example 6
The Annuity Contract 7
Communicating To Us About Your Contract 7
Sun Life Assurance Company of Canada (U.S.) 8
The Variable Account 8
Variable Account Options: The Funds 8
The Fixed Account 10
The Fixed Account Options: The Guarantee Periods 11
The Accumulation Phase 11
Issuing Your Contract 11
Amount and Frequency of Purchase Payments 12
Allocation of Net Purchase Payments 12
Your Account 12
Your Account Value 12
Variable Account Value 12
Fixed Account Value 13
Transfer Privilege 14
Waivers; Reduced Charges; Special Guaranteed Interest
Rates 15
Optional Programs 15
Withdrawals and Market Value Adjustment 17
Cash Withdrawals 17
Market Value Adjustment 18
Contract Charges 19
Account Fee 19
Administrative Expense Charge 19
Mortality and Expense Risk Charge 19
Charges for Optional Death Benefit Riders 20
Premium Taxes 20
Fund Expenses 20
Modification in the Case of Group Contracts 20
Death Benefit 20
Amount of Death Benefit 20
The Basic Death Benefit 21
Optional Death Benefit Riders 21
Spousal Continuance 22
Calculating the Death Benefit 23
Method of Paying Death Benefit 23
Non-Qualified Contracts 23
Selection and Change of Beneficiary 24
Payment of Death Benefit 24
Due Proof of Death 24
The Income Phase -- Annuity Provisions 24
Selection of the Annuitant or Co-Annuitant 24
Selection of the Annuity Commencement Date 25
Annuity Options 25
Selection of Annuity Option 26
Amount of Annuity Payments 26
Exchange of Variable Annuity Units 27
Account Fee 28
Annuity Payment Rates 28
Annuity Options as Method of Payment for Death Benefit 28
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Other Contract Provisions 28
Exercise of Contract Rights 28
Change of Ownership 28
Voting of Fund Shares 29
Periodic Reports 30
Substitution of Securities 30
Change in Operation of Variable Account 30
Splitting Units 30
Modification 30
Discontinuance of New Participants 31
Reservation of Rights 31
Right to Return 31
Tax Considerations 32
U.S. Federal Tax Considerations 32
DEDUCTIBILITY OF PURCHASE PAYMENTS 32
PRE-DISTRIBUTION TAXATION OF CONTRACTS 32
DISTRIBUTIONS AND WITHDRAWALS FROM NON-QUALIFIED
CONTRACTS 32
DISTRIBUTION AND WITHDRAWALS FROM QUALIFIED
CONTRACTS 33
WITHHOLDING 33
INVESTMENT DIVERSIFICATION AND CONTROL 33
TAX TREATMENT OF THE COMPANY AND THE VARIABLE
ACCOUNT 33
QUALIFIED RETIREMENT PLANS 34
PENSION AND PROFIT-SHARING PLANS 34
TAX-SHELTERED ANNUITIES 34
INDIVIDUAL RETIREMENT ACCOUNTS 34
ROTH IRAS 35
Puerto Rico Tax Considerations 35
Administration of the Contract 35
Distribution of the Contract 35
Performance Information 36
Available Information 37
Incorporation of Certain Documents by Reference 37
Additional Information About the Company 38
General 38
Selected Financial Data 38
Cautionary Statement 39
Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year Ended
December 31, 1999 40
Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Period
Ending March 31, 2000 46
Financial Condition and Liquidity 48
Other Matters 49
Quantitative and Qualitative Disclosures About Market
Risk 50
Reinsurance 52
Reserves 52
Investments 52
Competition 53
Employees 53
Properties 53
State Regulation 53
Legal Proceedings 54
Accountants 54
Financial Statements 54
Table of Contents of Statement of Additional Information 106
Appendix A -- Glossary 108
Appendix B -- Market Value Adjustment 111
Appendix C -- Calculation of Basic Death Benefit 113
Appendix D -- Calculation of Earnings Enhancement Optional
Death Benefit Rider 114
Appendix E -- Calculation of Death Benefit When All Three
Optional Death Benefit Riders are Selected 115
</TABLE>
3
<PAGE>
SPECIAL TERMS
Your Contract is a legal document that uses a number of specially defined
terms. We explain most of the terms that we use in this Prospectus in the
context where they arise, and some are self-explanatory. In addition, for
convenient reference, we have compiled a list of these terms in the Glossary
included at the back of this Prospectus as Appendix A. If, while you are reading
this Prospectus, you come across a term that you do not understand, please refer
to the Glossary for an explanation.
EXPENSE SUMMARY
The purpose of the following table is to help you understand the costs and
expenses that you will bear directly and indirectly under a Contract WHEN YOU
ALLOCATE MONEY TO THE VARIABLE ACCOUNT. The table reflects expenses of the
Variable Account as well as of each Fund. The table should be considered
together with the narrative provided under the heading "Contract Charges" in
this Prospectus, and with the Funds' prospectus(es). In addition to the expenses
listed below, we may deduct premium taxes, where required by state law.
SUMMARY OF CONTRACT EXPENSES
<TABLE>
<S> <C>
TRANSACTION EXPENSES
Sales Load Imposed on Purchase Payments..................... $ 0
Transfer Fee (1)............................................ $ 15
ANNUAL ACCOUNT FEE per Contract or Certificate (2) $ 50
VARIABLE ACCOUNT ANNUAL EXPENSES (as a percentage of average
Variable Account assets)
</TABLE>
<TABLE>
<CAPTION>
FOR CONTRACTS WITH AN INITIAL FOR CONTRACTS WITH AN INITIAL
PURCHASE PAYMENT PURCHASE PAYMENT
LESS THAN $1,000,000 OF $1,000,000 OR MORE
<S> <C> <C> <C>
Mortality and Expense Risks Charge...... 1.25% Mortality and Expense Risks Charge...... 1.00%
Administrative Expenses Charge.......... 0.15% Administrative Expenses Charge.......... 0.15%
==== ====
Total Variable Annuity Annual Total Variable Annuity Annual
Expenses (3)............................ 1.40% Expenses (3)............................ 1.15%
</TABLE>
------------------------
(1) We impose no fee upon transfers; however, we reserve the right to impose up
to $15 per transfer. In addition, a Market Value Adjustment may be imposed
on amounts transferred from or within the Fixed Account.
(2) The annual Account Fee will never exceed $50.
(3) An additional charge will apply during the Accumulation Phase if you elect
one or more of the optional death benefit riders. For more information, see
"Charges for Optional Death Benefit Riders."
4
<PAGE>
UNDERLYING FUND ANNUAL EXPENSES (1)
(AS A PERCENTAGE OF FUND NET ASSETS)
<TABLE>
<CAPTION>
OTHER TOTAL ANNUAL FUND
MANAGEMENT FUND EXPENSES(2) EXPENSES
FUND FEES (AFTER REIMBURSEMENT) (AFTER REIMBURSEMENT)
---- ----------- --------------------- ---------------------
<S> <C> <C> <C>
Bond Series............................... 0.60% 0.12% 0.72%
Capital Appreciation Series............... 0.71% 0.05% 0.76%
Capital Opportunities Series.............. 0.75% 0.09% 0.84%
Emerging Growth Series.................... 0.70% 0.05% 0.75%
Emerging Markets Equity Series............ 1.25% 0.35% 1.60%
Equity Income Series...................... 0.75% 0.26% 1.01%
Global Asset Allocation Series............ 0.75% 0.14% 0.89%
Global Governments Series................. 0.75% 0.15% 0.90%
Global Growth Series...................... 0.90% 0.11% 1.01%
Global Total Return Series................ 0.75% 0.14% 0.89%
Government Securities Series.............. 0.55% 0.06% 0.61%
High Yield Series......................... 0.75% 0.08% 0.83%
International Growth Series............... 0.97% 0.25% 1.23%
International Growth and Income Series.... 0.97% 0.18% 1.16%
Managed Sectors Series.................... 0.73% 0.06% 0.79%
Massachusetts Investors Growth Stock
Series................................... 0.75% 0.08% 0.83%
Massachusetts Investors Trust Series...... 0.55% 0.04% 0.59%
Money Market Series....................... 0.50% 0.07% 0.57%
New Discovery Series...................... 0.90% 0.16% 1.06%
Research Series........................... 0.70% 0.05% 0.75%
Research Growth and Income Series......... 0.75% 0.11% 0.86%
Research International Series............. 1.00% 0.50% 1.50%
Strategic Growth Series(3)................ 0.75% 0.25% 1.00%
Strategic Income Series................... 0.75% 0.33% 1.08%
Technology Series(4)...................... 0.75% 0.25% 1.00%
Total Return Series....................... 0.65% 0.04% 0.69%
Utilities Series.......................... 0.75% 0.06% 0.81%
</TABLE>
--------------------------
(1) The information relating to Fund expenses was provided by the Funds and we
have not independently verified it. You should consult the Fund
prospectus(es) for more information about Fund expenses. For all Series
except the Technology Series, the "Management Fees," "Other Fund Expense,"
and "Total Fund Annual Expenses" are based on actual expenses for the fiscal
year ended December 31, 1999, net of any applicable expense reimbursement or
waiver. Expense figures shown for the Technology Series are estimates for
the year 2000, based on the applicable expense reimbursement waiver. No
actual expense figures are shown for this Fund because it commenced
operations in June, 2000, and, therefore, has less than 12 months of
investment performance.
(2) Each Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into such other
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses" in the table. Had these fees been taken
into account, "Total Fund Expenses" for certain of the Funds would be as
follows:
<TABLE>
<S> <C>
Bonds Series................................................ 0.71%
Capital Appreciation Series................................. 0.75%
Capital Opportunities Series................................ 0.83%
Equity Income Series........................................ 0.91%
Global Asset Allocation Series.............................. 0.88%
New Discovery Series........................................ 1.05%
Strategic Income Series..................................... 1.03%
Technology Series........................................... 1.03%
Utilities Series............................................ 0.81%
</TABLE>
(3) MFS has agreed to bear the expenses of the Fund such that "Other Expenses,"
after taking into account the expense offset arrangement described in
Footnote (2) above, will not exceed 0.25% annually. This arrangement will
continue until at least May 1, 2001, unless changed with the consent of the
Series Fund's Board of Directors; provided, however, that this arrangement
will terminate prior to May 1, 2001 in the event that the Fund's "Other
Expenses" equal or fall below 0.25% annually. Without taking into
5
<PAGE>
account the fee waiver and/or expense reimbursement, the Fund's "Other
Expenses" and "Total Fund Expenses" would be estimated to be 3.26% and
4.01%, respectively.
(4) MFS has agreed to bear the expenses of the Fund such that "Other Expenses,"
after taking into account the expense offset arrangement described in the
previous paragraph, do not exceed 0.25% annually. This arrangement will
continue until at least May 1, 2001, unless changed with the consent of the
Series Fund's Board of Directors.
EXAMPLE
If you do or do not surrender your Contract at the end of the applicable
time period, you would pay the following expenses on a $1,000 investment,
assuming an average Contract size of $50,000, a 5% annual return and no optional
death benefit riders have been elected:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Bond Series................................................. $23 $89 $119 $255
Capital Appreciation Series................................. $23 $71 $121 $250
Capital Opportunities Series................................ $24 $73 $125 $268
Emerging Growth Series...................................... $23 $70 $120 $258
Emerging Markets Equity Series.............................. $31 $96 $163 $341
Equity Income Series........................................ $25 $75 $129 $276
Global Asset Allocation Series.............................. $24 $75 $120 $213
Global Governments Series................................... $24 $75 $128 $274
Global Growth Series........................................ $25 $78 $134 $285
Global Total Return Series.................................. $24 $65 $128 $273
Government Securities Series................................ $21 $66 $113 $244
High Yield Series........................................... $23 $72 $124 $265
International Growth Series................................. $28 $85 $144 $306
International Growth and Income Series...................... $27 $88 $141 $299
Managed Sectors Series...................................... $23 $72 $123 $263
Massachusetts Investors Growth Stock Series................. $24 $73 $125 $267
Massachusetts Investors Trust Series........................ $21 $65 $112 $242
Money Market Series......................................... $21 $65 $111 $240
New Discovery Series........................................ $26 $80 $136 $290
Research Series............................................. $23 $70 $120 $258
Research Growth and Income Series........................... $24 $74 $126 $270
Research International Series............................... $28 $85 $144 $306
Strategic Growth Series..................................... $26 $78 $133 $284
Strategic Income Series..................................... $26 $80 $137 $291
Technology Series........................................... $25 $78 $133 $284
Total Return Series......................................... $22 $80 $117 $252
Utilities Series............................................ $24 $72 $124 $266
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR
FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
6
<PAGE>
THE ANNUITY CONTRACT
Sun Life Assurance Company of Canada (U.S.) (the "Company", "we" or "us")
and Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") offer
the Contract to groups and individuals for use in connection with their
retirement plans. The Contract is available on a group basis and, in certain
states, may be available on an individual basis. We issue an Individual Contract
directly to the individual owner of the Contract. We issue a Group Contract to
the Owner, covering all individuals participating under the Group Contract; each
individual receives a Certificate that evidences his or her participation under
the Group Contract.
In this Prospectus, unless we state otherwise, we refer to both the owners
of Individual Contracts and participating individuals under Group Contracts as
"Participants" and we address all Participants as "you"; we use the term
"Contracts" to include Individual Contracts, Group Contracts, and Certificates
issued under Group Contracts. For the purpose of determining benefits under both
Individual Contracts and Group Contracts, we establish an Account for each
Participant, which we will refer to as "your" Account or a "Participant
Account."
Your Contract provides a number of important benefits for your retirement
planning. It has an Accumulation Phase, during which you make payments under the
Contract and allocate them to one or more Variable Account or Fixed Account
options, and an Income Phase, during which we make annuity payments based on the
amount you have accumulated. Your Contract provides tax deferral, so that you do
not pay taxes on your earnings under your Contract until you withdraw them. It
provides a basic death benefit if you die during the Accumulation Phase. You may
enhance the basic death benefit by electing one or more optional death benefit
riders and paying an additional charge for each optional death benefit rider you
elect. Finally, if you so elect, during the Income Phase we will make annuity
payments to you or someone else for life or for another period that you choose.
You choose these benefits on a variable or fixed basis or a combination of
both. When you choose Variable Account investment options or a Variable Annuity
option, your benefits will be responsive to changes in the economic environment,
including inflationary forces and changes in rates of return available from
different types of investments. With these variable options, you assume all
investment risk under your Contract. When you choose a Guarantee Period in our
Fixed Account or a Fixed Annuity option, we assume the investment risk, except
in the case of early withdrawals in the Accumulation Phase, where you bear the
risk of unfavorable interest rate changes. You also bear the risk that the
interest rates we will offer in the future and the rates we will use in
determining your Fixed Annuity might not exceed our minimum guaranteed rate,
which is 3% per year during the Accumulation Phase and 2.5% per year during the
Income Phase, compounded annually.
The Contract is designed for use in connection with retirement and
deferred compensation plans, some of which qualify for favorable federal income
tax treatment under Sections 401, 403, 408 or 408A of the Internal Revenue Code.
The Contract is also designed so that it may be used in connection with certain
non-tax-qualified retirement plans, such as payroll savings plans and such other
groups (trusteed or nontrusteed) as may be eligible under applicable law. We
refer to Contracts used with plans that receive favorable tax treatment as
"Qualified Contracts," and all other Contracts as "Non-Qualified Contracts."
COMMUNICATING TO US ABOUT YOUR CONTRACT
All materials sent to us, including Purchase Payments, must be sent to our
Annuity Mailing Address as set forth on the first page of this Prospectus. For
all telephone communications, you must call (800) 752-7215.
Unless this Prospectus states differently, we will consider all materials
sent to us and all telephone communications to be received on the date we
actually receive them at our Annuity Mailing Address. However, we will consider
all financial transactions, including Purchase Payments, withdrawal requests and
transfer instructions, to be received on the next Business Day if we receive
them (1) on a day that is not a Business Day or (2) after 4:00 p.m., Eastern
Time.
7
<PAGE>
When we specify that notice to us must be in writing, we reserve the
right, at our sole discretion, to accept notice in another form.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We are a stock life insurance company incorporated under the laws of
Delaware on January 12, 1970. We do business in 48 states, the District of
Columbia, and Puerto Rico, and we have an insurance company subsidiary that does
business in New York. Our Executive Office mailing address is One Sun Life
Executive Park, Wellesley Hills, Massachusetts 02481.
We are an indirect wholly-owned subsidiary of Sun Life Assurance Company
of Canada ("Sun Life (Canada)"). Sun Life (Canada) 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 Sun Life (Canada) and the Company. Sun Life Financial, a
corporation organized in Canada, is a reporting company under the Securities
Exchange Act of 1934 with common shares listed on the Toronto, New York, London,
and Manila stock exchanges.
THE VARIABLE ACCOUNT
We established the Variable Account as a separate account on July 13,
1989, pursuant to a resolution of our Board of Directors. The Variable Account
funds the Contract and various other variable annuity and variable life
insurance product contracts which we offer. These other products may have
features, benefits and charges that are different from those under the Contract.
Under Delaware insurance law and the Contract, the income, gains or losses
of the Variable Account are credited to or charged against the assets of the
Variable Account without regard to the other income, gains, or losses of the
Company. These assets are held in relation to the Contract and other variable
annuity and variable life insurance contracts that provide benefits that vary in
accordance with the investment performance of the Variable Account. Although the
assets maintained in the Variable Account will not be charged with any
liabilities arising out of any other business we conduct, all obligations
arising under a Contract, including the promise to make annuity payments, are
general corporate obligations of the Company.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account invests exclusively in shares of a specific Fund. All amounts
allocated to the Variable Account will be used to purchase Fund shares as
designated by you at their net asset value. Any and all distributions made by
the Funds with respect to the shares held by the Variable Account will be
reinvested to purchase additional Fund shares at their net asset value.
Deductions will be made from the Variable Account for cash withdrawals, annuity
payments, death benefits, Account Fees, Contract charges against the assets of
the Variable Account for the assumption of mortality and expense risks,
administrative expenses and any applicable taxes. The Variable Account will be
fully invested in Fund shares at all times.
VARIABLE ACCOUNT OPTIONS:
THE FUNDS
The MFS/Sun Life Series Trust (the "Series Fund") is an open-end
management investment company registered under the Investment Company Act of
1940. Our affiliate, Massachusetts Financial Services Company ("MFS"), serves as
the investment adviser to the Series Fund.
The Series Fund is composed of 28 independent portfolios of securities,
each of which has separate investment objectives and policies. Shares of the
Series Fund are issued in 28 series each, a "Fund"), each corresponding to one
of the portfolios. The Contract provides for investment by the Sub-Accounts in
shares of the 27 Funds described below. Additional portfolios may be added to
the Series Fund which may or may not be available for investment by the Variable
Account.
BOND SERIES will mainly seek as high a level of current income as is
believed to be consistent with prudent investment risk; its secondary
objective is to seek to protect shareholders' capital.
8
<PAGE>
CAPITAL APPRECIATION SERIES will seek to maximize capital appreciation by
investing in securities of all types, with major emphasis on common stocks.
CAPITAL OPPORTUNITIES SERIES will seek capital appreciation.
EMERGING GROWTH SERIES will seek long-term growth of capital.
EMERGING MARKETS EQUITY SERIES will seek capital appreciation.
EQUITY INCOME SERIES will mainly seek reasonable income by investing mainly
in income producing securities; its secondary objective is to seek capital
appreciation.
GLOBAL ASSET ALLOCATION SERIES will seek total return over the long term
through investments in equity and fixed income securities and will also
seek to have low volatility of share price (I.E., net asset value per
share) and reduced risk (compared to an aggressive equity/fixed income
portfolio).
GLOBAL GOVERNMENTS SERIES will seek to provide moderate current income,
preservation of capital and growth of capital by investing in debt
obligations that are issued or guaranteed as to principal and interest by
either (i) the U.S. Government, its agencies, authorities, or
instrumentalities, or (ii) the governments of foreign countries (to the
extent that the Fund's adviser believes that the higher yields available
from foreign government securities are sufficient to justify the risks of
investing in these securities).
GLOBAL GROWTH SERIES will seek capital appreciation by investing in
securities of companies worldwide growing at rates expected to be well
above the growth rate of the overall U.S. economy.
GLOBAL TOTAL RETURN SERIES will seek total return by investing in
securities which will provide above average current income (compared to a
portfolio invested entirely in equity securities) and opportunities for
long-term growth of capital and income.
GOVERNMENT SECURITIES SERIES will seek current income and preservation of
capital by investing in U.S. Government and U.S. Government-related
securities.
HIGH YIELD SERIES will seek high current income and capital appreciation by
investing primarily in certain low rated or unrated securities (possibly
with equity features) of U.S. and foreign issuers (also known as "junk
bonds").
INTERNATIONAL GROWTH SERIES will seek capital appreciation.
INTERNATIONAL GROWTH AND INCOME SERIES will seek capital appreciation and
current income.
MANAGED SECTORS SERIES will seek capital appreciation by varying the
weighting of its portfolio among 13 industry sectors.
MASSACHUSETTS INVESTORS GROWTH STOCK SERIES will seek to provide long-term
growth of capital and future income rather than current income.
MASSACHUSETTS INVESTORS TRUST SERIES will seek long-term growth of capital
and future income while providing more current dividend income than is
normally obtainable from a portfolio of only growth stocks.
MONEY MARKET SERIES will seek maximum current income to the extent
consistent with stability of principal by investing exclusively in money
market instruments maturing in less than 13 months.
NEW DISCOVERY SERIES will seek capital appreciation.
RESEARCH SERIES will seek to provide long-term growth of capital and future
income.
9
<PAGE>
RESEARCH GROWTH AND INCOME SERIES will seek to provide long-term growth of
capital, current income and growth of income.
RESEARCH INTERNATIONAL SERIES will seek capital appreciation.
STRATEGIC GROWTH SERIES will seek capital appreciation.
STRATEGIC INCOME SERIES will seek to provide high current income by
investing in fixed income securities and will seek to take advantage of
opportunities to realize significant capital appreciation while maintaining
a high level of current income.
TECHNOLOGY SERIES will seek capital appreciation.
TOTAL RETURN SERIES will mainly seek to obtain above-average income
(compared to a portfolio entirely invested in equity securities) consistent
with prudent employment of capital; its secondary objective is to take
advantage of opportunities for growth of capital and income since many
securities offering a better than average yield may also possess growth
potential.
UTILITIES SERIES will seek capital growth and current income (income above
that available from a portfolio invested entirely in equity securities) by
investing, under normal market conditions, at least 65% of its assets in
equity and debt securities of both domestic and foreign companies in the
utilities industry.
Each Fund pays fees to MFS, as its investment adviser, for services
rendered pursuant to investment advisory agreements. MFS also serves as
investment adviser to each of the funds in the MFS Family of Funds, and to
certain other investment companies established by MFS and/or us. MFS
Institutional Advisers, Inc., a wholly-owned subsidiary of MFS, provides
investment advice to substantial private clients. MFS and its predecessor
organizations have a history of money management dating from 1924. MFS operates
as an autonomous organization and the obligation of performance with respect to
the investment advisory and underwriting agreements (including supervision of
the sub-advisers noted below) is solely that of MFS. We undertake no obligation
in this regard.
MFS may serve as the investment adviser to other mutual funds which have
similar investment goals and principal investment policies and risks as the
Funds, and which may be managed by a Fund's portfolio manager(s). While a Fund
may have many similarities to these other funds, its investment performance will
differ from their investment performance. This is due to a number of differences
between the Fund and these similar products, including differences in sales
charges, expense ratios and cash flows.
The Series Fund also offers its shares to other separate accounts
established by the Company and our New York subsidiary in connection with
variable annuity and variable life insurance contracts. Although we do not
anticipate any disadvantages to this arrangement, there is a possibility that a
material conflict may arise between the interests of the Variable Account and
one or more of the other separate accounts investing in the Series Fund. A
conflict may occur due to differences in tax laws affecting the operations of
variable life and variable annuity separate accounts, or some other reason. We
and the Series Fund's Board of Trustees will monitor events for such conflicts,
and, in the event of a conflict, we will take steps necessary to remedy the
conflict, including withdrawal of the Variable Account from participation in the
Fund which is involved in the conflict or substitution of shares of other Funds
or other mutual funds.
MORE COMPREHENSIVE INFORMATION ABOUT THE FUNDS AND THE MANAGEMENT,
INVESTMENT OBJECTIVES, POLICIES, RESTRICTIONS, EXPENSES AND POTENTIAL RISKS OF
EACH FUND MAY BE FOUND IN THE ACCOMPANYING CURRENT FUND PROSPECTUS(ES). YOU
SHOULD READ THE FUND PROSPECTUS(ES) CAREFULLY BEFORE INVESTING. THE STATEMENT OF
ADDITIONAL INFORMATION OF THE FUNDS IS AVAILABLE BY CALLING 1-800-752-7215.
THE FIXED ACCOUNT
The Fixed Account is made up of all the general assets of the Company
other than those allocated to any separate account. Amounts you allocate to
Guarantee Periods become part of the
10
<PAGE>
Fixed Account, and are available to fund the claims of all classes of our
customers, including claims for benefits under the Contracts.
We will invest the assets of the Fixed Account in those assets we choose
that are allowed by applicable state insurance laws. In general, these laws
permit investments, within specified limits and subject to certain
qualifications, in federal, state and municipal obligations, corporate bonds,
preferred and common stocks, real estate mortgages, real estate and certain
other investments. We intend to invest primarily in investment-grade fixed
income securities (I.E., rated by a nationally recognized rating service within
the 4 highest grades) or instruments we believe are of comparable quality.
We are not obligated to invest amounts allocated to the Fixed Account
according to any particular strategy, except as may be required by applicable
state insurance laws. You will not have a direct or indirect interest in the
Fixed Account investments.
THE FIXED ACCOUNT OPTIONS:
THE GUARANTEE PERIODS
You may elect one or more Guarantee Period(s) from those we make available
from time to time. We publish Guaranteed Interest Rates for each Guarantee
Period offered. We may change the Guaranteed Interest Rates we offer from time
to time, but no Guaranteed Interest Rate will ever be less than 3% per year,
compounded annually. Also, once we have accepted your allocation to a particular
Guarantee Period, we promise that the Guaranteed Interest Rate applicable to
that allocation will not change for the duration of the Guarantee Period.
We determine Guaranteed Interest Rates at our discretion. We do not have a
specific formula for establishing the rates for different Guarantee Periods. Our
determination will be influenced by the interest rates on fixed income
investments in which we may invest amounts allocated to the Guarantee Periods.
We will also consider other factors in determining these rates, including
regulatory and tax requirements, sales commissions and administrative expenses
borne by us, general economic trends and competitive factors. We cannot predict
the level of future interest rates.
We may from time to time at our discretion offer special interest rate for
new Purchase Payments that are higher than the rates we are then offering for
renewals or transfers.
Early withdrawals from your allocation to a Guarantee Period, including
cash withdrawals, transfers and commencement of an annuity option, may be
subject to a Market Value Adjustment, which could decrease or increase the value
of your Account. See "Withdrawals and Market Value Adjustment."
THE ACCUMULATION PHASE
During the Accumulation Phase of your Contract, you make payments into
your Account, and your earnings accumulate on a tax-deferred basis. The
Accumulation Phase begins with our acceptance of your first Purchase Payment and
ends the Business Day before your Annuity Commencement Date. The Accumulation
Phase will end sooner if you surrender your Contract or die before the Annuity
Commencement Date.
ISSUING YOUR CONTRACT
When you purchase a Contract, a completed Application and the initial
Purchase Payment are sent to us for acceptance. When we accept an Individual
Contract, we issue the Contract to you. When we accept a Group Contract, we
issue the Contract to the Owner; we issue a Certificate to you as a Participant.
We will credit your initial Purchase Payment to your Account within 2
Business Days of receiving your completed Application. If your Application is
not complete, we will notify you. If we do not have the necessary information to
complete the Application within 5 Business Days, we will send your money back to
you or ask your permission to retain your Purchase Payment until the Application
is
11
<PAGE>
made complete. Then we will apply the Purchase Payment within 2 Business Days of
when the Application is complete.
AMOUNT AND FREQUENCY OF PURCHASE PAYMENTS
The amount of Purchase Payments may vary; however, we will not accept an
initial Purchase Payment of less than $20,000, and each additional Purchase
Payment must be at least $1,000, unless we waive these limits. In addition, we
will not accept a Purchase Payment if your Account Value is over $2 million, or
if the Purchase Payment would cause your Account Value to exceed $2 million,
unless we have approved the Payment in advance. Within these limits, you may
make Purchase Payments at any time during the Accumulation Phase.
ALLOCATION OF NET PURCHASE PAYMENTS
You may allocate your Purchase Payments among the different Sub-Accounts
and Guarantee Periods we offer, but any allocation to a Guarantee Period must be
at least $1,000. Over the life of your Contract, you may allocate amounts among
as many as 18 of the available investment options.
In your Application, you may specify the percentage of each Purchase
Payment to be allocated to each Sub-Account or Guarantee Period. These
percentages are called your allocation factors. You may change the allocation
factors for future Payments by sending us notice of the change in a form
acceptable to us, as required. We will use your new allocation factors for the
first Purchase Payment we receive with or after we have received notice of the
change, and for all future Purchase Payments, until we receive another change
notice.
Although it is currently not our practice, we may deduct applicable
premium taxes or similar taxes from your Purchase Payments (see "Contract
Charges -- Premium Taxes"). In that case, we will credit your Net Purchase
Payment, which is the Purchase Payment minus the amount of those taxes.
YOUR ACCOUNT
When we accept your first Purchase Payment, we establish an Account for
you, which we maintain throughout the Accumulation Phase of your Contract.
YOUR ACCOUNT VALUE
Your Account Value is the sum of the value of the 2 components of your
Contract: the Variable Account portion of your Contract ("Variable Account
Value") and the Fixed Account portion of your Contract ("Fixed Account Value").
These 2 components are calculated separately, as described below under "Variable
Account Value" and "Fixed Account Value."
VARIABLE ACCOUNT VALUE
VARIABLE ACCUMULATION UNITS
In order to calculate your Variable Account Value, we use a measure called
a Variable Accumulation Unit for each Sub-Account. Your Variable Account Value
is the sum of your Account Value in each Sub-Account, which is the number of
your Variable Accumulation Units for that Sub-Account times the value of each
Unit.
VARIABLE ACCUMULATION UNIT VALUE
The value of each Variable Accumulation Unit in a Sub-Account reflects the
net investment performance of that Sub-Account. We determine that value once on
each day that the New York Stock Exchange is open for trading, at the close of
trading, which is currently 4:00 p.m., Eastern Time. (The close of trading is
determined by the New York Stock Exchange.) We also may determine the value of
Variable Accumulation Units of a Sub-Account on days the Exchange is closed if
there is enough trading in securities held by that Sub-Account to materially
affect the value of the Variable Accumulation Units. Each day we make a
valuation is called a "Business Day." The period that begins at the
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time Variable Accumulation Units are valued on a Business Day and ends at that
time on the next Business Day is called a Valuation Period. On days other than
Business Days, the value of a Variable Accumulation Unit does not change.
To measure these values, we use a factor -- which we call the Net
Investment Factor -- which represents the net return on the Sub-Account's
assets. At the end of any Valuation Period, the value of a Variable Accumulation
Unit for a Sub-Account is equal to the value of that Sub-Account's Variable
Accumulation Units at the end of the previous Valuation Period, multiplied by
the Net Investment Factor. We calculate the Net Investment Factor by dividing
(1) the net asset value of a Fund share held in the Sub-Account at the end of
that Valuation Period, plus the per share amount of any dividend or capital
gains distribution made by that Fund during the Valuation Period, by (2) the net
asset value per share of the Fund share at the end of the previous Valuation
Period; we then deduct a factor representing the mortality and expense risk
charge and administrative expense charge for each day in the Valuation Period.
See "Contract Charges."
For a hypothetical example of how we calculate the value of a Variable
Accumulation Unit, see the Statement of Additional Information.
CREDITING AND CANCELING VARIABLE ACCUMULATION UNITS
When we receive an allocation to a Sub-Account either from a Net Purchase
Payment or a transfer of Account Value, we credit that amount to your Account in
Variable Accumulation Units. Similarly, we cancel Variable Accumulation Units
when you transfer or withdraw amounts from a Sub-Account, or when we deduct
certain charges under the Contract. We determine the number of Units credited or
canceled by dividing the dollar amount by the Variable Accumulation Unit value
for that Sub-Account at the end of the Valuation Period during which the
transaction or charge is effective.
FIXED ACCOUNT VALUE
Your Fixed Account value is the sum of all amounts allocated to Guarantee
Periods, either from Net Purchase Payments, transfers or renewals, plus interest
credited on those amounts, and minus withdrawals, transfers out of Guarantee
Periods, and any deductions for charges under the Contract taken from your Fixed
Account Value.
A Guarantee Period begins the day we apply your allocation and ends when
the number of calendar years (or months if the Guarantee Period is less than one
year) in the Guarantee Period (measured from the end of the calendar month in
which the amount was allocated to the Guarantee Period) have elapsed. The last
day of the Guarantee Period is its Renewal Date.
Each additional Purchase Payment, transfer or renewal credited to your
Fixed Account Value will result in a new Guarantee Period with its own Renewal
Date. Amounts allocated at different times to Guarantee Periods of the same
duration may have different Renewal Dates.
CREDITING INTEREST
We credit interest on amounts allocated to a Guarantee Period at the
applicable Guaranteed Interest Rate for the duration of the Guarantee Period.
During the Guarantee Period, we credit interest daily at a rate that yields the
Guaranteed Interest Rate on an annual effective basis.
GUARANTEE AMOUNTS
Each separate allocation you make to a Guarantee Period, together with
interest credited thereon, is called a Guarantee Amount. Each Guarantee Amount
is treated separately for purposes of determining the Market Value Adjustment. A
Guarantee Period that will extend beyond your maximum Annuity Commencement Date
will result in an application of a Market Value Adjustment upon annuitization or
withdrawals. Each new allocation to a Guarantee Period must be at least $1,000.
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RENEWALS
We will notify you in writing between 45 and 75 days before the Renewal
Date for any Guarantee Amount. A new Guarantee Period of the same duration will
begin automatically for that Guarantee Amount on the first day following the
Renewal Date, unless before the Renewal Date we receive:
(1) written notice from you electing a different Guarantee Period from
among those we then offer, or
(2) instructions to transfer the Guarantee Amount to one or more
Sub-Accounts, in accordance with the transfer privilege provisions of
the Contract (see "Transfer Privilege").
A Guarantee Amount will not renew into a Guarantee Period that will extend
beyond your Maximum Annuity Commencement Date. Unless you notify us otherwise,
we will automatically renew your Guarantee Amount into the next available
Guarantee Period.
EARLY WITHDRAWALS
If you withdraw, transfer, or annuitize an allocation to a Guarantee
Period 30 days prior to the Renewal Date, we will apply a Market Value
Adjustment to the transaction. This could result in an increase or a decrease of
your Account Value, depending on interest rates at the time. You bear the risk
that you will receive less than your principal if the Market Value Adjustment
applies.
TRANSFER PRIVILEGE
PERMITTED TRANSFERS
During the Accumulation Phase, you may transfer all or part of your
Account Value to one or more Sub-Accounts or Guarantee Periods then available,
subject to the following restrictions:
- You may not make more than 12 transfers in any Account Year;
- The amount transferred from a Sub-Account must be at least $1,000,
unless you are transferring your entire balance in that Sub-Account;
- Your Account Value remaining in a Sub-Account must be at least $1,000;
- The amount transferred from a Guarantee Period must be the entire
Guarantee Amount, except for transfers of interest credited during the
current Account Year;
- At least 30 days must elapse between transfers to or from Guarantee
Periods;
- Transfers to or from Sub-Accounts are subject to terms and conditions
that may be imposed by the Funds; and
- We impose additional restrictions on market timers, which are further
described below.
These restrictions do not apply to transfers made under an approved
dollar-cost averaging program.
There is usually no charge imposed on transfers; however, we reserve the
right to impose a transfer charge of $15 for each transfer. Transfers out of a
Guarantee Period more than 30 days before the Renewal Date or any time after the
Renewal Date will be subject to the Market Value Adjustment described below.
Under current law, there is no tax liability for transfers.
REQUESTS FOR TRANSFERS
You may request transfers in writing or by telephone. The telephone
transfer privilege is available automatically, and does not require your written
election. We will require personal identifying information to process a request
for a transfer made by telephone. We will not be liable for following
instructions communicated by telephone that we reasonably believe are genuine.
Your transfer request will be effective as of the close of the Business
Day if we receive your transfer request before the earlier of (a) 4:00 p.m.
Eastern Time on a Business Day or (b) the close of
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the New York Stock Exchange on days that the Stock Exchange closes before 4:00
p.m. Otherwise it will be effective on the next Business Day.
MARKET TIMERS
The Contracts are not designed for professional market timing
organizations or other entities using programmed and frequent transfers. If you
wish to employ such strategies, you should not purchase a Contract. Accordingly,
transfers may be subject to restrictions if exercised by a market timing firm or
any other third party authorized to initiate transfer transactions on behalf of
multiple Participants. In imposing such restrictions, we may, among other
things, not accept (1) the transfer instructions of any agent acting under a
power of attorney on behalf of more than one Participant, or (2) the transfer
instructions of individual Participants who have executed preauthorized transfer
forms that are submitted at the same time by market timing firms or other third
parties on behalf of more than one Participant. We will not impose these
restrictions unless our actions are reasonably intended to prevent the use of
such transfers in a manner that will disadvantage or potentially impair the
Contract rights of other Participants.
In addition, the Series Fund has reserved the right to temporarily or
permanently refuse exchange requests from the Variable Account if, in MFS'
judgment, a Fund would be unable to invest effectively in accordance with its
investment objective and policies, or would otherwise potentially be adversely
affected. In particular, a pattern of exchanges that coincide with a market
timing strategy may be disruptive to a Fund and therefore may be refused.
Accordingly, the Variable Account may not be in a position to effectuate
transfers and may refuse transfer requests without prior notice. We also reserve
the right, for similar reasons, to refuse or delay exchange requests involving
transfers to or from the Fixed Account.
WAIVERS; REDUCED CHARGES; SPECIAL GUARANTEED INTEREST RATES
We may reduce or waive the mortality and expense risk charges, the
administrative service fee or the annual Account Fee, credit additional amounts,
or grant Special Guaranteed Interest Rates in certain situations. These
situations may include sales of Contracts (1) where selling and/or maintenance
costs associated with the Contracts are reduced, such as the sale of several
Contracts to the same Participant, sales of large Contracts, and certain group
sales, and (2) to officers, directors and employees of the Company or its
affiliates, registered representatives and employees of broker-dealers with a
current selling agreement with the Company and affiliates of such
representatives and broker-dealers, employees of affiliated asset management
firms, and persons who have retired from such positions ("Eligible Employees")
and immediate family members of Eligible Employees. Eligible Employees and their
immediate family members may also purchase a Contract without regard to minimum
Purchase Payment requirements.
OPTIONAL PROGRAMS
DOLLAR-COST AVERAGING
Dollar-cost averaging allows you to invest gradually, over time, in up to
12 Sub-Accounts. You may select a dollar-cost averaging program at no extra
charge by allocating a minimum of $1,000 to a designated Sub-Account or to a
Guarantee Period we make available in connection with the program. Amounts
allocated to the Fixed Account under the program will earn interest at a rate
declared by the Company for the Guarantee Period you select. Previously applied
amounts may not be transferred to a Guarantee Period made available in
connection with this program. At regular time intervals, we will transfer the
same amount automatically to one or more Sub-Accounts that you choose, up to a
maximum of 12 Sub-Accounts. The program continues until your Account Value
allocated to the program is depleted or you elect to stop the program. The final
amount transferred from the Fixed Account will include all interest earned.
No Market Value Adjustment (either positive or negative) will apply to
amounts automatically transferred from the Fixed Account under the dollar-cost
averaging program. However, if you discontinue or alter the program prior to
completion, amounts remaining in the Fixed Account will be
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transferred to the Money Market Fund investment option under the Contract,
unless you instruct us otherwise, and the Market Value Adjustment will be
applied. Any new allocation of a Purchase Payment to the program will be treated
as commencing a new dollar-cost averaging program and is subject to the $1,000
minimum.
The main objective of a dollar-cost averaging program is to minimize the
impact of short-term price fluctuations on Account Value. In general, since you
transfer the same dollar amount to the variable investment options at set
intervals, dollar-cost averaging allows you to purchase more Variable
Accumulation Units (and, indirectly, more Fund shares) when prices are low and
fewer Variable Accumulation Units (and, indirectly, fewer Fund shares) when
prices are high. Therefore, you may achieve a lower average cost per Variable
Accumulation Unit over the long term. A dollar-cost averaging program allows you
to take advantage of market fluctuations. However, it is important to understand
that a dollar-cost averaging program does not assure a profit or protect against
loss in a declining market. We do not allow transfers into any of the Guarantee
Periods.
ASSET ALLOCATION
One or more asset allocation programs may be available in connection with
the Contract, at no extra charge. Asset allocation is the process of investing
in different asset classes -- such as equity funds, fixed income funds, and
money market funds -- depending on your personal investment goals, tolerance for
risk, and investment time horizon. By spreading your money among a variety of
asset classes, you may be able to reduce the risk and volatility of investing,
although there are no guarantees, and asset allocation does not insure a profit
or protect against loss in a declining market.
Currently, you may select one of 3 asset allocation models, each of which
represents a combination of Sub-Accounts with a different level of risk. The
available models are: the conservative asset allocation model, the moderate
asset allocation model, and the aggressive asset allocation model. Each model
allocates a different percentage of Account Value to Sub-Accounts investing in
the various asset classes, with the conservative asset allocation model
allocating the lowest percentage to Sub-Accounts investing in the equity asset
class and the aggressive asset allocation model allocating the highest
percentage to the equity asset class. These asset allocation models, as well as
the terms and conditions of the asset allocation program, are fully described in
a separate brochure. We may add or delete such programs in the future.
If you elect an asset allocation program, we will automatically allocate
your Purchase Payments among the Sub-Accounts represented in the model you
choose. By electing an asset allocation program, you thereby authorize us to
automatically reallocate your investment options that participate in the asset
allocation program on a quarterly basis, or as determined by the terms of the
Asset Allocation Program, to reflect the current composition of the model you
have selected, without further instruction, until we receive notification that
you wish to terminate the program or choose a different model.
SYSTEMATIC WITHDRAWAL AND INTEREST OUT PROGRAMS
If you have an Account Value of $10,000 or more, you may select our
Systematic Withdrawal Program or our Interest Out Program.
Under the Systematic Withdrawal Program, you determine the amount and
frequency of regular withdrawals you would like to receive from your Fixed
Account Value and/or Variable Account Value and we will effect them
automatically; a Market Value Adjustment may be applicable upon withdrawal.
Under the Interest Out Program, we automatically pay you or reinvest interest
credited for all Guarantee Periods you have chosen. The withdrawals under these
programs may be subject to surrender charges or a Market Value Adjustment. They
may also be included as income and subject to a 10% federal tax penalty. You
should consult your tax adviser before choosing these options.
You may change or stop either program at any time, by written notice to
us.
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PORTFOLIO REBALANCING PROGRAM
Under the Portfolio Rebalancing Program, we transfer funds among all
Sub-Accounts to maintain the percentage allocation you have selected among these
Sub-Accounts. At your election, we will make these transfers on a quarterly,
semi-annual or annual basis.
Portfolio Rebalancing does not permit transfers to or from any Guarantee
Period.
WITHDRAWALS AND MARKET VALUE ADJUSTMENT
CASH WITHDRAWALS
REQUESTING A WITHDRAWAL
At any time during the Accumulation Phase, you may withdraw in cash all or
any portion of your Account Value. To make a withdrawal, you must send us a
written request at our Annuity Mailing Address. Your request must specify
whether you want to withdraw the entire amount of your Account or, if less, the
amount you wish to receive.
When you make a withdrawal, we consider the oldest Purchase Payment that
you have not already withdrawn to be withdrawn first, then the second oldest
Purchase Payments, and so forth. Once all Purchase Payments are withdrawn, the
balance withdrawn is considered to be accumulated value.
We do not deduct any sales charge from your Purchase Payments when they
are made, nor do we impose a withdrawal charge (known as a "contingent deferred
sales charge") on amounts you withdraw.
However, all withdrawals from your Fixed Account Value may be subject to a
Market Value Adjustment (see "Market Value Adjustment"). Withdrawals also may
have adverse income tax consequences, including a 10% penalty tax (see "Tax
Considerations"). You should carefully consider these tax consequences before
requesting a cash withdrawal.
FULL WITHDRAWALS
If you request a full withdrawal, we calculate the amount we will pay you
as follows: We start with the total value of your Account at the end of the
Valuation Period during which we receive your withdrawal request; we deduct the
Account Fee for the Account Year in which the withdrawal is made; and finally,
we add or subtract the amount of any Market Value Adjustment applicable to your
Fixed Account Value.
A full withdrawal results in the surrender of your Contract, and
cancellation of all rights and privileges under your Contract.
PARTIAL WITHDRAWALS
If you request a partial withdrawal, we will pay you the actual amount
specified in your request and then adjust the value of your Account by deducting
the amount paid, and adding or deducting any Market Value Adjustment applicable
to amounts withdrawn from the Fixed Account.
You may specify the amount you want withdrawn from each Sub-Account and/or
Guarantee Amount to which your Account is allocated. If you do not so specify,
we will deduct the total amount you request pro rata, based on your Account
Value at the end of the Valuation Period during which we receive your request.
If you request a partial withdrawal that would result in your Account
Value being reduced to an amount less than the Account Fee for the Account Year
in which you make the withdrawal, we will treat it as a request for a full
withdrawal.
TIME OF PAYMENT
We will pay you the applicable amount of any full or partial withdrawal
within 7 days after we receive your withdrawal request, except in cases where we
are permitted, and choose, to defer payment
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under the Investment Company Act of 1940 and applicable state insurance law.
Currently, we may defer payment of amounts you withdraw from the Variable
Account only for the following periods:
- When the New York Stock Exchange is closed (except weekends and
holidays) or when trading on the New York Stock Exchange is restricted;
- When it is not reasonably practical to dispose of securities held by a
Fund or to determine the value of the net assets of a Fund, because an
emergency exists; or
- When an SEC order permits us to defer payment for the protection of
Participants.
We also may defer payment of amounts you withdraw from the Fixed Account
for up to 6 months from the date we receive your withdrawal request. We do not
pay interest on the amount of any payments we defer.
WITHDRAWAL RESTRICTIONS FOR QUALIFIED PLANS
If your Contract is a Qualified Contract, you should carefully check the
terms of your retirement plan for limitations and restrictions on cash
withdrawals.
Special restrictions apply to withdrawals from Contracts used for
Section 403(b) annuities (see "Tax Considerations -- Tax-Sheltered Annuities."
MARKET VALUE ADJUSTMENT
If permitted under the laws of your state, we will apply a Market Value
Adjustment if you withdraw or transfer amounts from your Fixed Account Value
more than 30 days before the end of the applicable Guarantee Period. For this
purpose, using Fixed Account Value to provide an annuity is considered a
withdrawal, and the Market Value Adjustment will apply. However, we will not
apply the Market Value Adjustment to automatic transfers to a Sub-Account from a
Guarantee Period as part of our dollar-cost averaging program.
We apply the Market Value Adjustment separately to each Guarantee Amount
in the Fixed Account, that is to each separate allocation you have made to a
Guarantee Period together with interest credited on that allocation. However, we
do not apply the adjustment to the amount of interest credited during your
current Account Year. Any withdrawal from a Guarantee Amount is attributed first
to such interest.
A Market Value Adjustment may decrease, increase or have no effect on your
Account Value. This will depend on changes in interest rates since you made your
allocation to the Guarantee Period and the length of time remaining in the
Guarantee Period. In general, if the Guaranteed Interest Rate we currently
declare for Guarantee Periods equal to the balance of your Guarantee Period (or
your entire Guarantee Period for Guarantee Periods of less than one year) is
higher than your Guaranteed Interest Rate, the Market Value Adjustment is likely
to decrease your Account Value. If our current Guaranteed Interest Rate is
lower, the Market Value Adjustment is likely to increase your Account Value.
We determine the amount of the Market Value Adjustment by multiplying the
amount that is subject to the adjustment by the following formula:
N/12
1 + I
( -------- ) -1
1 + J + b
where:
I is the Guaranteed Interest Rate applicable to the Guarantee Amount from
which you withdraw, transfer or annuitize;
J is the Guaranteed Interest Rate we declare at the time of your
withdrawal, transfer or annuitization for Guarantee Periods equal to the length
of time remaining in the Guarantee Period applicable to your Guarantee Amount,
rounded to the next higher number of complete years, for Guarantee Periods of
one year or more. For any Guarantee Periods of less than one year, J is the
Guaranteed
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Interest Rate we declare at the time of your withdrawal, transfer or
annuitization for a Guarantee Period of the same length as your Guarantee
Period. If, at that time, we do not offer the applicable Guarantee Period we
will use an interest rate determined by straight-line interpolation of the
Guaranteed Interest Rates for the Guarantee Periods we do offer;
N is the number of complete months remaining in your Guarantee Period; and
b is a factor that currently is 0%, but that in the future we may increase
to up to 0.25%. Any increase would be applicable only to Participants who
purchase their Contracts after the date of that increase.
We will apply the Market Value Adjustment to the amount being withdrawn
after deduction of any Account Fee, if applicable, but before we impose any
withdrawal charge on the amount withdrawn.
For examples of how we calculate the Market Value Adjustment, see
Appendix B.
CONTRACT CHARGES
ACCOUNT FEE
During the Accumulation Phase of your Contract, we will deduct from your
Account an annual Account Fee of $50 to help cover the administrative expenses
we incur related to the issuance of Contracts and the maintenance of Accounts.
We deduct the Account Fee on each Account Anniversary. The annual Account Fee
will never exceed $50. We deduct the Account Fee pro rata from each Sub-Account
and each Guarantee Period, based on the allocation of your Account Value on your
Account Anniversary.
We will not charge the Account Fee if:
(1) your Account has been allocated only to the Fixed Account during the
applicable Account Year; or
(2) your Account Value is $100,000 or more on your Account Anniversary.
If you make a full withdrawal of your Account, we will deduct the full
amount of the Account Fee at the time of the withdrawal. In addition, on the
Annuity Commencement Date we will deduct a pro rata portion of the Account Fee
to reflect the time elapsed between the last Account Anniversary and the day
before the Annuity Commencement Date.
After the Annuity Commencement Date, we will deduct an annual Account Fee
of $50 in the aggregate in equal amounts from each Variable Annuity payment we
make during the year. We do not deduct any Account Fee from Fixed Annuity
payments.
ADMINISTRATIVE EXPENSE CHARGE
We deduct an administrative expense charge from the assets of the Variable
Account at an annual effective rate equal to 0.15% during both the Accumulation
Phase and the Income Phase. This charge is designed to reimburse us for expenses
we incur in administering the Contracts, Participant Accounts and the Variable
Account that are not covered by the annual Account Fee.
MORTALITY AND EXPENSE RISK CHARGE
During both the Accumulation Phase and the Income Phase, we deduct a
mortality and expense risk charge from the assets of the Variable Account at an
effective annual rate equal to 1.25%, if your initial Purchase Payment was less
than $1,000,000, or 1.00% if your initial Purchase Payment was $1,000,000 or
more. The mortality risk we assume arises from our contractual obligation to
continue to make annuity payments to each Annuitant, regardless of how long the
Annuitant lives and regardless of how long all Annuitants as a group live. This
obligation assures each Annuitant that neither the longevity of fellow
Annuitants nor an improvement in life expectancy generally will have an adverse
effect on the amount of any annuity payment received under the Contract. The
mortality risk also arises from our contractual obligation to pay a death
benefit upon the death of the Participant prior to
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the Annuity Commencement Date. The expense risk we assume is the risk that the
annual Account Fee and administrative expense charge we assess under the
Contract may be insufficient to cover the actual total administrative expenses
we incur. If the amount of the charge is insufficient to cover the mortality and
expense risks, we will bear the loss. If the amount of the charge is more than
sufficient to cover the risks, we will make a profit on the charge. We may use
this profit for any proper corporate purpose, including the payment of marketing
and distribution expenses for the Contract.
CHARGES FOR OPTIONAL DEATH BENEFIT RIDERS
If you elect an optional death benefit rider, we will deduct a charge from
the assets of the Variable Account based upon the number of optional death
benefits riders you elect, as follows:
<TABLE>
<CAPTION>
NUMBER OF % OF
RIDERS YOU AVERAGE
ELECT DAILY VALUE
---------- -----------
<S> <C>
1 0.15%
2 0.25%
3 0.40%
</TABLE>
PREMIUM TAXES
Some states and local jurisdictions impose a premium tax on us that is
equal to a specified percentage of the Purchase Payments you make. In many
states there is no premium tax. We believe that the amounts of applicable
premium taxes currently range from 0% to 3.5%. You should consult a tax adviser
to find out if your state imposes a premium tax and the amount of any tax.
In order to reimburse us for the premium tax we may pay on Purchase
Payments, our policy is to deduct the amount of such taxes from the amount you
apply to provide an annuity at the time of annuitization. However, we reserve
the right to deduct the amount of any applicable tax from your Account at any
time, including at the time you make a Purchase Payment or make a full or
partial withdrawal. We do not make any profit on the deductions we make to
reimburse premium taxes.
FUND EXPENSES
There are fees and charges deducted from each Fund. These fees and
expenses are described in the Fund prospectus(es) and related Statements of
Additional Information.
MODIFICATION IN THE CASE OF GROUP CONTRACTS
For Group Contracts, we may modify the annual Account Fee, the
administrative expense charge and the mortality and expense risk charge upon
notice to Owners. However, such modification will apply only with respect to
Participant Accounts established after the effective date of the modification.
DEATH BENEFIT
If the Covered Person dies during the Accumulation Phase, we will pay a
death benefit to your Beneficiary, using the payment method elected (a single
cash payment or one of our Annuity Options). If the Beneficiary is not living on
the date of death of the Covered Person, we will pay the death benefit in one
sum to your estate. We do not pay a death benefit if the Covered Person dies
during the Income Phase. However, the Beneficiary will receive any annuity
payments provided under an Annuity Option that is in effect. If your Contract
names more than one Covered Person, we will pay the death benefit upon the first
death of such Covered Persons.
AMOUNT OF DEATH BENEFIT
To calculate the amount of the death benefit, we use a "Death Benefit
Date." The Death Benefit Date is the date we receive proof of the death of the
Covered Person in an acceptable form ("Due Proof of Death") if you have elected
a death benefit payment method before the death of the Covered Person and it
remains in effect. Otherwise, the Death Benefit Date is the later of the date we
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receive Due Proof of Death or the date we receive the Beneficiary's election of
either payment method or, if the Beneficiary is your spouse, Contract
continuation. If we do not receive the Beneficiary's election within 60 days
after we receive Due Proof of Death, we reserve the right to provide a lump sum
to your Beneficiary.
The amount of the death benefit is determined as of the Death Benefit
Date.
THE BASIC DEATH BENEFIT
In general, if you were 85 or younger on your Contract Date (the date we
accepted your first Purchase Payment), the death benefit will be the greatest of
the following amounts:
1. Your Account Value for the Valuation Period during which the Death
Benefit Date occurs;
2. The amount we would pay if you had surrendered your entire Account on
the Death Benefit Date; and
3. Your total Purchase Payments (adjusted for partial withdrawals as
described in "Calculating the Death Benefit") as of the Death Benefit
Date.
For examples of how to calculate this basic death benefit, see
Appendix C.
If you were 86 or older on your Contract Date, the death benefit is equal
to amount (2) above. Because this amount will reflect any applicable withdrawal
charges and Market Value Adjustment, it may be less than your Account Value.
OPTIONAL DEATH BENEFIT RIDERS
Subject to availability in your state, you may enhance the "Basic Death
Benefit" by electing one or more of the following optional death benefit riders.
You must make your election before the date on which your Contract becomes
effective. You will pay a charge for each optional death benefit rider you
elect. (For a description of these charges, see "Charges for Optional Death
Benefit Riders.") The Maximum Anniversary Account Value Rider, the 5% Premium
Roll-Up Rider, and the Earnings Enhancement Rider are available only if you are
younger than 80 on the Contract Date. Any optional death benefit election may
not be changed after the Contract is issued. For a complete description of how
the death benefits under the optional death benefit riders are calculated, see
"Calculating the Death Benefit."
MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER
Under this rider, the death benefit will be the greater of:
- any of the death benefit amounts payable under the "Basic Death
Benefit" (above), or
- your highest Account Value on any Account Anniversary before your 81st
birthday, adjusted for any subsequent Purchase Payments, partial
withdrawals and charges made between that Account Anniversary and the
Death Benefit Date.
5% PREMIUM ROLL-UP RIDER
Under this rider, the death benefit will be the greater of:
- any of the death benefit amounts payable under the "Basic Death
Benefit" (above), or
- the sum of your total Purchase Payments plus interest accruals,
adjusted for partial withdrawals.
Under this rider, interest accrues at a rate of 5% per year on Purchase
Payments and transfers to the Variable Account while they remain in the Variable
Account. The 5% interest accruals will continue until the earlier of:
- the first day of the month following your 80th birthday, or
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- the day the death benefit amount under this rider equals twice the
total of your Purchase Payments and transferred amounts, adjusted for
withdrawals.
Net Purchase Payments under this rider will be adjusted for all partial
withdrawals, as described in "Calculating the Death Benefit."
EARNINGS ENHANCEMENT RIDER
Under this rider, if you are 69 or younger on your Contract Date, the
death benefit will be:
- the greatest of any of the death benefit amounts payable under the
"Basic Death Benefit" (above), plus
- 40% of the lesser of your net Purchase Payments or your Account Value
minus net Purchase Payments, calculated as of the Death Benefit Date.
If you are between the ages of 70 and 79 on your Contract Date, the death
benefit will be:
- the greatest of any of the death benefit amounts payable under the
"Basic Death Benefit" (above), plus
- 25% of the lesser of your net Purchase Payments or your Account Value
minus net Purchase Payments, calculated as of the Death Benefit Date.
For examples of how the death benefit is calculated under the Earnings
Enhancement Rider, see Appendix D.
SELECTING MULTIPLE DEATH BENEFIT RIDERS
If you elect more than one optional death benefit rider, the death benefit
will be calculated as follows:
1) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH 5% PREMIUM
ROLL-UP RIDER: The death benefit will equal the greater of the death
benefit under the Maximum Anniversary Account Value Rider or the death
benefit under the 5% Premium Roll-Up Rider.
2) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH EARNINGS
ENHANCEMENT RIDER: The death benefit will equal the death benefit under
the Maximum Anniversary Account Value Rider, PLUS the amount calculated
under the Earnings Enhancement Rider. The death benefit under the
Earnings Enhancement Rider is calculated using the Account Value before
the application of the Maximum Anniversary Account Rider.
3) EARNINGS ENHANCEMENT RIDER COMBINED WITH 5% PREMIUM ROLL-UP RIDER: The
death benefit will equal the death benefit under the 5% Premium Roll-Up
Rider, PLUS the amount calculated under the Earnings Enhancement Rider.
The death benefit under the Earnings Enhancement Rider is calculated
using the Account Value before the application of the 5% Premium Roll-Up
Rider.
4) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER, THE 5% PREMIUM ROLL-UP RIDER
AND THE EARNINGS ENHANCEMENT RIDER: The death benefit will equal the
GREATER of the death benefit under the Maximum Anniversary Account Value
Rider or the death benefit under the 5% Premium Roll-Up Rider, PLUS the
amount calculated under the Earnings Enhancement Rider. The death
benefit under the Earnings Enhancement Rider is calculated using the
Account Value before the application of the 5% Premium Roll-Up Rider or
the Maximum Anniversary Account Value Rider.
SPOUSAL CONTINUANCE
If your spouse is your Beneficiary, upon your death your spouse may elect
to continue the Contract as the Participant, rather than receive the death
benefit amount. In that case, we will not pay a death benefit, but the
Contract's Account Value will be equal to your Contract's death benefit amount,
as defined under the "Basic Death Benefit" or any optional death benefit rider
you have
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selected. All Contract provisions, including any optional death benefit riders
you have selected, will continue as if your spouse had purchased the Contract on
the Death Benefit Date with a deposit equal to the death benefit amount. For
purposes of calculating death benefits and expenses from that date forward, your
spouse's age on the original effective date of the Contract will be used.
CALCULATING THE DEATH BENEFIT
In calculating the death benefit amount payable under option (3) of the
"Basic Death Benefit" or any of the optional death benefit riders, any partial
withdrawals will reduce the death benefit amount to an amount equal to the death
benefit amount immediately before the withdrawal multiplied by the ratio of the
Account Value immediately after the withdrawal to the Account Value immediately
before the withdrawal.
If the death benefit is the amount payable under options (2) or (3) of the
"Basic Death Benefit" or under any of the optional death benefit riders, your
Account Value may be increased by the excess, if any, of that amount over option
(1) of the "Basic Death Benefit." Any such increase will be allocated to the
Sub-Accounts in proportion to your Account Value in those Sub-Accounts on the
Death Benefit Date. Such increase will be made only if the Beneficiary elects to
annuitize, elects to defer annuitization, or elects to continue the Contract.
Also, any portion of this new Account Value attributed to the Fixed Account will
be transferred to the available Money Market Fund investment option (without the
application of a Market Value Adjustment). If your spouse, as the named
Beneficiary, elects to continue the Contract after your death, your spouse may
transfer any such Fixed Account portion back to the Fixed Account and begin a
new Guarantee Period.
METHOD OF PAYING DEATH BENEFIT
The death benefit may be paid in a single cash payment or as an annuity
(either fixed, variable or a combination), under one or more of our Annuity
Options. We describe the Annuity Options in this Prospectus under "The Income
Phase -- Annuity Provisions."
During the Accumulation Phase, you may elect the method of payment for the
death benefit. If no such election is in effect on the date of your death, the
Beneficiary may elect either a single cash payment or an annuity. If the
Beneficiary is your spouse, the Beneficiary may elect to continue the Contract.
These elections are made by sending us a completed election form, which we will
provide. If we do not receive the Beneficiary's election within 60 days after we
receive Due Proof of Death, we will pay the death benefit in a single cash
payment.
If we pay the death benefit in the form of an Annuity Option, the
Beneficiary becomes the Annuitant/Payee under the terms of that Annuity Option.
NON-QUALIFIED CONTRACTS
If your Contract is a Non-Qualified Contract, special distribution rules
apply to the payment of the death benefit. The amount of the death benefit must
be distributed either (1) as a lump sum within 5 years after your death, or
(2) if in the form of an annuity, over a period not greater than the life or
expected life of the "designated beneficiary" within the meaning of
Section 72(s) of the Internal Revenue Code, with payments beginning no later
than one year after your death.
The person you have named as Beneficiary under your Contract, if any, will
be the "designated beneficiary." If the named Beneficiary is not living and no
contingent beneficiary has been named, the Annuitant automatically becomes the
designated beneficiary.
If the designated beneficiary is your surviving spouse, your spouse may
continue the Contract in his or her own name as Participant. To make this
election, your spouse must give us written notification within 60 days after we
receive Due Proof of Death. The special distribution rules will then apply on
the death of your spouse. To understand what happens when your spouse continues
the Contract, see "Spousal Continuance," above.
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During the Income Phase, if the Annuitant dies, the remaining value of the
Annuity Option in place must be distributed at least as rapidly as the method of
distribution under that option.
If the Participant is not a natural person, these distribution rules apply
on a change in, or the death of, either the Annuitant or the Co-Annuitant.
Payments made in contravention of these special rules would adversely
affect the treatment of the Contracts as annuity contracts under the Internal
Revenue Code. Neither you nor the Beneficiary may exercise rights that would
have that effect.
SELECTION AND CHANGE OF BENEFICIARY
You select your Beneficiary in your Application. You may change your
Beneficiary at any time by sending us written notice on our required form,
unless you previously made an irrevocable Beneficiary designation. A new
Beneficiary designation is not effective until we record the change.
PAYMENT OF DEATH BENEFIT
Payment of the death benefit in cash will be made within 7 days of the
Death Benefit Date, except if we are permitted to defer payment in accordance
with the Investment Company Act of 1940. If an Annuity Option is elected, the
Annuity Commencement Date will be the first day of the second calendar month
following the Death Benefit Date, and your Account will remain in effect until
the Annuity Commencement Date.
DUE PROOF OF DEATH
We accept any of the following as proof of any person's death:
- An original certified copy of an official death certificate;
- An original certified copy of a decree of a court of competent
jurisdiction as to the finding of death; or
- Any other proof we find satisfactory.
THE INCOME PHASE -- ANNUITY PROVISIONS
During the Income Phase, we make regular monthly annuity payments to the
Annuitant.
The Income Phase of your Contract begins with the Annuity Commencement
Date. On that date, we apply your Account Value, adjusted as described below,
under the Annuity Option(s) you have selected, and we make the first annuity
payment.
Once the Income Phase begins, no lump sum settlement option or cash
withdrawals are permitted, except pursuant to Annuity Option D, Monthly Payments
for a Specified Period Certain, as described below under the heading "Annuity
Options," and you cannot change the Annuity Option selected. You may request a
full withdrawal before the Annuity Commencement Date, which will be subject to
all charges applicable on withdrawals (see "Withdrawals and Market Value
Adjustment").
SELECTION OF THE ANNUITANT OR CO-ANNUITANT
You select the Annuitant in your Application. The Annuitant is the person
who receives annuity payments during the Income Phase and on whose life these
payments are based. In your Contract, the Annuity Option(s) refer to the
Annuitant as the "Payee." If you name someone other than yourself as Annuitant
and the Annuitant dies before the Income Phase, you become the Annuitant.
In a Non-Qualified Contract, if you name someone other than yourself as
Annuitant, you may also select a Co-Annuitant, who will become the new Annuitant
if the original Annuitant dies before the Income Phase. If both the Annuitant
and Co-Annuitant die before the Income Phase, you become the Annuitant. If you
have named both an Annuitant and a Co-Annuitant, you may designate one of them
to become the sole Annuitant as of the Annuity Commencement Date, if both are
living at that
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time. If you have not made that designation on the 30th day before the Annuity
Commencement Date, and both the Annuitant and the Co-Annuitant are still living,
the Co-Annuitant will become the Annuitant.
When an Annuity Option has been selected as the method of paying the death
benefit, the Beneficiary is the Payee of the annuity payment.
SELECTION OF THE ANNUITY COMMENCEMENT DATE
You select the Annuity Commencement Date in your Application. The
following restrictions apply to the date you may select:
- The earliest possible Annuity Commencement Date is the first day of the
first month following your first Account Anniversary.
- The latest possible Annuity Commencement Date is the first day of the
month following the Annuitant's 95th birthday or, if there is a
Co-Annuitant, the 95th birthday of the younger of the Annuitant and
Co-Annuitant.
- The Annuity Commencement Date must always be the first day of a month.
You may change the Annuity Commencement Date from time to time by sending
us written notice, with the following additional limitations:
- We must receive your notice at least 30 days before the current Annuity
Commencement Date.
- The new Annuity Commencement Date must be at least 30 days after we
receive the notice.
There may be other restrictions on your selection of the Annuity
Commencement Date imposed by your retirement plan or applicable law. In most
situations, current law requires that for a Qualified Contract, certain minimum
distributions must commence no later than April 1 following the year the
Annuitant reaches age 70 1/2 (or, for Qualified Contracts other than IRAs, no
later than April 1 following the year the Annuitant retires, if later than the
year the Annuitant reaches age 70 1/2).
ANNUITY OPTIONS
We offer the following Annuity Options for payments during the Income
Phase. Each Annuity Option may be selected for a Variable Annuity, a Fixed
Annuity, or a combination of both. We may also agree to other settlement
options, at our discretion.
ANNUITY OPTION A -- LIFE ANNUITY
We provide monthly payments during the lifetime of the Annuitant. Annuity
payments stop when the Annuitant dies. There is no provision for continuation of
any payments to a Beneficiary.
ANNUITY OPTION B -- LIFE ANNUITY WITH 60, 120, 180 OR 240 MONTHLY PAYMENTS
CERTAIN
We make monthly payments during the lifetime of the Annuitant. In
addition, we guarantee that the Beneficiary will receive monthly payments for
the remainder of the period certain, if the Annuitant dies during that period.
The election of a longer period results in smaller monthly payments. If no
Beneficiary is designated, we pay the discounted value of the remaining payments
in one sum to the Annuitant's estate. The Beneficiary may also elect to receive
the discounted value of the remaining payments in one sum. The discount rate for
a Variable Annuity will be the assumed interest rate in effect; the discount
rate for a Fixed Annuity will be based on the interest rate we used to determine
the amount of each payment.
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ANNUITY OPTION C -- JOINT AND SURVIVOR ANNUITY
We make monthly payments during the lifetime of the Annuitant and another
person you designate and during the lifetime of the survivor of the two. We stop
making payments when the survivor dies. There is no provision for continuance of
any payments to a Beneficiary.
ANNUITY OPTION D -- MONTHLY PAYMENTS FOR A SPECIFIED PERIOD CERTAIN
We make monthly payments for a specified period of time from 5 to 30
years, as you elect. If payments under this option are paid on a variable
annuity basis, the Annuitant may elect to receive, at any time, some or all of
the discounted value of the remaining payments, less any applicable withdrawal
charge; the discount rate for this purpose will be the assumed interest rate in
effect. If the Annuitant dies during the period selected, the remaining income
payments are made as described under Annuity Option B. The election of this
Annuity Option may result in the imposition of a penalty tax. The 5- to 9-year
period certain is not available if your Account has been issued within the past
7 years.
SELECTION OF ANNUITY OPTION
You select one or more of the Annuity Options, which you may change from
time to time during the Accumulation Phase, as long as we receive your selection
or change in writing at least 30 days before the Annuity Commencement Date. If
we have not received your written selection on the 30th day before the Annuity
Commencement Date, you will receive Annuity Option B, for a life annuity with
120 monthly payments certain.
You may specify the proportion of your Adjusted Account Value you wish to
provide a Variable Annuity or a Fixed Annuity. Under a Variable Annuity, the
dollar amount of payments will vary, while under a Fixed Annuity, the dollar
amount of payments will remain the same. If you do not specify a Variable
Annuity or a Fixed Annuity, your Adjusted Account Value will be divided between
Variable Annuities and Fixed Annuities in the same proportions as your Account
Value was divided between the Variable and Fixed Accounts on the Annuity
Commencement Date. You may allocate your Adjusted Account Value applied to a
Variable Annuity among the Sub-Accounts, or we will use your existing
allocations.
There may be additional limitations on the options you may elect under
your particular retirement plan or applicable law.
REMEMBER THAT THE ANNUITY OPTIONS MAY NOT BE CHANGED ONCE ANNUITY PAYMENTS
BEGIN.
AMOUNT OF ANNUITY PAYMENTS
ADJUSTED ACCOUNT VALUE
The Adjusted Account Value is the amount we apply to provide a Variable
Annuity and/or a Fixed Annuity. We calculate Adjusted Account Value by taking
your Account Value on the Business Day just before the Annuity Commencement Date
and making the following adjustments:
- We deduct a proportional amount of the Account Fee, based on the
fraction of the current Account Year that has elapsed.
- If applicable, we apply the Market Value Adjustment to your Account
Value in the Fixed Account, which may result in a deduction, an
addition, or no change.
- We deduct any applicable premium tax or similar tax if not previously
deducted.
- On the Annuity Commencement Date, we will exchange your Account's
Variable Annuity Units for Annuitization Units which have an annual
mortality and expense risk charge of 1.40% of your average daily net
assets (1.15% if your initial Purchase Payment was $1,000,000 or more).
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VARIABLE ANNUITY PAYMENTS
Variable Annuity payments may vary each month. We determine the dollar
amount of the first payment using the portion of your Adjusted Account Value
applied to a Variable Annuity and the Annuity Payment Rates in your Contract,
which are based on an assumed interest rate of 3% per year, compounded annually.
See "Annuity Payment Rates."
To calculate the remaining payments, we convert the amount of the first
payment into Annuity Units for each Sub-Account; we determine the number of
those Annuity Units by dividing the portion of the first payment attributable to
the Sub-Account by the Annuity Unit Value of that Sub-Account for the Valuation
Period ending just before the Annuity Commencement Date. This number of Annuity
Units for each Sub-Account will remain constant (unless the Annuitant requests
an exchange of Annuity Units). However, the dollar amount of the next Variable
Annuity payment -- which is the sum of the number of Annuity Units for each
Sub-Account times its Annuity Unit Value for the Valuation Period ending just
before the date of the payment -- will increase, decrease, or remain the same,
depending on the net investment return of the Sub-Accounts.
If the net investment return of the Sub-Accounts selected is the same as
the assumed interest rate of 3%, compounded annually, the payments will remain
level. If the net investment return exceeds the assumed interest rate, payments
will increase and, conversely, if it is less than the assumed interest rate,
payments will decrease.
Please refer to the Statement of Additional Information for more
information about calculating Variable Annuity Units and Variable Annuity
payments, including examples of these calculations.
FIXED ANNUITY PAYMENTS
Fixed Annuity payments are the same each month. We determine the dollar
amount of each Fixed Annuity payment using the fixed portion of your Adjusted
Account Value and the applicable Annuity Payment Rates. These will be either
(1) the rates in your Contract, which are based on a minimum guaranteed interest
rate of 2.5% per year, compounded annually, or (2) new rates we have published
and are using on the Annuity Commencement Date, if they are more favorable. See
"Annuity Payment Rates."
MINIMUM PAYMENTS
If your Adjusted Account Value is less than $2,000, or the first annuity
payment for any Annuity Option is less than $20, we will pay the Adjusted
Account Value to the Annuitant in one payment.
EXCHANGE OF VARIABLE ANNUITY UNITS
During the Income Phase, the Annuitant may exchange Annuity Units in one
Sub-Account for Annuity Units in another Sub-Account, up to 12 times each
Account Year. To make an exchange, the Annuitant sends us, at our Annuity
Mailing Address, a written request stating the number of Annuity Units in the
Sub-Account he or she wishes to exchange and the new Sub-Account for which
Annuity Units are requested. The number of new Annuity Units will be calculated
so the dollar amount of an annuity payment on the date of the exchange would not
be affected. To calculate this number, we use Annuity Unit values for the
Valuation Period during which we receive the exchange request.
Before exchanging Annuity Units in one Sub-Account for those in another,
the Annuitant should carefully review the Fund prospectuses for the investment
objectives and risk disclosure of the Funds in which the Sub-Accounts invest.
During the Income Phase, we permit only exchanges among Sub-Accounts. No
exchanges to or from a Fixed Annuity are permitted.
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ACCOUNT FEE
During the Income Phase, we deduct the annual Account Fee of $50 in equal
amounts from each Variable Annuity payment. We do not deduct the annual Account
Fee from Fixed Annuity payments.
ANNUITY PAYMENT RATES
The Contracts contain Annuity Payment Rates for each Annuity Option
described in this Prospectus. The rates show, for each $1,000 applied, the
dollar amount of (a) the first monthly Variable Annuity payment based on the
assumed interest rate specified in the applicable Contract (3% per year,
compounded annually), and (b) the monthly Fixed Annuity payment, when this
payment is based on the minimum guaranteed interest rate specified in the
Contract (at least 2.5% per year, compounded annually). We may change these
rates under Group Contracts for Accounts established after the effective date of
such change (see "Other Contract Provisions -- Modification").
The Annuity Payment Rates may vary according to the Annuity Option elected
and the adjusted age of the Annuitant. The Contracts also describe the method of
determining the adjusted age of the Annuitant. The mortality table used in
determining the Annuity Payment Rates for Annuity Options A, B and C is the
Annuity 2000 Table.
ANNUITY OPTIONS AS METHOD OF PAYMENT FOR DEATH BENEFIT
You or your Beneficiary may also select one or more Annuity Options to be
used in the event of the covered person's death before the Income Phase, as
described under the "Death Benefit" section of this Prospectus. In that case,
your Beneficiary will be the Annuitant. The Annuity Commencement Date will be
the first day of the second month beginning after the Death Benefit Date.
OTHER CONTRACT PROVISIONS
EXERCISE OF CONTRACT RIGHTS
An Individual Contract belongs to the individual to whom the Contract is
issued. A Group Contract belongs to the Owner. In the case of a Group Contract,
the Owner may expressly reserve all Contract rights and privileges; otherwise,
each Annuitant will be entitled to exercise such rights and privileges. In any
case, such rights and privileges can be exercised without the consent of the
Beneficiary (other than an irrevocably designated Beneficiary) or any other
person. Such rights and privileges may be exercised only during the lifetime of
the Annuitant before the Annuity Commencement Date, except as the Contract
otherwise provides.
The Annuitant becomes the Payee on and after the Annuity Commencement
Date. The Beneficiary becomes the Payee on the death of the Participant prior to
the Annuity Commencement Date, or on the death of the Annuitant after the
Annuity Commencement Date. Such Payee may thereafter exercise such rights and
privileges, if any, of ownership which continue.
CHANGE OF OWNERSHIP
Ownership of a Qualified Contract may not be transferred except to:
(1) the Annuitant; (2) a trustee or successor trustee of a pension or profit
sharing trust which is qualified under Section 401 of the Internal Revenue Code;
(3) the employer of the Annuitant, provided that the Qualified Contract after
transfer is maintained under the terms of a retirement plan qualified under
Section 403(a) of the Internal Revenue Code for the benefit of the Annuitant;
(4) the trustee or custodian of an individual retirement account plan qualified
under Section 408 of the Internal Revenue Code for the benefit of the
Participants under a Group Contract; or (5) as otherwise permitted from time to
time by laws and regulations governing the retirement or deferred compensation
plans for which a Qualified Contract may be issued. Subject to the foregoing, a
Qualified Contract may not be sold, assigned, transferred, discounted or pledged
as collateral for a loan or as security for the performance of an obligation or
for any other purpose to any person other than the Company.
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The Owner of a Non-Qualified Contract may change the ownership of the
Contract prior to the Annuity Commencement Date; and each Participant, in like
manner, may change the ownership interest in a Contract. A change of ownership
will not be binding on us until we receive written notification. When we receive
such notification, the change will be effective as of the date on which the
request for change was signed by the Owner or Participant, as appropriate, but
the change will be without prejudice to us on account of any payment we make or
any action we take before receiving the change. If you change the Owner of a
Non-Qualified Contract, you will become immediately liable for the payment of
taxes on any gain realized under the Contract prior to the change of ownership,
including possible liability for a 10% federal excise tax.
Change of ownership may affect the availability of optional death benefit
riders or the expenses incurred by the election of any optional death benefit
riders.
VOTING OF FUND SHARES
We will vote Fund shares held by the Sub-Accounts at meetings of
shareholders of the Funds or in connection with similar solicitations, but will
follow voting instructions received from persons having the right to give voting
instructions. During the Accumulation Phase, you will have the right to give
voting instructions, except in the case of a Group Contract where the Owner has
reserved this right. During the Income Phase, the Payee -- that is the Annuitant
or Beneficiary entitled to receive benefits -- is the person having such voting
rights. We will vote any shares attributable to us and Fund shares for which no
timely voting instructions are received in the same proportion as the shares for
which we receive instructions from Owners, Participants and Payees, as
applicable.
Owners of Qualified Contracts issued on a group basis may be subject to
other voting provisions of the particular plan and of the Investment Company Act
of 1940. Employees who contribute to plans that are funded by the Contracts may
be entitled to instruct the Owners as to how to instruct us to vote the Fund
shares attributable to their contributions. Such plans may also provide the
additional extent, if any, to which the Owners shall follow voting instructions
of persons with rights under the plans. If no voting instructions are received
from any such person with respect to a particular Participant Account, the Owner
may instruct the Company as to how to vote the number of Fund shares for which
instructions may be given.
Neither the Variable Account nor the Company is under any duty to provide
information concerning the voting instruction rights of persons who may have
such rights under plans, other than rights afforded by the Investment Company
Act of 1940, or any duty to inquire as to the instructions received or the
authority of Owners, Participants or others, as applicable, to instruct the
voting of Fund shares. Except as the Variable Account or the Company has actual
knowledge to the contrary, the instructions given by Owners under Group
Contracts and Payees will be valid as they affect the Variable Account, the
Company and any others having voting instruction rights with respect to the
Variable Account.
All Fund proxy material, together with an appropriate form to be used to
give voting instructions, will be provided to each person having the right to
give voting instructions at least 10 days prior to each meeting of the
shareholders of the Fund. We will determine the number of Fund shares as to
which each such person is entitled to give instructions as of the record date
set by the Fund for such meeting, which is expected to be not more than 90 days
prior to each such meeting. Prior to the Annuity Commencement Date, the number
of Fund shares as to which voting instructions may be given to the Company is
determined by dividing the value of all of the Variable Accumulation Units of
the particular Sub-Account credited to the Participant Account by the net asset
value of one Fund share as of the same date. On or after the Annuity
Commencement Date, the number of Fund shares as to which such instructions may
be given by a Payee is determined by dividing the reserve held by the Company in
the Sub-Account with respect to the particular Payee by the net asset value of a
Fund share as of the same date. After the Annuity Commencement Date, the number
of Fund shares as to which a Payee is entitled to give voting instructions will
generally decrease due to the decrease in the reserve.
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PERIODIC REPORTS
During the Accumulation Period we will send you, or such other person
having voting rights, at least once during each Account Year, a statement
showing the number, type and value of Accumulation Units credited to your
Account and the Fixed Accumulation Value of your Account, which statement shall
be accurate as of a date not more than 2 months previous to the date of mailing.
These periodic statements contain important information concerning your
transactions with respect to your Contract. It is your obligation to review each
such statement carefully and to report to us, at the address or telephone number
provided on the statement, any errors or discrepancies in the information
presented therein within 60 days of the date of such statement. Unless we
receive notice of any such error or discrepancy from you within such period, we
may not be responsible for correcting the error or discrepancy.
In addition, every person having voting rights will receive such reports
or prospectuses concerning the Variable Account and the Funds as may be required
by the Investment Company Act of 1940 and the Securities Act of 1933. We will
also send such statements reflecting transactions in your Account as may be
required by applicable laws, rules and regulations.
Upon request, we will provide you with information regarding fixed and
variable accumulation values.
SUBSTITUTION OF SECURITIES
Shares of any or all Funds may not always be available for investment
under the Contract. We may add or delete Funds or other investment companies as
variable investment options under the Contract. We may also substitute for the
shares held in any Sub-Account shares of another Fund or shares of another
registered open-end investment company or unit investment trust, provided that
the substitution has been approved, if required, by the SEC. In the event of any
substitution pursuant to this provision, we may make appropriate endorsement to
the Contract to reflect the substitution.
CHANGE IN OPERATION OF VARIABLE ACCOUNT
At our election and subject to any necessary vote by persons having the
right to give instructions with respect to the voting of Fund shares held by the
Sub-Accounts, the Variable Account may be operated as a management company under
the Investment Company Act of 1940 or it may be deregistered under the
Investment Company Act of 1940 in the event registration is no longer required.
Deregistration of the Variable Account requires an order by the SEC. In the
event of any change in the operation of the Variable Account pursuant to this
provision, we may make appropriate endorsement to the Contract to reflect the
change and take such other action as may be necessary and appropriate to effect
the change.
SPLITTING UNITS
We reserve the right to split or combine the value of Variable
Accumulation Units, Annuity Units or any of them. In effecting any such change
of unit values, strict equity will be preserved and no change will have a
material effect on the benefits or other provisions of the Contract.
MODIFICATION
Upon notice to the Participant, in the case of an Individual Contract, and
the Owner and Participant(s), in the case of a Group Contract (or the Payee(s)
during the Income Phase), we may modify the Contract if such modification:
(i) is necessary to make the Contract or the Variable Account comply with any
law or regulation issued by a governmental agency to which the Company or the
Variable Account is subject; (ii) is necessary to assure continued qualification
of the Contract under the Internal Revenue Code or other federal or state laws
relating to retirement annuities or annuity contracts; (iii) is necessary to
reflect a change in the operation of the Variable Account or the Sub-Account(s)
(see "Change in Operation of Variable Account"); (iv) provides additional
Variable Account
30
<PAGE>
and/or fixed accumulation options; or (v) as may otherwise be in the best
interests of Owners, Participants, or Payees, as applicable. In the event of any
such modification, we may make appropriate endorsement in the Contract to
reflect such modification.
In addition, upon notice to the Owner, we may modify a Group Contract to
change the withdrawal charges, Account Fee, mortality and expense risk charges,
administrative expense charges, the tables used in determining the amount of the
first monthly variable annuity and fixed annuity payments and the formula used
to calculate the Market Value Adjustment, provided that such modification
applies only to Participant Accounts established after the effective date of
such modification. In order to exercise our modification rights in these
particular instances, we must notify the Owner of such modification in writing.
The notice shall specify the effective date of such modification which must be
at least 60 days following the date we mail notice of modification. All of the
charges and the annuity tables which are provided in the Group Contract prior to
any such modification will remain in effect permanently, unless improved by the
Company, with respect to Participant Accounts established prior to the effective
date of such modification.
DISCONTINUANCE OF NEW PARTICIPANTS
We may limit or discontinue the acceptance of new Applications and the
issuance of new Certificates under a Group Contract by giving 30 days prior
written notice to the Owner. This will not affect rights or benefits with
respect to any Participant Accounts established under such Group Contract prior
to the effective date of such limitation or discontinuance.
RESERVATION OF RIGHTS
We reserve the right, to the extent permitted by law, to: (1) combine any
2 or more variable accounts; (2) add or delete Funds, sub-series thereof or
other investment companies and corresponding Sub-Accounts; (3) add or remove
Guarantee Periods available at any time for election by a Participant; and (4)
restrict or eliminate any of the voting rights of Participants (or Owners) or
other persons who have voting rights as to the Variable Account. Where required
by law, we will obtain approval of changes from Participants or any appropriate
regulatory authority. In the event of any change pursuant to this provision, we
may make appropriate endorsement to the Contract to reflect the change.
RIGHT TO RETURN
If you are not satisfied with your Contract, you may return it by mailing
or delivering it to us at our Annuity Mailing Address, as shown on the cover of
this Prospectus, within 10 days after it was delivered to you. When we receive
the returned Contract, it will be cancelled and we will refund to you your
Account Value. If applicable state law requires, we will return the full amount
of any Purchase Payment(s) we received. State law may also require us to give
you a longer "free look" period or allow you to return the Contract to your
sales representative.
If you are establishing an Individual Retirement Account ("IRA"), the
Internal Revenue Code requires that we give you a disclosure statement
containing certain information about the Contract and applicable legal
requirements. We must give you this statement on or before the date the IRA is
established. If we give you the disclosure statement before the seventh day
preceding the date the IRA is established, you will not have any right of
revocation under the Code. If we give you the disclosure statement at a later
date, then you may give us a notice of revocation at any time within 7 days
after your Contract Date. Upon such revocation, we will refund your Purchase
Payment(s). This right of revocation with respect to an IRA is in addition to
the return privilege set forth in the preceding paragraph. We allow a
Participant establishing an IRA a "ten day free-look," notwithstanding the
provisions of the Internal Revenue Code.
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<PAGE>
TAX CONSIDERATIONS
This section describes general federal income tax consequences based upon
our understanding of current federal tax laws. Actual federal tax consequences
may vary depending on, among other things, the type of retirement plan with
which you use and where the site where your Contract was issued. Also,
legislation affecting the current tax treatment of annuity contracts could be
enacted in the future and could apply retroactively to Contracts that you
purchased before the date of enactment. We do not make any guarantee regarding
the federal, state, or local tax status of any Contract or any transaction
involving any Contract. You should consult a qualified tax professional for
advice before purchasing a Contract or executing any other transaction (such as
a rollover, distribution, withdrawal or payment) involving a Contract.
U.S. FEDERAL TAX CONSIDERATIONS
The following discussion applies only to those Contracts issued in the
United States. For a discussion of tax considerations effecting Contracts issued
in Puerto Rico, see "Puerto Rico Tax Considerations," below.
DEDUCTIBILITY OF PURCHASE PAYMENTS
For federal income tax purposes, Purchase Payments made under
Non-Qualified Contracts are not deductible.
PRE-DISTRIBUTION TAXATION OF CONTRACTS
Generally, an increase in the value of a Contract will not give rise to
tax, prior to distribution.
However, corporate (or other non-natural person) Owners of, and
Participants under, a Non-Qualified Contract incur current tax, regardless of
distribution, on Contract value increases. Such current taxation does not apply,
though, to (i) immediate annuities, which the Internal Revenue Code (the "Code")
defines as a single premium contract with an annuity commencement date within
one year of the date of purchase, or (ii) any Contract that the non-natural
person holds as agent for a natural person (such as where a bank or other entity
holds a Contract as trustee under a trust agreement).
You should note that qualified retirement investments generally provide
tax deferral regardless of whether the underlying contract is an annuity.
DISTRIBUTIONS AND WITHDRAWALS FROM NON-QUALIFIED CONTRACTS
The Account Value will include an amount attributable to Purchase
Payments, the return of which is not taxable, and an amount attributable to
investment earnings, the return of which is taxable at ordinary income rates.
The relative portions of a distribution that derive from nontaxable Purchase
Payments and taxable investment earnings depend upon the timing of the
distribution.
If you withdraw less than your entire Account Value under a Non-Qualified
Contract before the Annuity Commencement Date, you must treat the withdrawal
first as a return of investment earnings. You may treat only withdrawals in
excess of the amount of the Account Value attributable to investment earnings as
a return of Purchase Payments. Account Value amounts assigned or pledged as
collateral for a loan will be treated as if withdrawn from the Contract.
If a Payee receives annuity payments under a Non-Qualified Contract after
the Annuity Commencement Date, however, the Payee treats a portion of each
payment as a nontaxable return of Purchase Payments. In general, the nontaxable
portion of such a payment bears the same ratio to the total payment as the
Purchase Payments bear to the Payee's expected return under the Contract. The
remainder of the payment constitutes a taxable return of investment earnings.
Once the Payee has received nontaxable payments in an amount equal to total
Purchase Payments, all future distributions constitute fully taxable ordinary
income. If the Annuitant dies before the Payee recovers the full amount of
Purchase Payments, the Payee may deduct an amount equal to unrecovered Purchase
Payments.
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<PAGE>
Upon the transfer of a Non-Qualified Contract by gift (other than to the
Participant's spouse), the Participant must treat an amount equal to the Account
Value minus the total amount paid for the Contract as income.
A penalty tax of 10% may apply to taxable cash withdrawals and lump-sum
payments from Non-Qualified Contracts. This penalty will not apply in certain
circumstances, such as distributions pursuant to the death of the Participant or
distributions under an immediate annuity (as defined above), or after age
59 1/2.
DISTRIBUTIONS AND WITHDRAWALS FROM QUALIFIED CONTRACTS
Generally, distributions from a Qualified Contract will constitute fully
taxable ordinary income. Also, a 10% penalty tax will, except in certain
circumstances, apply to distributions prior to age 59 1/2.
Distributions from a Qualified Contract are not subject to current
taxation or a 10% penalty, however, if:
- the distribution is a hardship distribution or part of a series of
payments for life or for a specified period of 10 years or more (an
"eligible rollover distribution"), and
- the Participant or Payee rolls over the distribution (with or without
actually receiving the distribution) into a qualified retirement plan
eligible to receive the rollover.
Only you or your spouse may elect to roll over a distribution to an
eligible retirement plan.
WITHHOLDING
In the case of an eligible rollover distribution (as defined above) from a
Qualified Contract (other than from a Contract issued for use with an individual
retirement account), we (or the plan administrator) must withhold and remit to
the U.S. Government 20% of the distribution, unless the Participant or Payee
elects to make a direct rollover of the distribution to another qualified
retirement plan that is eligible to receive the rollover; however, only you or
your spouse may elect a direct rollover. In the case of a distribution from
(i) a Non-Qualified Contract, (ii) a Qualified Contract issued for use with an
individual retirement account, or (iii) a Qualified Contract where the
distribution is not an eligible rollover distribution, we will withhold and
remit to the U.S. Government a part of the taxable portion of each distribution
unless, prior to the distribution, the Participant or Payee provides us his or
her taxpayer identification number and instructs us (in the manner prescribed)
not to withhold. The Participant or Payee may credit against his or her federal
income tax liability for the year of distribution any amounts that we (or the
plan administrator) withhold.
INVESTMENT DIVERSIFICATION AND CONTROL
The Treasury Department has issued regulations that prescribe investment
diversification requirements for mutual fund series underlying nonqualified
variable contracts. Contracts must comply with these regulations to qualify as
annuities for federal income tax purposes. Contracts that do not meet the
guidelines are subject to current taxation on annual increases in value. We
believe that each Fund available as an investment option under the Contract
complies with these regulations. The preamble to the regulations states that the
Internal Revenue Service may promulgate guidelines under which an owner's
excessive control over investments underlying the contract will preclude the
contract from qualifying as an annuity for federal tax purposes. We cannot
predict whether such guidelines, if in fact promulgated, will be retroactive. We
reserve the right to modify the Contract and/or the Variable Account to the
extent necessary to comply with any such guidelines, but cannot assure that such
modifications would satisfy any retroactive guidelines.
TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT
As a life insurance company under the Code, we will record and report
operations of the Variable Account separately from other operations. The
Variable Account will not, however, constitute a regulated investment company or
any other type of taxable entity distinct from our other operations. We will not
incur tax on the income of the Variable Account (consisting primarily of
interest, dividends, and net capital gains) if we use this income to increase
reserves under Contracts participating in the Variable Account.
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<PAGE>
QUALIFIED RETIREMENT PLANS
You may use Qualified Contracts with several types of qualified retirement
plans. Because tax consequences will vary with the type of qualified retirement
plan and the plan's specific terms and conditions, we provide below only brief,
general descriptions of the consequences that follow from using Qualified
Contracts in connection with various types of qualified retirement plans. We
stress that the rights of any person to any benefits under these plans may be
subject to the terms and conditions of the plans themselves, regardless of the
terms of the Qualified Contracts that you are using. These terms and conditions
may include restrictions on, among other things, ownership, transferability,
assignability, contributions and distributions.
PENSION AND PROFIT-SHARING PLANS
Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of retirement plans for
employees. The Tax Equity and Fiscal Responsibility Act of 1982 eliminated most
differences between qualified retirement plans of corporations and those of
self-employed individuals. Self-employed persons, as a general rule, may
therefore use Qualified Contracts as a funding vehicle for their retirement
plans.
TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees
of certain types of charitable, educational and scientific organizations
specified in Section 501(c)(3) of the Code to purchase annuity contracts and,
subject to certain limitations, exclude the amount of purchase payments from
gross income for tax purposes. The Code imposes restrictions on cash withdrawals
from Section 403(b) annuities.
If the Contracts are to receive tax-deferred treatment, cash withdrawals
of amounts attributable to salary reduction contributions (other than
withdrawals of accumulation account value as of December 31, 1988) may be made
only when the Participant attains age 59 1/2, separates from service with the
employer, dies or becomes disabled (within the meaning of Section 72(m)(7) of
the Code). These restrictions apply to (i) any post-1988 salary reduction
contributions, (ii) any growth or interest on post-1988 salary reduction
contributions, and (iii) any growth or interest on pre-1989 salary reduction
contributions that occurs on or after January 1, 1989. It is permissible,
however, to withdraw post-1988 salary reduction contributions in cases of
financial hardship. While the Internal Revenue Service has not issued specific
rules defining financial hardship, we expect that to qualify for a hardship
distribution, the Participant must have an immediate and heavy bona fide
financial need and lack other resources reasonably available to satisfy the
need. Hardship withdrawals (as well as certain other premature withdrawals) will
be subject to a 10% tax penalty, in addition to any withdrawal charge applicable
under the Contracts. Under certain circumstances the 10% tax penalty will not
apply if the withdrawal is for medical expenses.
Under the terms of a particular Section 403(b) plan, the Participant may
be entitled to transfer all or a portion of the Account Value to one or more
alternative funding options. Participants should consult the documents governing
their plan and the person who administers the plan for information as to such
investment alternatives.
INDIVIDUAL RETIREMENT ACCOUNTS
Sections 219 and 408 of the Code permit eligible individuals to contribute
to an individual retirement program, including Simplified Employee Pension
Plans, Employer/Association of Employees Established Individual Retirement
Account Trusts, and Simple Retirement Accounts. Such IRAs are subject to
limitations on contribution levels, the persons who may be eligible, and on the
time when distributions may commence. In addition, certain distributions from
some other types of retirement plans may be placed in an IRA on a tax-deferred
basis. If we sell Contracts for use with IRAs, the Internal Revenue Service or
other agency may impose supplementary information requirements. We will provide
purchasers of the Contracts for such purposes with any necessary information.
You will have the right to revoke the Contract under certain circumstances, as
described in the section of this Prospectus entitled "Right to Return."
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<PAGE>
ROTH IRAS
Section 408A of the Code permits an individual to contribute to an
individual retirement program called a Roth IRA. Unlike contributions to a
traditional IRA under Section 408 of the Code, contributions to a Roth IRA are
not tax-deductible. Provided certain conditions are satisfied, distributions are
generally tax-free. Like traditional IRAs, Roth IRAs are subject to limitations
on contribution amounts and the timing of distributions. If an individual
converts a traditional IRA into a Roth IRA the full amount of the IRA is
included in taxable income. The Internal Revenue Service and other agencies may
impose special information requirements with respect to Roth IRAs. We will
provide the necessary information for Contracts issued in connection with Roth
IRAs.
PUERTO RICO TAX CONSIDERATIONS
Puerto Rico tax laws with respect to qualified retirement plans described
in this Prospectus vary significantly from those discussed above under "U.S.
Federal Tax Considerations." Although we currently offer the Contract in Puerto
Rico in connection with qualified retirement plans, the text of this Prospectus
under the heading "U.S. Federal Tax Considerations" dealing with such qualified
retirement plans is inapplicable to Puerto Rico and should be disregarded.
The following discussion applies if your Contract is issued in Puerto
Rico:
Under Section 1022 of the Puerto Rico Internal Revenue Code of 1994, as
amended (the "1994 Code"), the Contract offered by this Prospectus is considered
an annuity contract. The 1994 Code provides that no income tax is payable on
increases in value of accumulation shares of annuity units credited to a
variable annuity contract until payments are made to the annuitant or other
payee under such contract.
If any annuity distributions are made under an annuity contract, the
annuitant or other payee will be required to include as gross income the portion
of each payment equal to 3% of the aggregate premiums or other consideration
paid for the annuity. The amount, if any, in excess of the included amount is
excluded from gross income. After an amount equal to the aggregate amount
excluded from gross income has been received up to your investment, all of the
annuity payments are considered to be taxable income.
In the event payment under a Contract is made in a lump sum, the amount of
the payment would be included in the gross income of the Annuitant or other
Payee to the extent of the Annuitant's aggregate premiums or other consideration
paid.
For further information regarding the income tax consequences of owning a
Contract, you should consult a qualified tax adviser.
ADMINISTRATION OF THE CONTRACT
We perform certain administrative functions relating to the Contract,
Participant Accounts, and the Variable Account. These functions include, but are
not limited to, maintaining the books and records of the Variable Account and
the Sub-Accounts; maintaining records of the name, address, taxpayer
identification number, Contract number, Participant Account number and type, the
status of each Participant Account and other pertinent information necessary to
the administration and operation of the Contract; processing Applications,
Purchase Payments, transfers and full and partial withdrawals; issuing Contracts
and Certificates; administering annuity payments; furnishing accounting and
valuation services; reconciling and depositing cash receipts; providing
confirmations; providing toll-free customer service lines; and furnishing
telephonic transfer services.
DISTRIBUTION OF THE CONTRACT
We offer the Contract on a continuous basis. Contracts are sold by
licensed insurance agents in those states where the Contract may be lawfully
sold. Such agents will be registered representatives of broker-dealers
registered under the Securities Exchange Act of 1934 who are members of the
National Association of Securities Dealers, Inc. and who have entered into
distribution agreements with the Company and the general distributor, Clarendon
Insurance Agency, Inc. ("Clarendon"), One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02481. Clarendon, a wholly-owned subsidiary of the
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<PAGE>
Company, is registered with the SEC under the Securities Exchange Act of 1934 as
a broker-dealer and is a member of the National Association of Securities
Dealers, Inc.
Commissions and other distribution compensation will be paid by the
Company to the selling agents and will not be more than 2.50% of Purchase
Payments. In addition, after the first Account Year, broker-dealers who have
entered into distribution agreements with the Company may receive an annual
renewal commission of no more than 1.00% of the Participant's Account Value. In
addition to commissions, the Company may, from time to time, pay or allow
additional promotional incentives, in the form of cash or other compensation. We
reserve the right to offer these additional incentives only to certain
broker-dealers that sell or are expected to sell during specified time periods
certain minimum amounts of Contracts or Certificates or other contracts offered
by the Company. Promotional incentives may change at any time. Commissions may
be waived or reduced in connection with certain transactions described in this
Prospectus under the heading "Waivers; Reduced Charges; Special Guaranteed
Interest Rates."
PERFORMANCE INFORMATION
From time to time the Variable Account may publish reports to
shareholders, sales literature and advertisements containing performance
information relating to the Sub-Accounts. This information may include
standardized and non-standardized "Average Annual Total Return," "Cumulative
Growth Rate" and "Compound Growth Rate." We may also advertise "yield" and
"effective yield" for some Sub-Accounts.
Average Annual Total Return measures the net income of the Sub-Account and
any realized or unrealized gains or losses of the Fund in which it invests, over
the period stated. Average Annual Total Return figures are annualized and
represent the average annual percentage change in the value of an investment in
a Sub-Account over that period. Standardized Average Annual Total Return
information covers the period after the Variable Account was established or, if
shorter, the life of the Fund. Non-standardized Average Annual Total Return
covers the life of each Fund, which may predate the Variable Account. Cumulative
Growth Rate represents the cumulative change in the value of an investment in
the Sub-Account for the period stated, and is arrived at by calculating the
change in the Accumulation Unit Value of a Sub-Account between the first and the
last day of the period being measured. The difference is expressed as a
percentage of the Accumulation Unit Value at the beginning of the base period.
"Compound Growth Rate" is an annualized measure, calculated by applying a
formula that determines the level of return which, if earned over the entire
period, would produce the cumulative return.
Average Annual Total Return figures assume an initial Purchase Payment of
$1,000 and reflect all applicable withdrawal and Contract charges. The
Cumulative Growth Rate and Compound Growth Rate figures that we advertise do not
reflect withdrawal charges or the annual Account Fee, although such figures do
reflect all recurring charges. Results calculated without withdrawal and/or
certain Contract charges will be higher. We may also use other types of rates of
return that do not reflect withdrawal and Contract charges.
The performance figures used by the Variable Account are based on the
actual historical performance of the underlying Funds for the specified periods,
and the figures are not intended to indicate future performance. For periods
before the date the Contracts became available, we calculate the performance
information for the Sub-Accounts on a hypothetical basis. To do this, we reflect
deductions of the current Contract fees and charges from the historical
performance of the corresponding Funds.
Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (7-day period for the Money Market
Sub-Account available for investment under the Contract), expressed as a
percentage of the value of the Sub-Account's Accumulation Units. Yield is an
annualized figure, which means that we assume that the Sub-Account generates the
same level of net income over a one-year period and compound that income on a
semi-annual basis. We calculate the effective yield for the available Money
Market Sub-Account similarly, but include the increase due to assumed
compounding. The Money Market Sub-Account's effective yield will be slightly
higher than its yield as a result of its compounding effect.
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<PAGE>
The Variable Account may also from time to time compare its investment
performance to various unmanaged indices or other variable annuities and may
refer to certain rating and other organizations in its marketing materials. More
information on performance and our computations is set forth in the Statement of
Additional Information.
The Company may also advertise the ratings and other information assigned
to it by independent industry ratings organizations. Some of these organizations
are A.M. Best, Moody's Investor's Service, Standard and Poor's Insurance Rating
Services, and Duff and Phelps. Each year A.M. Best reviews the financial status
of thousands of insurers, culminating in the assignment of Best's rating. These
ratings reflect A.M. Best's current opinion of the relevant financial strength
and operating performance of an insurance company in comparison to the norms of
the life/health industry. Best's ratings range from A++ to F. Standard and
Poor's and Duff and Phelps' ratings measure the ability of an insurance company
to meet its obligations under insurance policies it issues. These two ratings do
not measure the insurance company's ability to meet non-policy obligations.
Ratings in general do not relate to the performance of the Sub-Accounts.
We may also advertise endorsements from organizations, individuals or
other parties that recommend the Company or the Contracts. We may occasionally
include in advertisements (1) comparisons of currently taxable and tax deferred
investment programs, based on selected tax brackets; or (2) discussions of
alternative investment vehicles and general economic conditions.
AVAILABLE INFORMATION
The Company and the Variable Account have filed with the SEC registration
statements under the Securities Act of 1933 relating to the Contracts. This
Prospectus does not contain all of the information contained in the registration
statements and their exhibits. For further information regarding the Variable
Account, the Company and the Contracts, please refer to the registration
statements and their exhibits.
In addition, the Company is subject to the informational requirements of
the Securities Exchange Act of 1934. We file reports and other information with
the SEC to meet these requirements. You can inspect and copy this information
and our registration statements at the SEC's public reference facilities at the
following locations: WASHINGTON, D.C. -- 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549; CHICAGO, ILLINOIS -- 500 West Madison Street, Chicago,
IL 60661; NEW YORK, NEW YORK -- 7 World Trade Center, 13th Floor, New York, NY
10048. The Washington, D.C. office will also provide copies by mail for a fee.
You may also find these materials on the SEC's website (http:// www.sec.gov).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1999 and the Report on Form 10-Q for the Quarterly Period Ended March 31, 2000,
filed with the SEC, are incorporated by reference in this Prospectus. Any
statement contained in a document we incorporate by reference is deemed modified
or superceded to the extent that a later filed document, including this
Prospectus, shall modify or supercede that statement. Any statement so modified
or superceded shall not be deemed, except as so modified or superceded, to
constitute part of this Prospectus.
The Company will furnish, without charge, to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of the document referred to above which has been incorporated by reference
in this Prospectus, other than exhibits to such document (unless such exhibits
are specifically incorporated by reference in this Prospectus). Requests for
such document should be directed to the Secretary, Sun Life Assurance Company of
Canada (U.S.), One Sun Life Executive Park, Wellesley Hills, Massachusetts
02481, telephone (800) 225-3950.
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<PAGE>
ADDITIONAL INFORMATION ABOUT THE COMPANY
GENERAL
The Company is engaged in the sale of individual variable life insurance,
group life and disability insurance, and individual and group fixed and variable
annuities. These contracts are sold in both the tax-qualified and
non-tax-qualified markets. These products are distributed through individual
insurance agents, insurance brokers and broker-dealers.
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 has changed its basis of accounting to generally accepted accounting
principles ("GAAP") effective January 1, 2000 and has filed its Quarterly Report
on Form 10-Q for the period ended March 31, 2000 in accordance with GAAP.
The Company has restated its financial statements originally filed in its
Annual Report on Form 10-K in accordance with GAAP. These financial statements
are included in this Prospectus and are referred to in Management's Discussion
and Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1999. See Note 13 to the Consolidated Financial Statements of the
Company for a reconcilation of statutory surplus to GAAP equity and statutory
net income to GAAP net income.
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the audited Consolidated Financial Statements and the Notes
thereto included in this Prospectus beginning on page 60 and the Unaudited
Consolidated Financial Statements and the Notes thereto included in this
Prospectus beginning on page 96.
<TABLE>
<CAPTION>
FOR THE FOR THE YEAR ENDED DECEMBER 31,
QUARTER ENDED ---------------------------------------
MARCH 31, 2000 1999 1998 1997
-------------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues
Premiums and other revenue............. $ 81,286 $ 262,603 $ 382,477 $ 406,883
Net investment income and realized
gains................................ 80,013 367,296 464,226 552,380
----------- ----------- ----------- -----------
161,299 629,899 846,703 959,263
----------- ----------- ----------- -----------
Benefits and expenses
Policyholder benefits.................. 80,259 334,890 588,108 672,350
Other expenses......................... 38,471 212,197 233,663 190,105
----------- ----------- ----------- -----------
118,730 547,087 821,771 862,455
----------- ----------- ----------- -----------
Operating gain........................... 42,569 82,812 24,932 96,808
Federal income tax expense............... 14,899 29,080 10,768 35,338
----------- ----------- ----------- -----------
Net income............................... $ 27,670 $ 53,732 $ 14,164 $ 61,470
=========== =========== =========== ===========
Assets................................... $22,485,834 $21,484,913 $18,248,262 $17,335,515
=========== =========== =========== ===========
Surplus notes............................ $ 565,000 $ 565,000 $ 565,000 $ 565,000
=========== =========== =========== ===========
</TABLE>
The Company has not restated the financial statements for 1996 and 1995;
therefore, the selected financial data on a statutory basis of accounting for
the Company as presented in its Annual
38
<PAGE>
Report on Form 10-K for the year ended December 31, 1999 and for the quarter
ended March 31, 2000 are shown below.
<TABLE>
<CAPTION>
FOR THE FOR THE YEAR ENDED DECEMBER 31,
QUARTER ENDED -------------------------------------------------------------------
MARCH 31, 2000 1999 1998 1997 1996 1995
-------------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Premiums, annuity
deposits and other
revenue............. $ 732,607 $ 2,869,250 $ 2,581,463 $ 2,623,629 $ 2,215,322 $ 1,883,901
Net investment income
and realized
gains............... 32,681 190,844 187,208 298,121 310,172 315,966
----------- ----------- ----------- ----------- ----------- -----------
765,288 3,060,094 2,768,671 2,921,750 2,525,494 2,199,867
----------- ----------- ----------- ----------- ----------- -----------
Benefits and expenses
Policyholder
benefits............ 673,927 2,706,121 2,416,950 2,579,104 2,232,528 1,995,208
Other expenses........ 60,681 239,136 214,607 206,065 175,342 150,937
----------- ----------- ----------- ----------- ----------- -----------
734,608 2,945,257 2,631,557 2,785,169 2,407,870 2,146,145
----------- ----------- ----------- ----------- ----------- -----------
Operating gain.......... 30,680 114,837 137,114 136,581 117,624 53,722
Federal income tax
expense (benefit)..... 9,275 24,479 11,713 7,339 (5,400) 17,807
----------- ----------- ----------- ----------- ----------- -----------
Net income.............. $ 21,405 $ 90,358 $ 125,401 $ 129,242 $ 123,024 $ 35,915
=========== =========== =========== =========== =========== ===========
Assets.................. $20,898,166 $19,948,155 $16,902,621 $15,925,357 $13,621,952 $12,359,683
=========== =========== =========== =========== =========== ===========
Surplus notes........... $ 565,000 $ 565,000 $ 565,000 $ 565,000 $ 315,000 $ 650,000
=========== =========== =========== =========== =========== ===========
</TABLE>
See discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CAUTIONARY STATEMENT
This following discussions include 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, 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.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- YEAR ENDED DECEMBER 31, 1999
RESULTS OF OPERATIONS
The following table provides a summary of income from operations by
segment, which is discussed more fully below.
NET INCOME FROM CONTINUING OPERATIONS BY SEGMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Wealth Management........................................... $59.7 $ 60.0 $60.7
Individual Protection....................................... (0.1) (46.5) (3.2)
Group Protection............................................ 0.4 1.3 (0.8)
Corporate................................................... (6.2) (0.7) 4.8
----- ------ -----
$53.7 $ 14.1 $61.5
===== ====== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO 1998:
NET INCOME
Net income increased by $28.2 million to $42.4 million in 1999, reflecting
an increase of $39.6 million in income from continuing operations, an increase
of $0.9 million in income from discontinued operations, and $12.3 million
after-tax loss from the sales of Massachusetts Casualty Insurance Company
("MCIC") and New London Trust F.S.B. ("NLT") which occurred in 1999.
NET INCOME FROM CONTINUING OPERATIONS BY SEGMENT
The Company's income from operations reflects the operations of its 4
business segments: the Wealth Management segment, the Individual Protection
segment, the Group Protection segment and the Corporate segment.
WEALTH MANAGEMENT SEGMENT
The Wealth Management segment focuses on the savings and retirement needs
of individuals preparing for retirement or 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 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 of the Company.
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.
40
<PAGE>
through independent managers. In 1997, the Company decided to no longer market
group pension and GIC products.
Net income decreased by $0.3 million to $59.7 million in 1999 as compared
to 1998. The increase in fee and other income, due to increased business, was
partially offset by higher operating expenses, resulting from both increased
business and continued investment in the Futurity distribution network. In
addition, the loss of earnings from the GICs, which block of business is
declining, contributed to the minor decline in earnings. Following are the major
factors affecting the Wealth Management segment's results in 1999 as compared to
1998:
- Fee and other income increased primarily as a result of higher variable
annuity account balances. Fee income was higher by approximately $37
million in 1999 compared to 1998. 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 $3.8 billion,
or 31%, since January 1, 1999.
- Net deposits of annuity products increased by $53 million to $290
million compared with 1998. The increase in net deposits results
primarily from significant increases in new deposits offset by
increased variable annuity surrenders in 1999. Management believes the
increase in new deposits is mainly a 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 decreased
in 1999. The Company believes this decline was a consequence of the
heightened interest in the DCA programs in 1999.
Total new deposits to fixed and variable annuities increased by $479
million to $2,746 million in 1999. Sales of the Futurity line of
products represented $341 million or 12% of total annuity deposits in
1999, an increase of $219 million from 1998. The Company expects that
sales of 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 continue
to respond favorably to introductions of new Futurity products and
product enhancements.
The surrenders are primarily related 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.
The Company is implementing a conservation program with the aim of
improving asset retention.
- There has been a shift in demand to variable account products from
general account products. Most sales are either DCA or variable
deposits. 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 approximately $26
million in 1999 compared to 1998. This decline in average general
account assets primarily reflects the Company's decision in 1997 to no
longer market group pension and GIC products and as a consequence, a
declining block of in-force business as GICs mature and are
surrendered.
- Policyholder benefits (the major elements of which are interest
credited to contractholder deposits and annuity benefits) decreased by
approximately $12.6 million in 1999 as compared to 1998. This is less
than the decrease in investment income as the surrenders of maturing
41
<PAGE>
GIC contracts on which the Company earns a positive 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.
- Other operating expenses increased by $9.0 million reflecting the
increased volumes of both new business and inforce business and
continued investment in the growth of the Futurity products wholesale
distribution network.
- Amortization of deferred policy acquisition costs increased by $6.8
million primarily reflecting the impact of the increased variable
annuity gross profits due to significant asset appreciation during
1999, and the resulting increase in fee income.
INDIVIDUAL PROTECTION SEGMENT
The Company currently markets individual variable life insurance products.
These products include a variable universal life product marketed to the
company-owned life insurance ("COLI") market, which product was introduced in
late 1997. In September 1999, the Company introduced a new variable life product
as part of the Futurity product portfolio.
Prior to 1999, the Individual Protection segment consisted of two main
elements, internal reinsurance and other life products.
INTERNAL REINSURANCE
In recent years, the Company has had various reinsurance agreements with
Sun Life (Canada). In some of these arrangements, Sun Life (Canada) has
reinsured the mortality risks of individual life policies sold in prior years by
the Company. These agreements, in the aggregate, had an immaterial effect on net
income in the years 1998 and 1999. Under another reinsurance agreement, which
became effective January 1, 1991 and terminated October 1, 1998, the Company
reinsured certain individual life insurance contracts issued by Sun Life
(Canada). Prior to its termination, this agreement had the effect of increasing
income from operations by approximately $16.5 million in 1998. In addition, the
effect of terminating this agreement was to decrease 1998 net income by
approximately $64.0 million as the termination payment made was greater than the
net reserves (reserves assumed less deferred policy acquisition costs) held
under the agreement. Because this agreement terminated in 1998, it had no effect
on income from operations in 1999.
Other Life Products
Net income associated with the other life products directly issued by the
Company from the Individual Protection segment decreased by approximately $0.5
million from 1998.
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 decreased by
$0.9 million from 1998 primarily due to unfavorable claims experience in the
group life product.
CORPORATE SEGMENT
The Corporate segment includes the unallocated capital of the Company, its
debt financing and items not otherwise attributable to the other segments.
Net income for the Corporate segment decreased by $5.5 million to ($6.2)
million. This decrease reflected lower net investment income, mainly from lower
assets due to dividend payments in 1999 of $80 million and in 1998 of $50
million, and increased operational expenses. Income taxes in 1999
42
<PAGE>
reflected an income tax benefit associated with tax operating losses with
subsidiaries not allocated to the operating segments.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997:
NET INCOME
Net income decreased by $116.3 million to $14.2 million in 1998,
reflecting a decrease of $47.4 million in income from continuing operations and
a decrease of $68.9 million in income from discontinued operations. On December
24, 1997 the Company transferred through a dividend its investment in MFS. Net
income of MFS in 1997 included in income from discontinued operations was $61.9
million. Net income from NLT and MCIC, which were both sold during 1999,
included in income from discontinued operations was $.1 million in 1998 and $7.1
million in 1997.
NET INCOME FROM CONTINUING OPERATIONS BY SEGMENT
WEALTH MANAGEMENT SEGMENT
Net income decreased by $0.7 million to $60.0 million in 1998 as compared
to 1997. Increased fee and other income was mainly offset by higher operating
expenses. Both fee income and operating expenses increased as a result of the
increased business. In addition the start-up of the Company's own wholesaling
distribution network for the Futurity product line increased operating expenses
during 1998. Also impacting net income was the loss of earnings from GICs, which
block of business declined. Following are the major factors affecting the Wealth
Management segment's results in 1998 as compared to 1997:
- Fee and other income increased primarily as a result of higher variable
annuity account balances. Fee income was higher by approximately $29
million in 1998 compared to 1997. 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 increased by approximately $2.8 billion or 30%
since January 1, 1998.
- Net deposits of annuity products decreased by $131 million to $237
million compared with 1997. The decrease in net deposits resulted from
both a decrease in new deposits and increased variable annuity
surrenders in 1998. Management believes the decrease in new deposits is
mainly a result increased competition in the marketplace. In particular
the competition in the DCA programs has intensified. During the fourth
quarter of 1998, the Company introduced a higher DCA rate and a new
six-month DCA program. While fixed annuity account deposits decreased,
deposits directly into variable accounts increased in 1998. The Company
believes the increase in variable deposits was a consequence of both
the continuing strong growth in equity markets generally and the
continuing strong performance of the investment funds underlying the
Company's variable annuity products.
Total new deposits to fixed and variable annuities decreased by $53
million to $2,267 million in 1998. Sales of the new Futurity line of products
represented $122 million or 5% of total annuity deposits in 1998. The Company
expects that sales of 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 continue to respond favorably to
introductions of new Futurity products and product enhancements.
The surrenders are primarily related to older products which are no longer
actively marketed and particularly those for which the surrender charge period
has expired. 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.
43
<PAGE>
- There has been a shift in demand to variable account products from
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. Net investment income and
realized gains for the Wealth Management segment decreased by
approximately $72 million in 1998 as compared to 1997. This decline in
average general account assets primarily reflects the Company's
decision in 1997 to no longer market group pension and GIC products and
as a consequence, a declining block of in-force business as GICs mature
and are surrendered.
- Policyholder benefits (the major elements of which are interest
credited to contractholder deposits and annuity benefits) decreased by
approximately $62 million in 1998 as compared to 1997. This is less
than the decrease in investment income as the surrenders of maturing
GIC contracts on which the Company earns a positive spread were
partially replaced by sales of annuities under the Company's DCA
programs.
- Other operating expenses increased by $16.0 million reflecting the
increased volumes of both new business and inforce business and
expenses associated with the startup of the Futurity product line and a
new distribution network dedicated to marketing the Futurity products.
Enhancements were made to the technology infrastructure to support the
growth in business.
- Amortization of deferred policy acquisition costs increased by $4.0
million primarily reflecting the impact of increased variable annuity
gross profits due to significant asset appreciation during 1998, and
the resulting increase in fee income.
INDIVIDUAL PROTECTION SEGMENT
Prior to 1999, the Individual Protection segment consisted of two main
elements, internal reinsurance and other life products.
INTERNAL REINSURANCE
In recent years, the Company has had various reinsurance agreements with
Sun Life (Canada). In some of these arrangements, Sun Life (Canada) has
reinsured the mortality risks of individual life policies sold in prior years by
the Company. These agreements, in the aggregate, had an immaterial effect on net
income in the years 1998 and 1997. Under another reinsurance agreement, which
became effective January 1, 1991 and terminated October 1, 1998, the Company
reinsured certain individual life insurance contracts issued by Sun Life
(Canada). Prior to its termination, this agreement had the effect of increasing
income from operations by approximately $16.5 million in 1998. In addition, the
effect of terminating this agreement was to decrease 1998 net income by
approximately $64.0 million as the termination payment made was greater than the
net reserves (reserves assumed less deferred policy acquisition costs) held
under the agreement. This resulted in a net loss on the reinsurance in 1998 of
$47.5 million as compared to a loss of $7.6 million in 1997.
OTHER LIFE PRODUCTS
Net income associated with the other life products directly issued by the
Company from the Individual Protection segment decreased by approximately $3.3
million from 1997. The decrease reflects primarily higher death benefit
payments, increased operating expenses associated with growth of the COLI
business and increased amortization of deferred policy acquisition costs.
GROUP PROTECTION SEGMENT
Net income from the Group Protection segment of $1.3 million in 1998
increased by $2.1 million from 1997 primarily due to favorable claims
experience. The claims experience in the disability products was poor in 1997
due to a greater number of claims. Claims returned to more normal levels in
1998.
44
<PAGE>
CORPORATE SEGMENT
Net income for the Corporate segment decreased by $5.5 million to ($0.7)
million. This decrease reflected lower net investment income, from both lower
interest rates and lower assets from dividend payments in 1998 of $50 million,
increased interest expense and increased operational expenses.
FINANCIAL CONDITION AND LIQUIDITY
ASSETS
The Company's total assets comprise those held in its general account and
those held in its separate accounts. General account assets support general
account liabilities. Separate accounts are investment vehicles for the Company's
variable life and annuity contracts. Policyholders may choose from among various
investment options offered under these contracts according to their individual
needs and preferences. Policyholders assume the investment risks associated with
these choices. State insurance law provides that separate account asset equal to
reserves and other liabilities are not available to fund the liabilities of the
general account.
The following table summarizes significant changes in asset balances
during 1999. The changes are discussed below.
<TABLE>
<CAPTION>
ASSETS ($ IN MILLIONS)
-------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998 % CHANGE 1999/1998
----------------- ----------------- ------------------
<S> <C> <C> <C>
General account assets...................... $ 5,361.6 $ 5,945.3 (10.9)
Separate account assets..................... 16,123.3 12,302.9 31.1
--------- --------- -----
Total assets................................ $21,484.9 $18,248.2 17.7
========= ========= =====
</TABLE>
General account assets decreased by 10.9% in 1999, but variable separate
account assets increased by 31.1%. This growth in variable separate accounts as
compared to the general account reflects 2 main factors: (1) appreciation of the
funds held in the variable separate accounts exceeded that of the funds held in
the general account; and (2) annuity deposits into variable accounts, including
transfers under the DCA programs, have increased, while annuity deposits into
fixed 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
account 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 represented essentially all of general account
assets at December 31, 1999. 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 amounted to
$2,677.3 million, representing 59.0% of the Company's total cash plus invested
assets ("total portfolio") at December 31, 1999, and included both public and
private issues. It is the Company's policy to acquire only investment-grade
securities. As a result, the overall quality of the fixed maturity portfolio is
high. At December 31, 1999, only 6.0% of the fixed maturity portfolio was
invested in below-investment-grade securities. Short-term investments of $177.2
million in fixed maturity securities represented 3.9% of the total portfolio.
The Company's mortgage holdings amounted to $931.4 million at December 31, 1999,
representing 20.5% of the total portfolio. All mortgage holdings at December 31,
1999 were in good standing. The Company believes that the high quality of its
mortgage portfolio is largely attributable to its stringent underwriting
standards. At December 31, 1999, investment real estate amounted to $95.1
million, representing about 2.1% 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 $67.9 million,
representing about 1.5% of the portfolio. Cash and cash equivalents of $550.3
million at December 31, 1999 represented about 12.1% of the total portfolio.
45
<PAGE>
LIABILITIES
As with assets, the proportion of variable separate account liabilities to
total liabilities has been increasing. Most of the Company's liabilities
comprise reserves for life insurance and for annuity contracts and deposit
funds. The Company expects the declining trend in general account liabilities to
continue, because it believes that net maturities will continue to exceed sales
for the fixed contracts associated with these liabilities. This trend stems
mainly from the Company's 1997 decision to discontinue selling group pension and
GIC contracts and to focus its marketing efforts on its combination
fixed/variable annuity products.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- QUARTERLY PERIOD ENDED MARCH 31, 2000
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO 1999:
NET INCOME
Net income increased by $31.9 million to $27.7 million in the first three
months of 2000, reflecting an increase of $7.1 million in income from continuing
operations, a decrease of $0.8 million in income from discontinued operations,
and $25.6 million of after-tax loss from the sale of Massachusetts Casualty
Insurance Company which occurred in 1999.
NET INCOME FROM OPERATIONS BY SEGMENT
The following table provides a summary of income from operations by
segment, which is discussed more fully below.
NET INCOME FROM OPERATIONS BY SEGMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-------------------
2000 1999 $ CHANGE % CHANGE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Wealth Management.......................................... $32.6 $18.1 $14.5 80.1%
Individual Protection...................................... (.1) -- (.1) --
Group Protection........................................... .6 .4 .2 50.0%
Corporate.................................................. (5.4) 2.1 (7.5) (357.1%)
----- ----- ----- ------
$27.7 $20.6 $ 7.1 34.5%
===== ===== ===== ======
</TABLE>
WEALTH MANAGEMENT SEGMENT
Net income increased by $14.5 million to $32.6 million in the first three
months of 2000 primarily due to the increased volume of in-force business.
Following are the major factors affecting the Wealth Management segment's
results in the first 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 $19 million in
the first three 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 almost $5 billion since January 1, 1999.
- Net deposits of annuity products decreased by $99 million compared with
the first quarter of 1999. The decrease in net deposits results
primarily from increases in variable annuity surrenders in 2000. The
surrenders are primarily related to older products which are no longer
46
<PAGE>
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. The
Company is implementing a conservation program with the aim of
improving asset retention.
- Total new deposits to fixed and variable annuities increased by $26
million to $669 million in 2000. Sales of the Futurity line of products
represented $155 million of total annuity deposits in 2000, an increase
of $96 million from the same three month period in 1999. The Company
expects that sales of 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 continue
to respond favorably to introductions of new Futurity products and
product enhancements.
- There has been a shift in demand to variable account products from
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. Net investment income and
realized gains for the Wealth Management segment decreased by $20
million for the first three months of 2000 as compared to the same
period in 1999. This decline in average general account assets
primarily reflects the Company's decision in 1997 to no longer market
group pension and GIC products and as a consequence, a declining block
of in-force business as GICs mature and are surrendered.
- Policyholder benefits (the major elements of which are interest
credited to contractholder deposits and annuity benefits) decreased by
approximately $5.4 million in the three months ended March 31, 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 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.
- Underwriting, acquisition and other operating expenses increased by
$4.0 million reflecting the increased volumes of both new business and
inforce business.
- Amortization of deferred policy acquisition costs decreased by $21.6
million primarily reflecting the impact of the increased variable
annuity assets, due to significant appreciation during the latter part
of 1999 and through the first quarter of 2000, and the resulting
increase in expected future gross profits from increased fee income.
Since future gross profits are expected to be higher, the current
amortization of deferred policy acquisition costs is lower.
INDIVIDUAL PROTECTION SEGMENT
The Company currently markets individual variable life insurance products.
These products include a variable universal life product marketed to the
company-owned life insurance ("COLI") market, which product was 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 that
the Company's variable life business will grow and become more significant in
the future.
Net income from the Individual Protection segment decreased by $0.1
million from the same period in 1999.
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
47
<PAGE>
in the state of New York through a subsidiary. Net income from the Group
Protection segment increased by $0.2 million from the same period in 1999
primarily due to favorable claims experience.
CORPORATE SEGMENT
The Corporate segment includes the unallocated capital of the Company, its
debt financing, and items not otherwise attributable to the other segments.
In the first three months of 2000, income from operations for the
Corporate segment decreased by $7.5 million to a ($5.4) million net loss. This
decrease reflected lower net investment income, mainly from lower assets due to
dividend payments in 1999 of $75 million, increased operational expenses and
increased income taxes. Income taxes in 1999 reflected an income tax benefit
associated with tax operating losses with subsidiaries not allocated to the
operating segments.
FINANCIAL CONDITION AND 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 three months of 2000. The changes are discussed below.
<TABLE>
<CAPTION>
ASSETS
(IN MILLIONS)
---------------------------------- % CHANGE
MARCH 31, 2000 DECEMBER 31, 1999 2000/1999
-------------- ----------------- ---------
<S> <C> <C> <C>
General Account Assets............................... $ 5,187.0 $ 5,361.6 (3.3)
Separate Account Assets.............................. 17,298.8 16,123.3 7.3
--------- --------- ----
Total Assets......................................... $22,485.8 $21,484.9 4.7
========= ========= ====
</TABLE>
General account assets decreased by 3.3% in the first three months of
2000, but variable separate account assets increased by 7.3%. This 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 account; and annuity deposits
into variable accounts, including transfers under the DCA programs have
increased, while annuity deposits into fixed 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 account 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 represented essentially all of general account
assets at March 31, 2000. Major types of invested asset holdings included fixed
maturity securities, short-term investment mortgages, real estate and other
invested assets. The Company's fixed maturity securities comprised 70.5% of the
Company's portfolio at March 31, 2000, and included both public and private
issues. It is the Company's policy to acquire only investment-grade securities.
As a result, the overall quality of the fixed maturity portfolio is high. At
March 31, 2000, only 5.1% of the fixed maturity portfolio was rated
below-investment-grade. Short-term investments in fixed maturity securities
represented 2.1% of the total portfolio. The Company's mortgage holdings
amounted to $898.1 million at March 31, 2000, representing 22.3% of the total
portfolio. All mortgage holdings at March 31, 2000 were in good
48
<PAGE>
standing. The Company believes that the high quality of its mortgage portfolio
is largely attributable to its stringent underwriting standards. At March 31,
2000, investment real estate amounted to $94.3 million, representing about 2.3%
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 $68.3 million, representing about 1.7% of the
portfolio. These holdings comprised mainly leveraged lease investments.
LIABILITIES
As with assets, the proportion of variable separate account liabilities to
total liabilities has been increasing. Most of the Company's liabilities
comprise reserves for life insurance and for annuity contracts and deposit
funds. The Company expects the declining trend in general account liabilities to
continue, because it believes that net maturities will continue to exceed sales
for the fixed contracts associated with these liabilities. This trend stems
mainly from the Company's 1997 decision to discontinue selling group pension and
GIC contracts and to focus its marketing efforts on its combination
fixed/variable annuity products.
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 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 "liquifiable" assets to its total demand liabilities. Liquifiable assets
comprise cash and assets that could quickly be converted to cash should the need
arise. These assets include short-term investments and other current assets and
investment-grade bonds. The Company's policy is to maintain a liquidity ratio in
excess of 100%, and it did so through December 31, 1999. 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
Sun Life (Canada), the Company's ultimate parent as of December 31, 1999,
completed its demutualization on March 22, 2000. As a result of the
demutualization, a new holding company, Sun
49
<PAGE>
Life Financial Services of Canada, Inc. ("SLF"), is now the ultimate parent of
Sun Life (Canada) 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.
SALE OF SUBSIDIARIES
On February 5, 1999, the Company sold Massachusetts Casualty Insurance
Company ("MCIC"), a disability insurance company, to Centre Solutions (U.S.)
Limited, a wholly-owned subsidiary of Centre Reinsurance Holdings Limited. The
net proceeds of this sale were $34.0 million and the Company realized a post-tax
loss of $25.5 million.
On October 29, 1999, the Company sold New London Trust F.S.B. ("NLT") to a
subsidiary of Phoenix Home Life Mutual Insurance Company for approximately $30.3
million and realized a post-tax gain of $13.2 million.
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.
(Investment real estate holdings represented approximately 2.1% of the Company's
total general account portfolio at December 31, 1999, and 2.3% of the Company's
total general account portfolio at March 31, 2000.) 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
50
<PAGE>
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.
Liabilities categorized as financial instruments and held in the Company's
general account had a fair value of $3,634.4 million at December 31, 1999 and a
fair value of $2,913.1 million at March 31, 2000. Fixed income investments
supporting those liabilities had a fair value of $4,308.6 million and $4,065.8
at December 31, 1999 and March 31, 2000, respectively. The Company performed a
sensitivity analysis on these interest-sensitive liabilities and assets on
December 31, 1999 and on March 31, 2000. The December 31, 1999 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 $118.0 million
and the corresponding assets would show a net decrease of $73.6 million. The
March 31, 2000 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 $66.7 million and the corresponding assets would show a net
decrease of $117.2 million.
By comparison, liabilities categorized as financial instruments and held
in the Company's general account at had a fair value of $4,385.0 million
December 31, 1998, and a fair value of $3,105.2 million at December 31, 1999.
Fixed income investments supporting those liabilities had a fair value of
$5,104.9 million and $4,308.6 million at December 31, 1998 and December 31,
1999, respectively. The Company performed a sensitivity analysis on these
interest-sensitive liabilities and assets at December 31, 1998 and at December
31, 1999. The December 31, 1998 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 $185.4 million and the corresponding
assets would show a net decrease of $168.7 million. The December 31, 1999
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.
51
<PAGE>
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 the Company's exposure to interest rate changes
will not materially affect its near-term financial position, results of
operations, or cash flows.
REINSURANCE
The Company has agreements with Sun Life (Canada) which provide that Sun
Life (Canada) will reinsure the mortality risks of the individual life insurance
contracts sold by the Company. Under these agreements, basic death benefits and
supplementary benefits are reinsured on a yearly renewable term basis and
coinsurance basis, respectively.
Effective January 1, 1991, the Company entered into an agreement with Sun
Life (Canada) under which certain individual life insurance contracts issued by
Sun Life (Canada) were reinsured by the Company on a 90% coinsurance basis. Also
effective January 1, 1991 the Company entered into an agreement with Sun Life
(Canada) which provides that Sun Life (Canada) will reinsure the mortality risks
in excess of $500,000 per policy for the individual life insurance contracts
assumed by the Company in the reinsurance agreement described above. Such death
benefits are reinsured on a yearly renewable term basis. The life reinsurance
assumed agreement requires the reinsurer to withhold funds in amounts equal to
the reserves assumed. The Company terminated these agreements effective
October 1, 1998.
The Company has also executed reinsurance agreements with unrelated
companies which provide reinsurance of certain individual life insurance
contracts on a modified coinsurance basis under which all deficiency reserves
are ceded.
During 1999, the Company entered into an agreement with an unrelated
company which provides reinsurance on certain fixed group annuity contracts.
Also during 1999, the Company entered into three agreements with two unrelated
companies for the purpose of obtaining stop-loss coverage of guaranteed minimum
death benefit exposure with respect to the Company's variable annuity business.
The Company has agreements with Sun Life (Canada) whereby Sun Life
(Canada) reinsures the mortality and mortality risks of the group life insurance
contracts and group long term disability contracts. Under these agreements,
certain death benefits and long-term disability benefits are reinsured on a
yearly renewable basis.
RESERVES
In accordance with the life insurance laws and regulations under which the
Company operates, it is obligated to carry on its books, as liabilities,
actuarially determined reserves to meet its obligations on its outstanding
contracts. Reserves are based on mortality tables in general use in the United
States and are computed to equal amounts that, with additions from premiums to
be received, and with interest on such reserves compounded annually at certain
assumed rates, will be sufficient to meet the Company's policy obligations at
their maturities or in the event of an insured's death. In the accompanying
Financial Statements, these reserves are determined in accordance with statutory
regulations.
INVESTMENTS
Of the Company's total assets of $21.5 billion at December 31, 1999, 75.1%
($16.1 billion) consisted of unitized and non-unitized separate account assets,
13.3% ($2.9 billion) was invested in
52
<PAGE>
bonds and similar securities, 4.3% ($931.4 million) was invested in mortgages,
0.4% ($95.1 million) was invested in real estate, and the remaining 6.9% ($1.5
billion) was invested in cash and other assets.
COMPETITION
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing insurance products. According to a 1999 statistical study published by
A.M. Best, the Company ranked 36th among North American life insurance companies
based upon admitted assets as of December 31, 1998.
EMPLOYEES
The Company and Sun Life (Canada) have entered into a service agreement
which provides that the latter will furnish the Company, as required, with
personnel as well as certain services and facilities on a cost reimbursement
basis. As of May 31, 2000, the Company had 385 direct employees who are employed
at its Principal Executive Office in Wellesley Hills, Massachusetts and at its
Retirement Products and Services Division in Boston, Massachusetts.
PROPERTIES
The Company occupies office space owned by it and leased to Sun Life
(Canada), and certain unrelated parties for lease terms not exceeding 5 years.
The Company also occupies office space which it leases from unaffiliated parties
for various lease terms.
STATE REGULATION
The Company is subject to the laws of the State of Delaware governing life
insurance companies and to regulation by the Commissioner of Insurance of
Delaware. An annual statement is filed with the Commissioner of Insurance on or
before March lst in each year relating to the operations of the Company for the
preceding year and its financial condition on December 31st of such year. Its
books and records are subject to review or examination by the Commissioner or
his agents at any time and a full examination of its operations is conducted at
periodic intervals.
The Company is also subject to the insurance laws and regulations of the
other states and jurisdictions in which it is licensed to operate. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to licensing to transact business, overseeing
trade practices, licensing agents, approving policy forms, establishing reserve
requirements, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. Each insurance company is required to file detailed
annual reports with supervisory agencies in each of the fire jurisdictions in
which it does business and its operations and accounts are subject to
examination by such agencies at regular intervals.
In addition, many states regulate affiliated groups of insurers, such as
the Company, Sun Life (Canada) and its affiliates, under insurance holding
company legislation. Under such laws, inter-company transfers of assets and
dividend payments from insurance subsidiaries may be subject to prior notice or
approval, depending on the size of such transfers and payments in relation to
the financial positions of the companies involved. Under insurance guaranty fund
laws in most states, insurers doing business therein can be assessed (up to
prescribed limits) for policyholder losses incurred by insolvent companies. The
amount of any future assessments of the Company under these laws cannot be
reasonably estimated. However, most of these laws do provide that an assessment
may be excused or deferred if it would threaten an insurer's own financial
strength and many permit the deduction of all or a portion of any such
assessment from any future premium or similar taxes payable.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes
53
<PAGE>
affecting the taxation of insurance companies, the tax treatment of insurance
products and its impact on the relative desirability of various personal
investment vehicles.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Variable Account. We
and our subsidiaries are engaged in various kinds of routine litigation which,
in management's judgment, is not of material importance to our respective total
assets or material with respect to the Variable Account.
ACCOUNTANTS
The financial statements of the Variable Account for the year ended
December 31, 1999 included in the Statement of Additional Information and the
consolidated financial statements of the Company for the years ended December
31, 1999, 1998 and 1997 included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this
Prospectus should be considered only as bearing on the ability of the Company to
meet its obligations with respect to amounts allocated to the Fixed Account and
with respect to the death benefit and the Company's assumption of the mortality
and expense risks. They should not be considered as bearing on the investment
performance of the Fund shares held in the Sub-Accounts of the Variable Account.
The financial statements of the Variable Account for the year ended
December 31, 1999 are included in the Statement of Additional Information.
------------------------
54
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONSOLIDATED STATEMENTS OF INCOME (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Premiums and annuity considerations....................... $ 45.1 $203.3 $257.4
Net investment income..................................... 365.0 455.9 539.9
Net realized investment gains............................. 2.3 8.4 12.5
Fee and other income...................................... 217.5 179.2 149.5
------ ------ ------
Total revenues............................................ 629.9 846.8 959.3
------ ------ ------
BENEFITS AND EXPENSES
Policyowner benefits...................................... 334.9 588.2 672.3
Other operating expenses.................................. 101.1 100.0 85.4
Amortization of deferred policy acquisition costs......... 67.8 88.8 62.3
------ ------ ------
Total benefits and expenses............................... 503.8 777.0 820.0
------ ------ ------
Income from operations.................................... 126.1 69.8 139.3
Interest expense.......................................... 43.3 44.9 42.5
------ ------ ------
Income before income tax expense and discontinued
operations.............................................. 82.8 24.9 96.8
INCOME TAX EXPENSE:
Federal................................................... 28.8 10.9 34.0
State..................................................... .3 (.1) 1.3
------ ------ ------
Income tax expense........................................ 29.1 10.8 35.3
------ ------ ------
Net income from continuing operations....................... 53.7 14.1 61.5
Net loss on disposal of subsidiaries, after tax............. (12.3) -- --
Discontinued operations..................................... 1.0 .1 69.0
------ ------ ------
NET INCOME.................................................. $ 42.4 $ 14.2 $130.5
====== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
55
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONSOLIDATED BALANCE SHEETS (IN MILLIONS)
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Investments
Fixed maturities available-for-sale at fair value
(amortized cost of $2,685.4 and $3,311.9 in 1999 and
1998, respectively)..................................... $ 2,677.3 $ 3,488.4
Trading fixed maturities at fair value (amortized cost of
$1.0 and $1.5 in 1999 and 1998, respectively)........... 1.0 1.5
Short-term investments.................................... 177.2 336.0
Mortgage loans............................................ 931.4 969.8
Real estate............................................... 95.1 99.0
Policy loans.............................................. 40.7 42.6
Other invested assets..................................... 67.9 64.2
--------- ---------
Total investments......................................... 3,990.6 5,001.5
Cash and cash equivalents................................. 550.3 264.7
Accrued investment income................................. 50.5 61.9
Deferred policy acquisition costs......................... 686.3 523.9
Outstanding premiums...................................... 2.7 .8
Other assets.............................................. 81.2 .1
Separate account assets................................... 16,123.3 12,302.9
Net assets from discontinued operations................... -- 92.4
--------- ---------
Total assets.............................................. $21,484.9 $18,248.2
========= =========
LIABILITIES
Future contract and policy benefits....................... $ 729.3 $ 736.1
Contractholder deposit funds and other policy
liabilities............................................. 3,144.8 3,658.2
Unearned revenue.......................................... 7.1 6.7
Accrued expenses and taxes................................ 98.8 32.8
Deferred federal income taxes............................. 77.7 113.1
Long-term debt payable to affiliates...................... 565.0 565.0
Other liabilities......................................... 67.7 55.8
Separate account liabilities.............................. 16,123.3 12,302.9
--------- ---------
Total liabilities......................................... 20,813.7 17,470.6
--------- ---------
COMMITMENTS AND CONTINGENCIES -- NOTE 15
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.................... 7.1 75.9
Retained earnings......................................... 458.8 496.4
--------- ---------
Total stockholder's equity................................ 671.2 777.6
--------- ---------
Total liabilities and stockholder's equity................ $21,484.9 $18,248.2
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
56
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $ 42.4 $14.2 $130.5
Other comprehensive income
Net unrealized holding gains (losses) on
available-for-sale securities, net of tax............... (68.6) (4.3) 26.7
Other..................................................... (.2) -- --
(68.8) (4.3) 26.7
Comprehensive income........................................ $ (26.4) $ 9.9 $157.2
======= ===== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
57
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<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, 1996............ $ 5.9 $199.4 $53.5 $470.6 $729.4
------ ------ ----- ------ ------
Net income............................ 130.5 130.5
Other comprehensive income............ 26.7 26.7
Dividends to stockholder.............. (68.9) (68.9)
------ ------ ----- ------ ------
Balance at December 31, 1997............ 5.9 199.4 80.2 532.2 817.7
------ ------ ----- ------ ------
Net income............................ 14.2 14.2
Other comprehensive income............ (4.3) (4.3)
Dividends to stockholder.............. (50.0) (50.0)
------ ------ ----- ------ ------
Balance at December 31, 1998............ 5.9 199.4 75.9 496.4 777.6
------ ------ ----- ------ ------
Net income............................ 42.4 42.4
Other comprehensive income............ (68.8) (68.8)
Dividends to stockholder.............. (80.0) (80.0)
------ ------ ----- ------ ------
Balance at December 31, 1999............ $ 5.9 $199.4 $ 7.1 $458.8 $671.2
====== ====== ===== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
58
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations....................... $ 53.7 $ 14.1 $ 61.5
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of discount and premiums..................... (0.5) 0.2 .6
Depreciation and amortization............................. 3.7 2.2 2.5
Net realized gains on investments......................... (2.3) (8.4) (12.5)
Interest credited to contractholder deposits.............. 216.4 238.7 282.9
Deferred federal income taxes............................. 14.5 (8.6) (1.6)
Cash dividends from subsidiaries.......................... 19.3 -- 40.6
Changes in assets and liabilities:
Deferred acquisition costs................................ (88.4) 208.7 (82.9)
Accrued investment income................................. 11.4 31.1 25.8
Other assets.............................................. (75.3) 78.5 (189.0)
Future contract and policy benefits....................... (7.5) (1,124.0) 182.5
Other, net................................................ 72.3 896.6 7.7
------- --------- ---------
Net cash provided by operating activities................... 217.3 329.1 318.1
------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, maturities and repayments of:
Available-for-sale fixed maturities....................... 1,240.9 1,665.6 1,535.8
Subsidiaries.............................................. 57.5 0.6 --
Other invested assets..................................... -- 0.9 .4
Mortgage loans............................................ 385.7 316.9 463.0
Real estate............................................... 2.8 6.0 15.1
Purchases of:
Available-for-sale fixed maturities....................... (615.2) (1,346.7) (1,334.1)
Equity securities......................................... -- (0.2) (.3)
Other invested assets..................................... (7.4) (11.4) (5.5)
Mortgage loans............................................ (344.9) (123.0) (159.0)
Real estate............................................... (1.6) (1.1) (10.1)
Capital contributions to subsidiaries....................... -- -- (2.0)
Changes in other investing activities, net.................. 3.1 (14.4) (.5)
Net change in policy loans.................................. 1.9 (1.6) (.2)
Net change in short-term investments........................ 155.9 (38.2) (152.9)
------- --------- ---------
Net cash provided by investing activities................... 878.7 453.4 349.7
------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
59
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits to contractholder deposit funds.................. 1,536.8 910.8 1,023.6
Withdrawals from contractholder deposit funds............. (2,267.2) (1,803.2) (1,550.8)
Issuance of long-term debt and borrowed funds............. -- -- 360.1
Repayment of long-term debt and borrowed funds............ -- (110.1) (58.0)
Dividends paid to stockholder............................. (80.0) (50.0) --
--------- --------- ---------
Net cash used in financing activities....................... (810.4) (1,052.5) (225.1)
--------- --------- ---------
Net change in cash and cash equivalents..................... 285.6 (270.0) 442.7
Cash and cash equivalents, beginning of year.............. 264.7 534.7 92.0
--------- --------- ---------
Cash and cash equivalents, end of year.................... $ 550.3 $ 264.7 $ 534.7
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................. $ 43.3 $ 40.5 $ 42.0
Income taxes paid......................................... 5.5 50.6 32.9
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
60
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Sun Life Assurance Company of Canada (U.S.) (the "Company") is
incorporated as a life insurance company 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, 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. ("SLC"), became the
ultimate parent of SLOC and the Company.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") in the United States of
America for stockholder-owned life insurance companies and include the accounts
of the Company and its subsidiaries.
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
the statutory 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. See Note 13 for a
reconciliation of statutory surplus to GAAP equity and statutory net income to
GAAP net income.
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. (formerly Sun Investment Services Company) ("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 Life of Canada (U.S.) SPE 97-1, Inc. ("SPE 97-1"),
Clarendon Insurance Agency, Inc. ("Clarendon"), and Sun Life Information
Services Ireland Limited ("SLIRL"). 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. SLIRL provides information systems development
services to the Company and it's affiliates. Sunfinco and Sunbesco are currently
inactive.
During 1999, the Company sold two of its subsidiaries, Massachusetts
Casualty Insurance Company ("MCIC") and New London Trust F.S.B. ("NLT") to
separate, unaffiliated parties. 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 Company owned a majority of Massachusetts Financial Services Company
("MFS"), an investment adviser and
61
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
broker-dealer, until December 24, 1997. The results of operations of these
subsidiaries are reported as discontinued operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Financial instruments
are more fully described in Note 5.
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, trading, or 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. Securities that do not
meet this criterion are classified as available-for-sale. Available-for-sale
securities are carried at aggregate fair value with changes in unrealized gains
or losses reported net of policyholder related amounts and of deferred income
taxes in a separate component of other comprehensive income. Trading securities
are carried at aggregate fair value with changes in unrealized gains or losses
reported as a component of net investment income. Fair values are obtained from
external market quotations. For privately placed fixed maturities, fair values
are estimated by taking into account prices for publicly traded securities of
similar credit risk, maturities repayment and liquidity characteristics. All
security transactions are recorded on a trade date basis. The Company's
accounting policy for impairment requires recognition of an other than temporary
impairment charge on a security if it is determined that the Company is unable
to recover all amounts due under the contractual obligations of the security. In
addition, for securities expected to be sold, an other than temporary impairment
charge is recognized if the Company does not expect the fair value of a security
to recover to cost or amortized cost prior to the
62
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
expected date of sale. Once an impairment charge has been recorded, the Company
then continues to review the other than temporarily impaired securities for
additional impairment, if necessary.
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 and 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 are 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 income are
carried at the lower of cost adjusted for accumulated depreciation or fair
value. Depreciation of buildings and improvements is calculated using the
straight-line method over the estimated useful life of the property, generally
40 to 50 years. 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 less estimated costs to
dispose at the time of foreclosure.
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. Hedge accounting is used to account for
certain derivatives. 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 on the statement of operations as a component of net investment
income.
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
63
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 principle 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.
DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting and other costs
which vary with and are primarily related to the production of new business.
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 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 cost
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 included in other assets.
64
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
POLICY LIABILITIES AND ACCRUALS
Future 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 6.0% to 11.3% 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 and its
affiliates' experience and industry standards. Estimated liabilities are
established for group life and health policies that contain experience rating
provisions.
Contractholder deposit funds 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 of 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.
INCOME TAXES
The Company and its subsidiaries participate in a consolidated federal
income tax return with US 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,
65
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
"Accounting for Income Taxes". These differences result primarily from policy
reserves, policy acquisition expenses and unrealized gains or losses on
investments, and are generally not chargeable with liabilities that arise from
any other business of the Company. Separate account assets are subject to
general account claims only to the extent the value of such assets exceeds the
separate account liabilities.
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 statement of financial position, 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 Statement 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. The Company is evaluating SFAS No.
133 and has not determined its effect on the consolidated financial statements.
On January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants (AICPA) Statement of Position (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.
On January 1, 1999, the Company adopted AICPA SOP 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." This SOP
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. The adoption of
SOP 98-1, resulted in an increase in pre-tax income of $6,232,000 for the year
ended December 31, 1999.
66
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES
Effective October 1, 1998, the Company terminated a reinsurance agreement
with Sun Life Assurance Company of Canada resulting in a decrease in income from
operations to the Company of approximately $64,000,000.
On February 11, 1999, two notes previously issued to the Company by
Massachusetts Financial Services Company ("MFS"), an affiliate, were combined
into a new note with a February 11, 2000 maturity date. The original notes were
each issued for $110,000,000. One note was issued on February 11, 1998 at an
interest rate of 6.0% and a due date of February 11, 1999. The other note was
issued on December 22, 1998 at an interest rate of 5.55% and a due date of
February 11, 1999. These two notes and an additional $10,000,000 were combined
into a new note of $230,000,000 with a floating interest rate based on the six
month LIBOR rate plus 25 basis points. The $230,000,000 note was repaid to the
Company on December 21,1999.
On December 31, 1998, the Company had an additional $20,000,000 investment
in notes issued by MFS, scheduled to mature in 2000. These notes were repaid to
the Company on December 21, 1999.
On January 14, 2000, the Company purchased $200,000,000 of notes from MFS.
On February 5, 1999, the Company sold MCIC to an unaffiliated company. The
net proceeds of this sale were $33,965,000. The Company realized a loss of
$25,465,000 net of a $14,482,000 tax benefit.
On October 29, 1999, the Company sold NLT to an unaffiliated company for
$30,254,000. The Company realized a gain of $13,170,000 after taxes of
$10,186,000.
On December 22, 1999, the Company acquired twenty-eight mortgages from
SLOC for a total cost of $118,092,000.
Dividends in the amounts of $80,000,000 and $50,000,000, were declared and
paid by the Company to its parent, Life Holdco during 1999 and 1998,
respectively. On December 24, 1997 the Company transferred as a dividend to Life
Holdco all of its ownership in MFS valued at $68,951,000. These dividends were
approved by the Company's Board of Directors.
The Company has management services agreements 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 these agreements
amounted to approximately $30,745,000 in 1999, $17,381,000 in 1998, and
$17,152,000 in 1997.
As more fully described in Note 7, the Company has been involved in
several reinsurance transactions with its ultimate parent, SLOC.
On December 22, 1997, the Company issued a $250,000,000 surplus note to
Life Holdco. This note has an interest rate of 8.625% and is due on or after
November 6, 2027.
On May 9, 1997, the Company issued a short-term note of $600,000,000 to
Life Holdco at an interest rate of 5.10%, which was extended at various interest
rates. This note was repaid on December 22, 1997.
On December 23, 1997, the Company issued a $110,000,000 note to US Holdco
at an interest rate of 5.80%, which was repaid on March 1, 1998. A $110,000,000
note was also issued to the Company by MFS on December 23, 1997 at an interest
rate of 5.85% and was repaid on February 11, 1998.
67
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)
On December 31, 1996, the Company issued a $58,000,000 note to SLOC at an
interest rate of 5.70% which was repaid on February 10, 1997. Also on December
31, 1996, the Company was issued a $58,000,000 note by MFS at an interest rate
of 5.76%. This note was repaid to the Company on February 10, 1997.
The Company accrued $4,259,000 and $4,259,000 for interest on surplus
notes for the years ended December 31, 1999 and 1998, respectively.
The Company expensed $43,266,000, $44,903,000, and $42,481,000 for
interest on surplus notes and notes payable for the years ended December 31,
1999, 1998 and 1997, respectively.
The Company had $565,000,000 of surplus notes issued to affiliates and
outstanding as of December 31, 1999 and 1998. The following table lists the
details of the surplus notes outstanding (in 000's):
<TABLE>
<CAPTION>
MATURITY PRINCIPAL RATE
-------- --------- --------
<S> <C> <C> <C>
Sun Canada Financial Co..................................... 12/15/07 $150,000 6.625%
Sun Canada Financial Co..................................... 12/15/15 150,000 7.250%
Sun Canada Financial Co..................................... 12/15/07 7,500 6.125%
Sun Canada Financial Co..................................... 12/15/15 7,500 5.750%
Life Holdco................................................. 11/06/27 250,000 8.625%
--------
Total............................................... $565,000
========
</TABLE>
68
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair value of fixed maturities were as follows (in
000's):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fixed maturities available-for-sale:
United States treasury securities, U.S.
Government and agency securities............. $ 107,272 $ 2,104 $ (3,191) $ 106,186
States, provinces and political subdivisions... 32,593 15 (161) 32,447
Mortgage-backed securities..................... 98,903 1,225 (541) 99,588
Public utilities............................... 360,672 7,954 (9,780) 358,846
Transportation................................. 327,544 8,585 (4,258) 331,871
Finance........................................ 281,303 4,632 (6,935) 279,000
Corporate...................................... 1,477,105 22,851 (30,556) 1,469,400
---------- ------- --------- ----------
Total fixed maturities available-for-sale........ $2,685,392 $47,366 $ (55,422) $2,677,338
========== ======= ========= ==========
Trading fixed maturities:
United States treasury securities, U.S.
Government and agency securities............. $ 1,000 $ 2 $ -- $ 1,002
---------- ------- --------- ----------
Total trading fixed securities................... $ 1,000 $ 2 $ -- $ 1,002
========== ======= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fixed maturities available-for-sale:
United States treasury securities, U.S.
Government and agency securities............. $ 221,724 $ 8,356 $ (360) $ 229,720
States, provinces and political subdivisions... 25,888 2,825 0 28,713
Mortgage-backed securities..................... 238,539 6,864 (1,501) 243,902
Public utilities............................... 473,243 31,526 (235) 504,534
Transportation................................. 378,393 31,168 (53) 409,508
Finance........................................ 369,809 15,927 (1,911) 383,825
Corporate...................................... 1,604,323 94,123 (10,224) 1,688,222
---------- -------- --------- ----------
Total fixed maturities available-for-sale........ $3,311,919 $190,789 $ (14,284) $3,488,424
========== ======== ========= ==========
Trading fixed maturities:
United States treasury securities, U.S.
Government and agency securities........... $ 1,506 $ 35 $ -- $ 1,541
---------- -------- --------- ----------
Total trading fixed securities................... $ 1,506 $ 35 $ -- $ 1,541
========== ======== ========= ==========
</TABLE>
There were no contractual fixed maturity investment commitments at
December 31, 1999 and 1998, respectively.
69
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value by maturity periods for fixed
maturity investments are shown below (in 000's). Actual maturities may differ
from contractual maturities on mortgage-backed securities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties, or the Company may have the right to put or sell the obligations back
to the issuers.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
<S> <C> <C>
Maturities of available for sale securities:
Due in one year or less................................... $ 216,235 $ 216,417
Due after one year through five years..................... 933,481 924,198
Due after five years through ten years.................... 600,735 605,804
Due after ten years....................................... 934,941 930,919
---------- ----------
$2,685,392 $2,677,338
========== ==========
Maturities of trading securities:
Due in one year or less................................... $ 500 500
Due after one year through five years..................... $ 500 502
---------- ----------
$ 1,000 $ 1,002
========== ==========
</TABLE>
Gross gains of $12,496,128, $25,752,149 and $18,292,309 and gross losses
of $7,646,028, $1,439,129, and $5,284,286 were realized on the voluntary sale of
fixed maturities for the years ended December 31, 1999, 1998, and 1997,
respectively.
Fixed maturites with an amortized cost of approximately $3,009,000 and
$2,976,000 at December 31, 1999 and 1998 respectively, were on deposit with
Federal and State governmental authorities as required by law.
No fixed maturities have been pledged to collateralize various liabilities
at December 31, 1999 and 1998, respectively.
As of December 31, 1999 and 1998, 94% of the Company's fixed maturities
were investment grade and there were no significant concentrations by issuer or
by industry, other than U.S. Treasury securities. Investment grade securities
are those that are rated "BBB" or better by nationally recognized rating
agencies. The Company believes that unrealized losses are temporary in nature,
and accordingly, no provisions for permanent impairment of value have been
recorded. All of the Company's securities were income producing for the periods
ending December 31, 1999, 1998 and 1997.
MORTGAGE LOANS AND REAL ESTATE
The Company invests in commercial first mortgage loans and real estate
throughout the United States. Investments are diversified by property type and
geographic area. 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. Real estate investments classified as held for sale have
been obtained
70
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. INVESTMENTS (CONTINUED)
primarily through foreclosure. The carrying value of mortgage loans and real
estate investments net of applicable reserves were as follows (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Total mortgage loans........................................ $931,351 $969,799
======== ========
Real estate:
Held for sale............................................. 7,804 4,323
Held for production of income............................. 87,290 94,625
-------- --------
Total real estate........................................... $ 95,094 $ 98,948
======== ========
</TABLE>
Accumulated depreciation on real estate was $18,529,000 and $16,829,000 at
December 31, 1999 and 1998, respectively.
The Company monitors the condition of the mortgage loans in its portfolio.
In those cases where mortgages have been restructured, appropriate allowances
for losses have been made. The Company has restructured mortgage loans totaling
$28,019,000 and $39,804,000 at December 31, 1999 and 1998, respectively, against
which there are allowances for losses of $3,705,000 and $5,700,000,
respectively. In those cases where, in management's judgment, the mortgage
loans' values are impaired, appropriate losses are recorded. The carrying value
of impaired loans was $19,356,000 and $27,500,000 with related reserves of
$2,123,000 and $3,730,000 as of December 31, 1999 and 1998, respectively. All
impaired loans were reserved as of December 31, 1999 and 1998. The average
carrying value of impaired loans was $19,491,000 and $27,313,000 with related
interest income while such loans were impaired of $1,782,000 and $2,181,000 as
of December 31, 1999 and 1998, respectively. During 1999 and 1998, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $20,433,000 and $22,372,000,
respectively.
The investment valuation allowances, which have been deducted in arriving
at investment carrying values as presented in the consolidated balance sheets,
were as follows (in 000's):
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
JANUARY 1, ADDITIONS SUBTRACTIONS DECEMBER 31,
---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
1999
Mortgage loans.................................... $6,600 $4,045 $(2,895) $7,750
Real estate....................................... 1,250 1,379 (906) 1,723
1998
Mortgage loans.................................... $6,671 $1,098 $(1,169) $6,600
Real estate....................................... 806 569 (125) 1,250
</TABLE>
71
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. INVESTMENTS (CONTINUED)
Mortgage loans and real estate investments comprise the following property
types and geographic regions (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Property Type:
Office building........................................... $ 357,466 $ 370,679
Residential............................................... 58,546 55,952
Retail.................................................... 433,970 401,549
Industrial/warehouse...................................... 156,204 248,417
Other..................................................... 29,732 --
Valuation allowances...................................... (9,473) (7,850)
---------- ----------
Total....................................................... $1,026,445 $1,068,747
========== ==========
Geographic region:
California................................................ $ 117,355 $ 134,789
Massachusetts............................................. 99,661 115,807
Michigan.................................................. 69,545 71,678
New York.................................................. 65,107 67,407
Ohio...................................................... 43,946 56,682
Pennsylvania.............................................. 159,328 155,216
Washington................................................ 68,657 73,555
All other................................................. 412,319 401,463
Valuation allowances...................................... (9,473) (7,850)
---------- ----------
Total....................................................... $1,026,445 $1,068,747
========== ==========
</TABLE>
At December 31, 1999, scheduled mortgage loan maturities were as follows
(000's):
<TABLE>
<S> <C>
2000........................................................ $113,731
2001........................................................ 71,648
2002........................................................ 72,535
2003........................................................ 41,430
Thereafter.................................................. 632,007
--------
Total....................................................... $931,351
========
</TABLE>
Actual maturities could differ from contractual maturities because
borrowers may have the right to prepay obligations with or without prepayment
penalties and loans may be refinanced.
The Company has made commitments of mortgage loans on real estate and
other loans into the future. The outstanding commitments for these mortgages
amount to $15,911,000 and $31,563,000 at December 31, 1999 and 1998,
respectively.
SECURITIES LENDING
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chase Manhattan of New York. The custodian has
indemnified the Company against losses arising from this program. The total par
value of securities out on loan was $0 and $0 at December 31, 1999 and 1998,
respectively. The Company requires collateral at 102% of the value of securities
loaned.
72
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. INVESTMENTS (CONTINUED)
As of December 31, 1999 and 1998, the Company received collateral with a fair
value of $0 and $0 for securities on loan. The income resulting from this
program was $37,000, $135,000 and $230,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
LEVERAGED LEASES
The Company is a lessor in a leverage lease agreement entered into on
October 21, 1994, under which equipment having an estimated economic life of
25-40 years was leased for a term of 9.78 years. The Company's equity investment
represented 22.9% of the purchase price of the equipment. The balance of the
purchase price was furnished by third-party long-term debt financing,
collateralized by the equipment and non-recourse to the Company. At the end of
the lease term, the master Lessee may exercise a fixed price purchase option to
purchase the equipment. The Company's net investment in leveraged leases is
composed of the following elements (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Lease contracts receivable.................................. $ 69,766 $ 78,937
Less: non-recourse debt..................................... (69,749) (78,920)
-------- --------
Net Receivable.............................................. 17 17
Estimated residual value of leased assets................... 41,150 41,150
Less: unearned and deferred income.......................... (7,808) (8,932)
-------- --------
Investment in leverage lease................................ 33,359 32,235
Less: fees.................................................. (113) (138)
-------- --------
Net investment in leverage leases........................... $ 33,246 $ 32,097
======== ========
</TABLE>
DERIVATIVES
The Company uses derivative financial instruments for risk management
purposes to hedge against specific interest rate risk, to alter investment rate
exposures arising from mismatches between assets and liabilities, and to
minimize the Company's exposure to fluctuations in interest rates, foreign
currency exchange rates and general market conditions. The derivative financial
instruments used by the Company include futures, interest rate swap agreements,
options, and interest rate and currency swap agreements structured as forward
spread lock contracts. The Company does not hold or issue any derivative
instruments for trading purposes.
FUTURES
A futures contract is a contractual agreement to make or take delivery of
a notional principal amount at a specified future date in accordance with terms
specified by a regulated futures exchange. Although futures contracts generally
specify delivery terms for the underlying commodity or financial instrument,
most futures contracts are settled in cash prior to delivery by executing a
futures position opposite to the original position. That is, a contract to take
delivery (a "long" position) is offset by executing a contract to make delivery
(a "short" position), and vice versa.
The Company purchases futures contracts to hedge against interest rate
fluctuations. Gains or losses on contracts that qualify as hedges are deferred
until the earliest of the completion of the hedging transaction, determination
that the transaction will no longer take place, or determination that
73
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. INVESTMENTS (CONTINUED)
the hedge is no longer effective. Upon completion of the hedge, where it is
impractical to allocate gains (losses) to specific hedged assets or liabilities,
gains (losses) are deferred and amortized over the remaining life of the hedged
assets. If instruments being hedged by futures are disposed, any unamortized
gains (losses) are included in the determination of gain or loss from the
disposition. Gains (losses) on hedge contracts that are deemed ineffective are
realized immediately. There were no deferred gains (losses), disposed hedges, or
hedges deemed ineffective in 1999 and 1998. The Company had no futures contracts
outstanding at December 31, 1999 and 1998, respectively.
INTEREST RATE SWAPS
Interest rate swap agreements are contracts with other parties to exchange
at specified intervals, the difference between fixed and floating rate interest
amounts based upon a notional principal amount. No cash is exchanged at the
outset of the contract and no principal payments are made by either party. A
single net payment is usually made by one counterparty at each interest payment
date.
The Company enters into interest rate swap agreements to hedge against
exposure to interest rate fluctuations. Because the underlying principal is not
exchanged, the Company's maximum exposure to counterparty credit risk is the
difference in payments exchanged. The net payable/receivable is recognized over
the life of the swap contract as an adjustment to net investment income. The net
increase (decrease) in net investment income related to interest rate swaps was
($2,512,745), ($1,685,909) and ($2,579,536) for the years ended December 31,
1999, 1998 and 1997 respectively. The company's derivatives did not qualify for
hedge accounting treatment in 1999 and 1998. As a result, the realized gains and
losses were realized immediately in those years and the deferred balances as of
year ended December 31, 1997 were realized during 1998.
PUT OPTIONS
Options are legal contracts that give the contractholder the right to buy
or sell a specific amount of the underlying interest at a strike price upon
exercise of the option. Cash is exchanged to purchase the option and on exercise
date, the holder of the option can elect to exercise or allow it to expire. The
Company utilizes options to hedge against stock market exposure inherent in the
mortality and expense risk charges and guaranteed minimum death benefit features
of the Company's variable annuities.
FORWARD SPREAD LOCK CONTRACTS
Interest rate and currency swap agreements structured as forward spread
lock contracts are swap agreements which are executed in a current period but
effective on a future date. The contracts outline the interest or currency
rates, which each party agrees to at contract date as well as the outset of the
contract. No principal payments are made by either party. A single net payment
is made to close out the contract prior to the effective date in the event that
either party to the contract wishes to terminate the agreement. If the contract
is not terminated prior to the effective future date, the contract becomes a
swap agreement as described above.
74
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. INVESTMENTS (CONTINUED)
The Company's underlying notional or principal amounts associated with
open derivatives positions were as follows (in 000's):
<TABLE>
<CAPTION>
OUTSTANDING AT
DECEMBER 31, 1999
---------------------
NOTIONAL MARKET
PRINCIPAL VALUE OF
AMOUNTS POSITIONS
--------- ---------
<S> <C> <C>
Interest rate swaps......................................... $368,000 $ 9,522
Foreign currency swaps...................................... 1,700 295
-------- --------
Total..................................................... $369,700 $ 9,817
======== ========
<CAPTION>
OUTSTANDING AT
DECEMBER 31, 1998
---------------------
NOTIONAL MARKET
PRINCIPAL VALUE OF
AMOUNTS POSITIONS
--------- ---------
Interest rate swaps $ 297,000 ) (10,656
<S> <C> <C>
Foreign currency swaps...................................... 3,100 689
-------- --------
Total..................................................... $300,100 $ (9,967)
======== ========
</TABLE>
During 1998, the Company discontinued hedge accounting treatment for
certain derivative instruments for which correlation could not be established.
The Company recognized gross realized gains of $4,734,971 and $6,567,922 in 1999
and 1998, respectively, as well as gross realized losses of $1,789,357 and
$20,538,120 during 1999 and 1998, respectively.
The Company's primary risks associated with these transactions are
exposure to potential credit loss in the event of non-performance by
counterparties and market risk. The Company regularly assesses the strength of
the counterparties and generally enters into transactions with counterparties
rated "A" or better by nationally recognized ratings agencies. Management
believes that the risk of incurring losses related to credit risk is remote. As
of December 31, 1999 and 1998, the Company's derivatives had no significant
concentration of credit risk. The Company does not require collateral or other
security to support derivative financial instruments with credit risk.
4. NET REALIZED INVESTMENT GAINS AND LOSSES
Net realized investment gains (losses) consisted of the following (in
000's):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Fixed maturities............................................ $ (1,839) $ 21,811 $ 671
Mortgage and other loans.................................... 1,981 36 9,465
Real estate................................................. (742) 499 2,393
Derivative instruments...................................... 2,945 (13,970) (63)
-------- -------- -------
Total..................................................... $ 2,345 $ 8,376 $12,466
======== ======== =======
</TABLE>
75
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (CONTINUED)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
5. NET INVESTMENT INCOME
Net investment income consisted of the following (in 000's):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Fixed maturities............................................ $254,390 $295,167 $324,150
Equity securities........................................... (33) 37 --
Mortgage and other loans.................................... 90,638 103,804 128,214
Real estate................................................. 6,829 7,844 7,070
Policy loans................................................ 3,172 2,934 3,639
Derivatives................................................. 17,671 (11,880) (3,060)
Income on funds withheld under reinsurance.................. -- 67,045 85,840
Other....................................................... (1,416) (817) 943
-------- -------- --------
Gross investment income................................... 371,251 464,134 546,796
Less: Investment expenses................................... 6,273 8,277 6,882
-------- -------- --------
Net investment income..................................... $364,978 $455,857 $539,914
======== ======== ========
</TABLE>
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107 excludes certain insurance liabilities and other non-financial
instruments from its disclosure requirements. The fair value amounts presented
herein do not include the expected interest margin (interest earnings over
interest credited) to be earned in the future on investment-type products or
other intangible items. Accordingly, the aggregate fair value amounts presented
herein do not necessarily represent the underlying value of the Company;
likewise, care should be exercised in deriving conclusions about the Company's
business or financial condition based on the fair value information presented
herein.
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1999 and 1998 (in
000's):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents..................... $ 550,265 $ 550,265 $ 264,744 $ 264,744
Fixed maturities.............................. 2,678,340 2,678,340 3,489,965 3,489,965
Short-term investments........................ 177,213 177,213 336,026 336,026
Mortgages..................................... 931,351 933,725 969,800 1,014,189
Derivatives................................... 9,817 9,817 (9,967) (9,967)
Policy loans.................................. 40,660 40,660 42,595 42,595
Other invested assets......................... 67,938 67,938 64,177 64,177
Financial liabilities:
Guaranteed investment contracts............... $ 677,265 $ 665,830 $1,064,357 $1,089,070
Contractholder deposit funds.................. 2,279,413 2,213,896 2,449,585 2,460,530
Fixed annuity contracts....................... 112,794 105,845 113,913 114,661
Interest sensitive life insurance............. 116,999 119,659 118,076 120,077
Long-term debt................................ 565,000 529,212 565,000 600,625
</TABLE>
76
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
6. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair values of cash and cash equivalents are estimated to be cost plus
accrued interest which approximates fair value. The fair values of short-term
bonds are estimated to be the amortized cost. The fair values of publicly traded
fixed maturities are based upon market prices or dealer quotes. For privately
placed fixed maturities, fair values are estimated by taking into account prices
for publicly traded securities of similar credit risk, maturity, repayment and
liquidity characteristics. The fair values of mortgage and other loans are
estimated by discounting future cash flows using current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Policy loans are state at unpaid principal balances which approximate fair
value.
The fair values of the Company's general account insurance reserves and
contractholder deposits under investment-type contracts (insurance, annuity and
pension contracts that do not involve mortality or morbidity risks) are
estimated using discounted cash flow analyses or surrender values based on
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for all contracts being valued. Those contracts
that are deemed to have short-term guarantees have a carrying amount equal to
the estimated market value.
The fair values of other deposits with future maturity dates are estimated
using discounted cash flows.
The fair value of notes payable and other borrowings are estimated using
discounted cash flow analyses based upon the Company's current incremental
borrowing rates for similar types of borrowings. The carrying amount of all
other assets is assumed to approximate fair value. The company's commitments to
extend credit approximate fair value.
7. REINSURANCE
INDIVIDUAL INSURANCE
The Company has agreements with SLOC which provide that SLOC will reinsure
the mortality risks of the individual life insurance contracts sold by the
Company. Under these agreements basic death benefits and supplementary benefits
are reinsured on a yearly renewable term basis and coinsurance basis,
respectively.
Effective January 1, 1991, the Company entered into an agreement with SLOC
under which certain individual life insurance contracts issued by SLOC were
reinsured by the Company on a 90% coinsurance basis. Also effective January 1,
1991, the Company entered into an agreement with SLOC which provides that SLOC
will reinsure the mortality risks in excess of $500,000 per policy for the
individual life insurance contracts assumed by the Company in the reinsurance
agreement described above. Such death benefits are reinsured on a yearly
renewable term basis. These two agreements were terminated effective October 1,
1998.
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured.
GROUP INSURANCE
The Company has agreements with SLOC whereby SLOC reinsures the mortality
and morbidity risks of the group life insurance contracts and group long-term
disability contracts. Under these agreements, certain death benefits and
long-term disability benefits are reinsured on a yearly renewable term
77
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
7. REINSURANCE (CONTINUED)
basis. The agreements provide that SLOC will reinsure the mortality risks in
excess of $50,000 per policy for group life contracts and $3,000 per policy per
month for long-term disability contracts ceded by the Company.
The effects of reinsurance were as follows (in 000's):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Insurance premiums
Direct.................................................... $ 33,033 $ 39,168 $ 43,312
Assumed................................................... -- 159,787 211,657
Ceded..................................................... 5,814 11,867 13,180
-------- -------- --------
Net Premiums................................................ $ 27,219 $187,088 $241,789
======== ======== ========
Insurance and other individual policy benefits and claims
Direct.................................................... $318,519 $330,592 $411,834
Assumed................................................... -- 248,664 241,947
Ceded..................................................... 3,821 11,170 5,361
-------- -------- --------
Net policy benefits and claims.............................. $314,698 $568,086 $648,420
======== ======== ========
</TABLE>
The Company is contingently liable for the portion of the policies
reinsured under each of its existing reinsurance agreements in the event the
reinsurance companies are unable to pay their portion of any reinsured claim.
Management believes that any liability from this contingency is unlikely.
However, to limit the possibility of such losses, the Company evaluates the
financial condition of its reinsurers and monitors concentration of credit risk.
8. RETIREMENT PLANS
PENSION PLAN
The Company and its subsidiaries participate with SLOC in a
non-contributory defined benefit pension plan covering essentially all
employees. Benefits under all plans are based on years of service and employees'
average compensation.
The Company's funding policies for the pension plans are to contribute
amounts which at least satisfy the minimum amount required by the Employee
Retirement Income Security Act of 1974 ("ERISA"); currently the plans are fully
funded. Most pension plan assets consist of separate accounts of SLOC or other
insurance company contracts. The following table sets forth the change in the
78
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. RETIREMENT PLANS (CONTINUED)
pension plan's projected benefit obligations and assets, as well as the plans
funded status at December 31, 1999 and 1998 (in 000's):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Change in projected benefit obligation:
Projected benefit obligation at beginning of year........... $110,792 $ 79,684
Service cost................................................ 5,632 4,506
Interest cost............................................... 6,952 6,452
Actuarial loss (gain)....................................... (21,480) 21,975
Benefits paid............................................... (2,376) (1,825)
-------- --------
Projected benefit obligation at end of year................. $ 99,520 $110,792
======== ========
Change in fair value of plan assets:
Fair value of plan assets at beginning of year.............. $151,575 $136,610
Actual return on plan assets................................ 9,072 16,790
Benefits paid............................................... (2,376) (1,825)
Fair value of plan assets at end of year.................... $158,271 $151,575
Funded status............................................... $ 58,752 $ 40,783
Unrecognized net actuarial loss............................. (20,071) (2,113)
Unrecognized transition obligation.......................... (22,617) (24,674)
Unrecognized prior service cost............................. 7,081 7,661
-------- --------
Prepaid benefit cost........................................ $ 23,145 $ 21,657
======== ========
</TABLE>
The following table sets forth the components of the net periodic pension
cost for the years ended December 31, 1999 and 1998 (in 000's).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Components of net periodic benefit cost:
Service cost................................................ $ 5,632 $ 4,506
Interest cost............................................... 6,952 6,452
Expected return on plan assets.............................. (12,041) (10,172)
Amortization of transition obligation asset................. (2,056) (2,056)
Amortization of prior service cost.......................... 580 580
Recognized net actuarial gain............................... (554) (677)
-------- --------
Net periodic benefit cost................................... $ (1,487) $ (1,367)
======== ========
The Company's share of net periodic benefit cost............ $ 736 $ 586
======== ========
</TABLE>
The projected benefit obligations were based on calculations that utilize
certain assumptions. The assumed weighted average discount rate was 7.5% and
6.75% for the years ended December 31, 1999 and 1998, respectively. The expected
return on plan assets for 1999 and 1998 was 8.75% and 8.00%, respectively, and
the assumed rate of compensation increase for both 1999 and 1998 was 4.50%.
79
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. RETIREMENT PLANS (CONTINUED)
The Company and certain subsidiaries also participate with SLOC and
certain affiliates in a 401(k) savings plan for which substantially all
employees are eligible. Under the various plans the Company matches, up to
specified amounts, employees' contributions to the plan. The Company's
contributions were $284,000 and $231,000 for the years ended December 31, 1999
and 1998, respectively.
OTHER POST-RETIREMENT BENEFIT PLANS
In addition to pension benefits, the Company and certain subsidiaries
provide certain health, dental, and life insurance benefits ("postretirement
benefits") for retired employees and dependents. Substantially all employees of
the participating companies may become eligible for these benefits if they reach
normal retirement age while working for the Company, or retire early upon
satisfying an alternate age plus service condition. Life insurance benefits are
generally set at a fixed amount.
The following table sets forth the change in other postretirement benefit
plans' obligations and assets, as well as the plans' funded status at December
31, 1999 and 1998 (in 000's).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year..................... $ 10,419 $ 9,845
Service cost................................................ 413 240
Interest cost............................................... 845 673
Actuarial loss.............................................. 1,048 308
Benefits paid............................................... (508) (647)
--------- ---------
Benefit obligation at end of year........................... $ 12,217 $ 10,419
========= =========
Change in fair value of plan assets:
Fair value of plan assets at beginning of year.............. $ -- $ --
Employer contributions...................................... 508 647
Benefits paid............................................... (508) (647)
--------- ---------
Fair value of plan assets at end of year.................... $ -- $ --
========= =========
Funded Status............................................... $ (12,217) $ (10,419)
Unrecognized net actuarial loss............................. 1,469 586
Unrecognized transition obligation.......................... 140 185
--------- ---------
Prepaid (accrued) benefit cost.............................. $ (10,608) $ (9,648)
========= =========
</TABLE>
80
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. RETIREMENT PLANS (CONTINUED)
The following table sets forth the components of the net periodic
postretirement benefit costs for the years ended December 31, 1999 and 1998 (in
000's).
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Components of net periodic benefit cost
Service cost................................................ $ 413 $240
Interest cost............................................... 845 673
Amortization of transition obligation (asset)............... 45 45
Recognized net actuarial loss (gain)........................ 164 (20)
------ ----
Net periodic benefit cost................................... $1,467 $938
====== ====
The Company's share of net periodic benefit cost............ $ 185 $ 95
====== ====
</TABLE>
In order to measure the postretirement benefit obligation at December 31,
1999, the Company assumed a 10.9% annual rate of increase in the per capita cost
of covered health care benefits. These rates were assumed to decrease gradually
to 5.0% for 2005 and remain at that level thereafter. Assumed health care cost
trend rates have a significant effect on the amounts reported for the health
care plans. For example, increasing the health care cost trend rate assumptions
by one percentage point in each year would increase the accumulated
postretirement benefit obligation at December 31, 1999 by $2.8 million, and the
aggregate of the service and interest cost components of net periodic
postretirement benefit expense for 1999 by $0.3 million. Conversely, decreasing
assumed rates by one percentage point in each year would decrease the
accumulated postretirement benefit obligation at December 31, 1999 by $2.3
million, and the aggregate of the service and interest cost components of net
periodic postretirement benefit expense for 1999 by $0.5 million. The assumed
weighted average discount rate used in determining the postretirement benefit
obligation was 7.5% and 6.75% for the year ended December 31, 1999 and 1998,
respectively.
9. FEDERAL INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return with US Holdco as previously described in Note 1. Federal income taxes
are calculated as if the Company was filing a separate federal income tax
return. A summary of the components of federal income tax expense in the
consolidated statements of income for the years ended December 31, 1999, 1998
and 1997 were as follows (in 000's):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal income tax expense
Current................................................... $18,570 $19,476 $35,689
Deferred.................................................. 10,210 (8,551) (1,674)
------- ------- -------
Total....................................................... $28,780 $10,925 $34,015
======= ======= =======
</TABLE>
81
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
9. FEDERAL INCOME TAXES (CONTINUED)
Federal income taxes attributable to the consolidated operations are
different from the amounts determined by multiplying income before federal
income taxes by the expected federal income tax rate of 35%. The Company's
effective rate differs from the federal income tax rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Expected federal income tax expense......................... $28,969 $ 9,405 $36,925
Low income housing credit................................... (6,348) (4,446) (3,270)
Additional tax provision.................................... 6,851 5,423 1,004
Other....................................................... (692) 543 (644)
------- ------- -------
Federal income tax expense.................................. $28,780 $10,925 $34,015
======= ======= =======
</TABLE>
The deferred income tax (asset) liability represents the tax effects of
temporary differences between the carrying amounts of assets and liabilities
used for financial reporting purposes and the amounts used for income tax
purposes. The components of the Company's deferred tax (assets) and liabilities
as of December 31, 1999 and 1998 were as follows (in 000's):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax asset
Actuarial liabilities..................................... $ 136,560 $ 118,074
Investments, net.......................................... $ 943 --
---------- ----------
Total deferred tax asset.................................... $ 137,503 $ 118,074
Deferred tax liabilities
Investments, net.......................................... $ -- $ (65,704)
Deferred policy acquisition costs......................... (193,238) (144,366)
Other..................................................... (21,940) (21,105)
---------- ----------
Total deferred tax liability................................ $ (215,178) $ (231,175)
---------- ----------
Net deferred tax liability.................................. $ (77,675) $ (113,101)
========== ==========
</TABLE>
The Company makes payments under the tax sharing agreements as if it were
filing as a separate company.
The Company's federal income tax returns are routinely audited by the
Internal Revenue Service ("IRS"), and provisions are made in the consolidated
financial statements in anticipation of the results of these audits. The Company
is currently under audit by the IRS for the years 1994 and 1995. In the
Company's opinion, adequate tax liabilities have been established for all years
and any adjustments that might be required for the years under audit will not
have a material effect on the Company's financial statements. However, the
amounts of these tax liabilities could be revised in the future if estimates of
the Company's ultimate liability are revised.
82
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSES
Activity in the liability for unpaid claims and claims adjustment expenses
related to the group life and group disability products is summarized below (in
000's):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Balance at January 1........................................ $15,002 $13,016
Less reinsurance recoverables............................... (3,232) (2,777)
------- -------
Net balance at January 1.................................... 11,770 10,239
------- -------
Incurred related to:
Current year.............................................. 12,187 10,212
Prior years............................................... (1,487) (1,721)
------- -------
Total incurred.............................................. 10,700 8,491
------- -------
Paid losses related to:
Current year.............................................. (6,755) (5,146)
Prior years............................................... (1,996) (1,814)
------- -------
Total paid.................................................. (8,751) (6,960)
------- -------
Net balance at December 31.................................. 17,755 15,002
Plus reinsurance recoverables............................... (4,036) (3,232)
------- -------
Balance at December 31...................................... $13,719 $11,770
======= =======
</TABLE>
The Company regularly updates its estimates of liabilities for unpaid
claims and claims adjustments expenses as new information becomes available and
further events occur which may impact the resolution of unsettled claims for its
individual and group disability lines of business. Changes in prior estimates
are recorded in results of operations in the year such changes are determined to
be needed.
11. DEFERRED POLICY ACQUISITION COSTS
The following illustrates the changes to the deferred policy acquisition
cost asset (in 000's):
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
Balance at January 1........................................ $523,872 $ 719,819
Acquisition costs deferred................................ 156,228 144,324
Amortized to expense during year.......................... (67,815) (88,794)
Adjustment for unrealized investment gains (losses) during
year.................................................... 73,993 (11,139)
Adjustment for termination of reinsurance agreement....... -- (240,338)
-------- ---------
Balance at December 31...................................... $686,278 $ 523,872
======== =========
</TABLE>
12. SEGMENT INFORMATION
The Company conducts business principally in five operating segments and
maintains a corporate segment to provide for the capital needs of the various
operating segments and to engage in other financing related activities. Each
segment was defined consistent with the way results are evaluated by the chief
operating decision-maker.
83
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
12. SEGMENT INFORMATION (CONTINUED)
INDIVIDUAL PROTECTION
The Individual Protection segment markets and administers life insurance
products sold to individuals and corporate owners of individual life insurance.
The products include a variety of whole life, universal life and variable life
products.
GROUP PROTECTION
The Group Protection segment markets and administers group life insurance,
long term disability and short-term disability products. These products are sold
to employers which provide group benefits for their employees.
WEALTH MANAGEMENT
The Wealth Management segment markets and administers both individual and
group fixed and variable annuity products and provides asset management services
to certain of the Company's separate accounts.
CORPORATE SEGMENT
The Corporate segment includes the unallocated capital of the Company, its
debt financing, and items not otherwise attributable to the other segments.
Management evaluates the results of the operating segments on a pre-tax
basis. The Company does not materially depend on one or a few customers, brokers
or agents. The following amounts pertain to the various business segments (in
000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
---------------------------------------
TOTAL TOTAL PRETAX NET OPERATING TOTAL
REVENUES EXPENDITURES INCOME INCOME ASSETS
-------- ------------ -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Individual Protection............... $ 17,139 $ 18,001 $ (861) $ (118) $ 291,508
Group Protection.................... 16,095 15,541 554 360 20,038
Wealth Management................... 543,424 460,788 82,636 59,734 20,534,218
Corporate........................... 53,241 52,758 483 (6,244) 639,149
-------- -------- ------- ------- -----------
Total............................. $629,899 $547,088 $82,812 $53,732 $21,484,913
======== ======== ======= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------
TOTAL TOTAL PRETAX NET OPERATING TOTAL
REVENUES EXPENDITURES INCOME INCOME ASSETS
-------- ------------ --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Individual Protection......... $230,219 $300,478 $ (70,259) $ (46,469) $ 357,042
Group Protection.............. 14,993 13,023 1,970 1,260 18,163
Wealth Management............. 538,053 457,483 80,570 59,978 17,211,359
Corporate..................... 63,438 50,787 12,651 (705) 661,698
-------- -------- --------- --------- -----------
Total....................... $846,703 $821,771 $ 24,932 $ 14,064 $18,248,262
======== ======== ========= ========= ===========
</TABLE>
84
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
12. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------
TOTAL TOTAL PRETAX NET OPERATING TOTAL
REVENUES EXPENDITURES INCOME INCOME ASSETS
-------- ------------ -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Individual Protection.......... $295,933 $301,216 $ (5,283) $ (3,260) $ 1,554,818
Group Protection............... 12,425 13,603 (1,178) (764) 13,793
Wealth Management.............. 586,925 499,225 87,700 60,709 15,026,991
Corporate...................... 63,980 48,411 15,569 4,785 739,913
-------- -------- -------- -------- -----------
Total........................ $959,263 $862,455 $ 96,808 $ 61,470 $17,335,515
======== ======== ======== ======== ===========
</TABLE>
13. REGULATORY FINANCIAL INFORMATION
The insurance subsidiaries are required to file annual statements with state
regulatory authorities prepared on an accounting basis prescribed or permitted
by such authorities (statutory basis). Statutory surplus differs from
shareholder's equity reported in accordance with generally accepted accounting
principles for stock life insurance companies primarily because policy
acquisition costs are expensed when incurred, investment reserves are based on
different assumptions, post-retirement benefit costs are based on different
assumptions and reflect a different method of adoption, life insurance reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable.
85
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
13. REGULATORY FINANCIAL INFORMATION (CONTINUED)
For the year ended December 31, 1999, the Company filed its Annual Report
on Form 10-K ("10-K") using audited statutory financial statements. The
following information reconciles statutory net income and statutory surplus with
net income and equity on a GAAP basis (in 000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Statutory net income........................................ $ 90,358 $ 125,401 $129,242
Adjustments to GAAP for life insurance companies:
Statutory interest maintenance reserve.................... 3,956 2,925 1,867
Investment income and realized gains (losses)............. 13,803 (4,532) 14,186
Policyowner benefits...................................... (154,293) (187,990) (84,895)
Deferred policy acquisition costs......................... 88,413 60,527 88,921
Deferred income taxes..................................... (13,615) 8,886 (26,067)
Other, net................................................ 13,850 9,017 7,247
--------- --------- --------
GAAP net income............................................. $ 42,472 $ 14,234 $130,501
========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Statutory capital stock and surplus......................... $ 886,342 $ 909,924
Adjustments to GAAP for life insurance companies:
Valuation of investments.................................. 3,697 139,826
Deferred policy acquisition costs......................... 686,278 550,900
Future policy benefits and Contractholder deposit funds... (350,181) (240,035)
Deferred income taxes..................................... (86,112) (106,343)
Statutory interest maintenance reserve.................... 42,325 44,668
Statutory asset valuation reserve......................... 45,281 46,698
Surplus notes............................................. (565,000) (565,000)
Other, net................................................ 8,615 (3,038)
--------- ---------
GAAP equity................................................. $ 671,245 $ 777,600
========= =========
</TABLE>
The NAIC 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.
14. DIVIDEND RESTRICTIONS
The Company and its insurance subsidiary's ability to pay dividends are
subject to certain restrictions. Delaware and New York have enacted laws
governing the payment of dividends to stockholders by insurers. These laws
affect the dividend paying ability of the Company and Sun Life (N.Y.).
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without prior
approval of the Delaware Commissioner of Insurance, is limited to the greater of
(i) 10% of its statutory surplus as of the preceding December 31st, or (ii) the
individual company's statutory net gain from operations for the preceding
calendar year (if such insurer is a life company), or its net income (not
including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer,
86
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
14. DIVIDEND RESTRICTIONS (CONTINUED)
whether or not in excess of the aforementioned threshold, from a source other
than statutory surplus, would also require the prior approval of the Delaware
Commissioner of Insurance. During 1997, the Company received approval from the
Delaware Commissioner of Insurance and transferred all of its ownership in MFS
valued at $68,951,000 as a dividend to Life Holdco. See Note 2 for additional
information. In 1998, a dividend in the amount of $50,000,000 was declared and
paid by the Company to its parent, Life Holdco. During 1999, a dividend in the
amount of $80,000,000 was declared and paid by the Company to Life Holdco. These
dividends were approved by the Board of Directors, but did not require prior
approval of the Insurance Commissioner. The maximum dividend payable by the
Company without prior approval of the Delaware Commissioner of Insurance at
December 31, 1999 was $8,000,000.
Under New York statute, cash dividends may be paid out of that part of the
Company's available and accumulated surplus funds, which was derived from
realized net operating profits of its business and realized capital gains. A
cash dividend otherwise lawful may be paid out of such earned surplus even
though total surplus is at the time less than previously contributed or paid-in
surplus. No cash dividend shall be paid to stockholder unless a notice of the
intention of the Board of Directors to declare such dividend and the amount
thereof shall have been filed with the Superintendent of Insurance of the State
of New York not less than thirty days in advance of such proposed declaration,
nor if the Superintendent within thirty days after such filing gives written
notice to the Company of his disapproval of such payment. During 1999 and 1998,
Sun (N.Y.) declared and paid dividends in the amounts of $6,500,000 and
$3,000,000, respectively, to the Company.
15. COMMITMENTS AND CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the
number of insurance companies that are under regulatory supervision. This may
result in an increase in mandatory assessments by state guaranty funds, or
voluntary payments by solvent insurance companies to cover losses to
policyholders of insolvent or rehabilitated companies. Mandatory assessments,
which are subject to statutory limits, can be partially recovered through a
reduction in future premium taxes in some states. The Company is not able to
reasonably estimate the potential effect on it of any such future assessments.
87
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (CONTINUED)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 if 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. The Company incurred
guaranty fund assessments of approximately $3,500,000, $3,500,000, and
$3,083,000 in 1999, 1998 and 1997, respectively.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. Although the Company does not
believe that there is a material contingency associated with the Year 2000
project, there can be no assurance that exposure for material contingencies may
not arise.
LITIGATION
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 assurance, management, at the present
time, does not anticipate that the ultimate liability arising from such pending
and threatened litigation will have a material effect on the financial condition
or operating results of the Company.
LEASE COMMITMENTS
The Company leases various facilities and equipment under operating leases
with terms up to twenty-five years. As of December 31, 1999, minimum future
lease payments under such leases are as follows (in 000's):
<TABLE>
<S> <C>
2000........................................................ $ 4,354
2001........................................................ 4,354
2002........................................................ 4,407
2003........................................................ 3,378
Thereafter.................................................. 2,776
=======
Total....................................................... $19,269
=======
</TABLE>
Total rental expense for the years ended December 31, 1999, 1998 and 1997
was $4,656,000, $4,139,000, and $3,875,000 respectively.
88
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
16. DISCONTINUED OPERATIONS
During 1999, the Company discontinued its individual disability segment and
its banking and trust segment. These segments were composed of MCIC and NLT
which were both sold during 1999 to separate, unaffiliated parties. Net proceeds
on the sale of MCIC were approximately $33,965,000 and the Company realized a
net loss after taxes of $25,465,000. Net proceeds on the sale of NLT were
approximately $30,000,000; the Company realized a net gain after taxes of
$13,170,000. Immediately before the sale date of NLT, the Company received a $19
million dividend distribution from NLT.
During 1997, the Company discontinued its investment management segment
which was comprised of Massachusetts Financial Services Company, ("MFS"). As
part of a corporate restructuring at the end of 1997, MFS was transferred to
Life Holdco in the form of a dividend valued at $68,951,000. MFS was then
transferred to US Holdco and then to a newly formed holding company, Sun Life of
Canada (U.S.) Financial Services Holdings, Inc.
Income from discontinued operations (in 000's):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue..................................................... $22,667 $104,225 $691,348
Expenses.................................................... 21,430 104,593 570,521
Provision for income taxes.................................. 203 (445) 51,795
------- -------- --------
Income from discontinued operations......................... $ 1,034 $ 77 $ 69,032
======= ======== ========
</TABLE>
89
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF SUN LIFE ASSURANCE
COMPANY OF CANADA (U.S.):
We have audited the accompanying consolidated balance sheets of Sun Life
Assurance Company of Canada (U.S.) and its subsidiaries (the "Company") as of
December 31, 1999 and 1998, and the related consolidated statements of income,
stockholder's equity, comprehensive income and of cash flows for each of the
three years in the period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Sun Life Assurance Company of
Canada (U.S.) and its subsidiaries as of December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 22, 2000
------------------------
90
<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 MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
2000 1999
--------- ---------
<S> <C> <C>
Revenues
Premiums and annuity considerations......................... $ 14.6 $ 11.0
Net investment income....................................... 79.9 98.4
Net realized investment gains............................... 0.2 4.5
Fee and other income........................................ 66.6 49.9
------ ------
Total revenues.............................................. 161.3 163.8
------ ------
Benefits and expenses
Policyowner benefits........................................ 80.3 84.7
Underwriting, acquisition and other operating expenses...... 27.0 20.0
Amortization of deferred policy acquisition costs........... 0.6 24.4
------ ------
Total benefits and expenses................................. 107.9 129.1
------ ------
Income from operations...................................... 53.4 34.7
Interest expense............................................ 10.8 10.8
------ ------
Income before income tax expense and discontinued
operations................................................ 42.6 23.9
Income tax expense.......................................... 14.9 3.3
------ ------
Net income from continuing operations....................... 27.7 20.6
Net loss on disposal of subsidiary, after tax............... -- (25.6)
Net income from discontinued operations..................... -- 0.8
------ ------
Net income (loss)........................................... $ 27.7 $ (4.2)
====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.
91
<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)
<TABLE>
<CAPTION>
UNAUDITED
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities available-for-sale at fair value (amortized
cost of $2,843.5 and $2,685.4 in 2000 and 1999,
respectively)............................................. $ 2,833.7 $ 2,677.3
Trading fixed maturities at fair value (amortized cost of
$1.0 and $1.0 in 2000 and 1999, respectively)............. 1.0 1.0
Short-term investments...................................... 85.5 177.2
Mortgage loans.............................................. 898.1 931.4
Real estate................................................. 94.3 95.1
Policy loans................................................ 40.4 40.7
Other invested assets....................................... 68.3 67.9
--------- ---------
Total investments........................................... 4,021.3 3,990.6
--------- ---------
Cash and cash equivalents................................... 321.0 550.3
Accrued investment income................................... 52.4 50.5
Deferred policy acquisition costs........................... 728.1 686.3
Outstanding premiums........................................ 2.0 2.7
Other assets................................................ 62.2 81.2
Separate account assets..................................... 17,298.8 16,123.3
--------- ---------
TOTAL ASSETS................................................ $22,485.8 $21,484.9
========= =========
LIABILITIES
Future contract and policy benefits......................... $ 727.4 $ 729.3
Contractholder deposit funds and other policy liabilities... 2,945.3 3,144.8
Unearned revenue............................................ 7.5 7.1
Accrued expenses and taxes.................................. 93.4 98.8
Deferred federal income taxes............................... 90.2 77.7
Long-term debt payable to affiliates........................ 565.0 565.0
Other liabilities........................................... 58.7 67.7
Separate account liabilities................................ 17,298.8 16,123.3
--------- ---------
Total liabilities........................................... 21,786.3 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...................... 7.7 7.1
Retained earnings........................................... 486.5 458.8
--------- ---------
Total stockholder's equity.................................. 699.5 671.2
--------- ---------
Total liabilities and stockholder's equity.................. $22,485.8 $21,484.9
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.
92
<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 THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
2000 1999
--------- ---------
<S> <C> <C>
Net income (loss)........................................... $27.7 $ (4.2)
Other comprehensive income:
Net change in unrealized holding gains and losses on
available-for-sale securities, net of tax................. 0.7 10.7
Currency translation........................................ (0.1) --
----- ------
Other comprehensive income:................................. 0.6 10.7
----- ------
Comprehensive income........................................ $28.3 $ 6.5
===== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.
93
<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 THREE MONTHS ENDED MARCH 31, 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, 1999............ $5.9 $199.4 $ 7.1 $458.8 $671.2
Comprehensive income:
Net income............................ -- -- -- 27.7 27.7
Other comprehensive income............ -- -- 0.6 -- 0.6
---- ------ ----- ------ ------
Balance at March 31, 2000............... $5.9 $199.4 $ 7.7 $486.5 $699.5
==== ====== ===== ====== ======
Balance at December 31, 1998............ $5.9 $199.4 $75.9 $496.4 $777.6
Comprehensive income:
Net income............................ -- -- -- (4.2) (4.2)
Other comprehensive income............ -- -- 10.7 -- 10.7
Dividends to stockholder.............. -- -- -- (75.0) (75.0)
---- ------ ----- ------ ------
Balance at March 31, 1999............... $5.9 $199.4 $86.6 $417.2 $709.1
==== ====== ===== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.
94
<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 THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income from continuing operations....................... $ 27.7 $ 20.6
Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:
Amortization of discount and premiums..................... (0.3) 0.0
Depreciation and amortization............................. 0.3 0.5
Net realized gains on investments......................... (0.2) (4.5)
Tax benefit on disposal of subsidiary..................... -- 14.8
Interest credited to contractholder deposits.............. 48.7 56.0
Deferred federal income taxes............................. 12.1 (5.9)
Changes in assets and liabilities:
Deferred acquisition costs................................ (39.0) (16.6)
Accrued investment income................................. (1.9) 1.0
Other assets.............................................. 13.1 (17.9)
Future contract and policy benefits....................... (1.4) (4.1)
Other, net................................................ (10.1) 12.7
------- -------
Net cash provided by operating activities................... 49.0 56.6
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, maturities and repayments of:
Available-for-sale fixed maturities..................... 208.9 413.3
Subsidiary.............................................. -- 33.6
Mortgage loans.......................................... 50.1 24.0
Real estate............................................. 3.0 --
Purchases of:
Available-for-sale fixed maturities..................... (366.9) (143.8)
Other invested assets................................... -- (1.0)
Mortgage loans.......................................... (17.6) (97.7)
Real estate............................................. (1.9) (0.1)
Changes in other investing activities, net................ 0.3 --
Net change in policy loans................................ 0.3 (0.7)
Net change in short term investments...................... 94.6 (91.3)
------- -------
Net cash provided by (used in) investing activities......... (29.2) 136.4
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits and interest credited to contractholder deposit
funds................................................... 317.0 341.3
Withdrawals from contractholder deposit funds............. (566.1) (471.8)
------- -------
Net cash used in financing activities....................... (249.1) (130.4)
------- -------
Net change in cash and cash equivalents..................... (229.3) 62.6
Cash and cash equivalents, beginning of period............ 550.3 264.7
Cash and cash equivalents, end of period.................. $ 321.0 $ 327.3
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid, net of refunds......................... $ (19.5) $ 13.3
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.
95
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
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, 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 has changed its basis of accounting for the three months ended March 31,
2000 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 March 31, 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 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 Life of Canada
(U.S.) SPE 97-1, Inc. ("SPE 97-1"), Clarendon Insurance Agency, Inc.
("Clarendon"), and Sun Life Information Services Ireland Limited ("SLIRL"). 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. SLIRL provides information systems development
services to the Company and its affiliates. Sunbesco and Sunfinco are currently
inactive.
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 these subsidiaries are reported as
discontinued operations.
96
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
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
97
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 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. Hedge accounting is used to account for
certain derivatives. 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.
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.
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,
98
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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
99
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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., 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. The Company is evaluating SFAS No. 133 and
has not determined its effect on the consolidated financial statements.
On January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants (AICPA) Statement of Position (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
100
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
such liability. The adoption of SOP 97-3 had no material impact on the financial
position or results of operations of the Company.
On January 1, 1999, the Company adopted AICPA SOP 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." This SOP
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. The adoption of
SOP 98-1, had no material impact on pre-tax income in either three month period.
(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 $7,374,000 and $6,798,000 for the three month period in 2000 and
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 month period amounted to approximately $1,994,000 in 2000 and
$1,762,000 in 1999.
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, 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 three operating
segments and maintains a corporate segment to provide for the capital needs of
the three 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.
101
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SEGMENT INFORMATION (CONTINUED)
Summarized unaudited financial information by segment is provided in the
tables below:
<TABLE>
<CAPTION>
PERIOD ENDED MARCH 31, 2000 MARCH 31,
--------------------------------------------- 2000
TOTAL TOTAL PRETAX NET ------------
REVENUES EXPENDITURES INCOME INCOME TOTAL ASSETS
-------- ------------ -------- -------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Individual Protection....................... $ 3.1 $ 3.2 $ (.1) $ (.1) $ 325.0
Group Protection............................ 4.2 3.3 .9 .6 27.8
Wealth Management........................... 146.9 99.3 47.6 32.6 21,903.1
Corporate................................... 7.1 12.9 (5.8) (5.4) 229.8
====== ====== ===== ===== =========
Total..................................... $161.3 $118.7 $42.6 $27.7 $22,485.7
====== ====== ===== ===== =========
Group Protection............................ 4.2 3.6 .6 .4 20.0
Wealth Management........................... 146.3 120.5 25.8 18.1 20,534.2
Corporate................................... 8.9 11.4 (2.5) 2.1 639.2
====== ====== ===== ===== =========
Total..................................... $163.8 $139.9 $23.9 $20.6 $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. 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>
MARCH 31, 1999
(IN MILLIONS)
--------------
<S> <C>
Revenue..................................................... $7.5
Expenses.................................................... 6.2
Provision for income taxes.................................. .5
====
Income from discontinued operations......................... $ .8
====
</TABLE>
(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 generally accepted accounting principles. The
Company has changed its basis of accounting for the three months ended March 31,
2000 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 March 31, 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 10-K is shown below:
102
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) STATUTORY FINANCIAL INFORMATION (CONTINUED)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND CAPITAL STOCK AND
SURPLUS
<TABLE>
<CAPTION>
DECEMBER 31, 1999
(IN MILLIONS)
-----------------
<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>
103
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) STATUTORY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
(IN MILLIONS)
-----------------
<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>
THREE MONTHS
ENDED MARCH 31,
-------------------
2000 1999
-------- --------
(IN MILLIONS)
<S> <C> <C>
Statutory net income........................................ $ 21.4 $ 37.7
Adjustments to GAAP for life insurance companies:
Statutory interest maintenance reserve.................... (.8) (.9)
Investment income and realized gains (losses)............... 1.9 (14.5)
Policyowner benefits........................................ (24.4) (35.4)
Deferred policy acquisition costs........................... 39.0 16.6
Deferred income taxes....................................... (11.1) (9.0)
Other, net.................................................. 1.7 1.3
------ ------
GAAP net income (loss)...................................... $ 27.7 $ (4.2)
====== ======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(IN MILLIONS)
<S> <C> <C>
Statutory surplus........................................... $ 915.5 $ 886.3
Adjustments to GAAP for life insurance companies:
Valuation of investments.................................. 3.2 3.7
Deferred policy acquisition costs......................... 728.1 686.3
Future policy benefits and Contractholder deposit funds... (386.4) (350.2)
Deferred income taxes..................................... (89.4) (86.1)
Statutory interest maintenance reserve.................... 41.3 42.3
Statutory asset valuation reserve......................... 42.4 45.3
Surplus notes............................................. (565.0) (565.0)
Other, net................................................ 9.8 8.6
------- -------
GAAP equity................................................. $ 699.5 $ 671.2
======= =======
</TABLE>
The NAIC 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.
104
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
------------------------
105
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Calculation of Performance Data
Advertising and Sales Literature
Calculations
Example of Variable Accumulation Unit Value Calculation
Example of Variable Annuity Unit Calculation
Example of Variable Annuity Payment Calculation
Distribution of the Contracts
Designation and Change of Beneficiary
Custodian
Financial Statements
</TABLE>
106
<PAGE>
This Prospectus sets forth information about the Contract and the Variable
Account that a prospective purchaser should know before investing. Additional
information about the Contract and the Variable Account has been filed with the
Securities and Exchange Commission in a Statement of Additional Information
dated June __, 2000 which is incorporated herein by reference. The Statement of
Additional Information is available upon request and without charge from Sun
Life Assurance Company of Canada (U.S.). To receive a copy, return this request
form to the address shown below or telephone (800) 752-7215.
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
To: Sun Life Assurance Company of Canada (U.S.)
c/o Retirement Products and Services
P.O. Box 1024
Boston, Massachusetts 02103
Please send me a Statement of Additional Information for
MFS Regatta Access Variable and Fixed Annuity
Sun Life of Canada (U.S.) Variable Account F.
</TABLE>
<TABLE>
<S> <C>
Name ------------------------------------------------------------
Address ------------------------------------------------------------
------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
City -------------------------------- State -------------- Zip -------
</TABLE>
<TABLE>
<S> <C>
Telephone ------------------------------------------------------------
</TABLE>
107
<PAGE>
APPENDIX A
GLOSSARY
The following terms as used in this Prospectus have the indicated
meanings:
ACCOUNT or PARTICIPANT ACCOUNT: An account established for each
Participant to which Net Purchase Payments are credited.
ACCOUNT VALUE: The Variable Accumulation Value, if any, plus the Fixed
Accumulation Value, if any, of your Account for any Valuation Period.
ACCOUNT YEAR and ACCOUNT ANNIVERSARY: Your first Account Year is the
period 365 days from the date on which we issued your Contract. Your Account
Anniversary is the last day of an Account Year. Each Account Year after the
first is the 365-day period that begins on your Account Anniversary. For
example, if the Contract Date is on March 12, the first Account Year is
determined from the Contract Date and ends on March 12 of the following year.
Your Account Anniversary is March 12 and all Account Years after the first are
measured from March 12. (If the Anniversary Date falls on a non-Business Day,
the previous Business Day will be used.)
ACCUMULATION PHASE: The period before the Annuity Commencement Date and
during the lifetime of the Annuitant during which you make Purchase Payments
under the Contract. This is called the "Accumulation Period" in the Contract.
*ANNUITANT: The person or persons to whom the first annuity payment is
made. If the Annuitant dies prior to the Annuity Commencement Date, the
Co-Annuitant will become the sole Annuitant. If the Co-Annuitant dies or if no
Co-Annuitant is named, the Participant becomes the Annuitant upon the
Annuitant's death prior to the Annuity Commencement Date. If you have not named
a sole Annuitant on the 30th day before the Annuity Commencement Date and both
the Annuitant and Co-Annuitant are living, the Co-Annuitant will be the sole
Annuitant/Payee during the Income Phase.
ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment
under each Contract is to be made.
ANNUITY OPTION: The method you choose for receiving annuity payments.
ANNUITY UNIT: A unit of measure used in the calculation of the amount of
the second and each subsequent Variable Annuity payment from the Variable
Account.
APPLICATION: The document signed by you or other evidence acceptable to us
that serves as your application for participation under a Group Contract or
purchase of an Individual Contract.
*BENEFICIARY: Prior to the Annuity Commencement Date, the person or entity
having the right to receive the death benefit and, for Non-Qualified Contracts,
who, in the event of the Participant's death, is the "designated beneficiary"
for purposes of Section 72(s) of the Internal Revenue Code. After the Annuity
Commencement Date, the person or entity having the right to receive any payments
due under the Annuity Option elected, if applicable, upon the death of the
Payee.
BUSINESS DAY: Any day the New York Stock Exchange is open for trading.
Also, any day on which we make a determination of the value of a Variable
Accumulation Unit.
CERTIFICATE: The document for each Participant which evidences the
coverage of the Participant under a Group Contract.
COMPANY: Sun Life Assurance Company of Canada (U.S.).
CONTRACT: Any Individual Contract, Group Contract, or Certificate issued
under a Group Contract.
CONTRACT DATE: The date on which we issue your Contract. This is called
the "Date of Coverage" in the Contract.
* You specify these items on the Application, and may change them, as we
describe in this Prospectus.
108
<PAGE>
COVERED PERSON: The person(s) identified as such in the Contract whose
death will trigger the death benefit provisions of the Contract and whose
medically necessary stay in a hospital or nursing facility may allow the
Participant to be eligible for a waiver of the withdrawal charge. Unless
otherwise noted, the the Participant/Owner is the Covered Person.
DEATH BENEFIT DATE: If you have elected a death benefit payment option
before the Annuitant's death that remains in effect, the date on which we
receive Due Proof of Death. If your Beneficiary elects the death benefit payment
option, the later of (a) the date on which we receive the Beneficiary's election
and (b) the date on which we receive Due Proof of Death. If we do not receive
the Beneficiary's election within 60 days after we receive Due Proof of Death,
the Death Benefit Date will be the last day of the 60 day period and we will pay
the death benefit in one lump sum.
DUE PROOF OF DEATH: An original certified copy of an official death
certificate, an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death, or any other proof satisfactory to the
Company.
FIXED ACCOUNT: The general account of the Company, consisting of all
assets of the Company other than those allocated to a separate account of the
Company.
FIXED ACCOUNT VALUE: The value of that portion of your Account allocated
to the Fixed Account.
FIXED ANNUITY: An annuity with payments which do not vary as to dollar
amount.
FUND: A registered management investment company, or series thereof, in
which assets of a Sub-Account may be invested.
GROUP CONTRACT: A Contract issued by the Company on a group basis.
GUARANTEE AMOUNT: Each separate allocation of Account Value to a
particular Guarantee Period (including interest earned thereon).
GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is
credited.
GUARANTEED INTEREST RATE: The rate of interest we credit on a compound
annual basis during any Guarantee Period.
INCOME PHASE: The period on and after the Annuity Commencement Date and
during the lifetime of the Annuitant during which we make annuity payments under
the Contract.
INDIVIDUAL CONTRACT: A Contract issued by the Company on an individual
basis.
NET INVESTMENT FACTOR: An index applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater or less than or equal to one.
NET PURCHASE PAYMENT (NET PAYMENTS): The portion of a Purchase Payment
which remains after the deduction of any applicable premium tax or similar tax.
This is also the term used to describe the total contribution made to the
Contract minus the total withdrawals.
NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement
plan that does not receive favorable federal income tax treatment under
Sections 401, 403, 408, or 408A of the Internal Revenue Code. The Participant's
interest in the Contract must be owned by a natural person or agent for a
natural person for the Contract to receive income tax treatment as an annuity.
*OWNER: The person, persons or entity entitled to the ownership rights
stated in a Group Contract and in whose name or names the Group Contract is
issued. The Owner may designate a trustee or custodian of a retirement plan
which meets the requirements of Section 401, Section 408(c), Section 408(k),
Section 408(p) or Section 408A of the Internal Revenue Code to serve as legal
owner of assets of a retirement plan, but the term "Owner," as used herein,
shall refer to the organization entering into the Group Contract.
* You specify these items on the Application, and may change them, as we
describe in this Prospectus.
109
<PAGE>
*PARTICIPANT: In the case of an Individual Contract, the owner of the
Contract. In the case of a Group Contract, the person named in the Contract who
is entitled to exercise all rights and privileges of ownership under the
Contract, except as reserved by the Owner. If there are 2 Participants, the
death benefit is paid upon the death of either Participant.
PAYEE: A recipient of payments under a Contract. The term includes an
Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Participant, or on the Annuity Commencement Date.
PURCHASE PAYMENT (PAYMENT): An amount paid to the Company as consideration
for the benefits provided by a Contract.
QUALIFIED CONTRACT: A Contract used in connection with a retirement plan
which may receive favorable federal income tax treatment under Sections 401,
403, 408 or 408A of the Internal Revenue Code of 1986, as amended.
RENEWAL DATE: The last day of a Guarantee Period.
SERIES FUND: MFS/Sun Life Series Trust.
SUB-ACCOUNT: That portion of the Variable Account which invests in shares
of a specific Fund or series of a Fund.
VALUATION PERIOD: The period of time from one determination of Variable
Accumulation Unit or Annuity Unit values to the next subsequent determination of
these values. Value determinations are made as of the close of the New York
Stock Exchange on each day that the Exchange is open for trading.
VARIABLE ACCOUNT: Variable Account F of the Company, which is a separate
account of the Company consisting of assets set aside by the Company, the
investment performance of which is kept separate from that of the general assets
of the Company.
VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of
Variable Account Value.
VARIABLE ACCOUNT VALUE: The value of that portion of your Account
allocated to the Variable Account.
VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount
in relation to the investment performance of the Variable Account.
110
<PAGE>
APPENDIX B
MARKET VALUE ADJUSTMENT
FIXED ACCOUNT -- EXAMPLES OF THE MARKET VALUE ADJUSTMENT ("MVA")
The MVA Factor is:
N/12
1 + I
( -------- ) -1
1 + J + b
These examples assume the following:
(1) The Guarantee Amount was allocated to a 5-year Guarantee Period with
a Guaranteed Interest Rate of 6% or .06.
(2) The date of surrender is 2 years from the Expiration Date (N = 24).
(3) The value of the Guarantee Amount on the date of surrender is
$11,910.16.
(4) The interest earned in the current Account Year is $674.16.
(5) No transfers or partial withdrawals affecting this Guarantee Amount
have been made.
(6) Withdrawal charges, if any, are calculated in the same manner as
shown in the examples in Part 1.
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender, the current rate (J) is 8% or .08
and the b factor is zero.
N/12
1 + I
The MVA factor = ( -------- ) -1
1 + J + b
24/12
1 + .06
= ( ------ ) -1
1 + .08
= (.981)2 -1
= .963 -1
= - .037
The value of the Guarantee Amount less interest credited to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA:
($11,910.16 - $674.16) X (-.037) = -$415.73
-$415.73 represents the MVA that will be deducted from the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $674.16) X (-.037) = -$49.06. -$49.06 represents the MVA
that will be deducted from the partial withdrawal amount before the deduction of
any withdrawal charge.
111
<PAGE>
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of surrender, the current rate (J) is 5% or .05
and the b factor is zero.
N/12
1 + I
The MVA factor = ( -------- ) -1
1 + J + b
24/12
1 + .06
= ( ------ ) -1
1 + .05
= (1.010)2 -1
= 1.019 -1
= - .019
The value of the Guarantee Amount less interested credit to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA:
($11,910.16 - $674.16) X .019 = $213.48
$213.48 represents the MVA that would be added to the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $674.16) X .019 = $25.19.
$25.19 represents the MVA that would be added to the value of the partial
withdrawal amount before the deduction of any withdrawal charge.
112
<PAGE>
APPENDIX C
CALCULATION OF BASIC DEATH BENEFIT
EXAMPLE 1:
Assume a Purchase Payment of $60,000.00 is made on the Contract Date and
an additional Purchase Payment of $40,000.00 is made one year later. Assume that
all of the money is invested in the Sub-Accounts, that no Withdrawals are made
and that the Account Value on the Death Benefit Date is $80,000.00. The
calculation of the Death Benefit to be paid is as follows:
<TABLE>
<S> <C> <C> <C>
The Basic Death Benefit is the greatest of:
Account Value = $ 80,000.00
Cash Surrender Value = $ 74,400.00
Purchase Payments = $100,000.00
The Basic Death Benefit would therefore be: $100,000.00
</TABLE>
EXAMPLE 2:
Assume a Purchase Payment of $60,000.00 is made on the Contract Date and
an additional Purchase Payment of $40,000.00 is made one year later. Assume that
all of the money is invested in the Sub-Accounts and that the Account Value is
$80,000.00 just prior to a $20,000.00 withdrawal. The Account Value on the Death
Benefit Date is $60,000.00.
<TABLE>
<S> <C> <C> <C>
The Basic Death Benefit is the greatest of:
Account Value = $ 60,000.00
Cash Surrender Value = $ 55,200.00
Adjusted Purchase Payments* = $ 75,000.00
The Basic Death Benefit would therefore be: $ 75,000.00
*Adjusted Purchase Payments can be calculated as follows:
Payments X (Account Value after withdrawal DIVIDED BY Account Value before
withdrawal)
$100,000.00 X ($60,000.00 DIVIDED BY $80,000.00)
</TABLE>
113
<PAGE>
APPENDIX D
CALCULATION OF EARNINGS ENHANCEMENT OPTIONAL DEATH BENEFIT
EXAMPLE 1:
Assume a Purchase Payment of $60,000.00 is made on the Contract Date and
an additional Purchase Payment of $40,000.00 is made one year later. Assume that
all of the money is invested into the Sub-Accounts, no withdrawals are made and
the Account Value on the Death Benefit Date is $150,000.00. In addition, this
Contract was issued prior to the Participant's 70th birthday. The calculation of
the Basic Death Benefit to be paid is as follows:
<TABLE>
<S> <C> <C> <C>
The Basic Death Benefit is the greatest of:
Account Value = $150,000.00
Cash Surrender Value = $ 72,800.00
Adjusted Purchase Payments = $100,000.00
The Basic Death Benefit would therefore = $150,000.00
The benefit under the optional death benefit rider
can be calculated as follows:
The lesser of:
Adjusted Purchase Payments = $100,000.00
Account Value -- adjusted Purchase Payments = $ 50,000.00
Amount to use to determine rider benefit = $ 50,000.00
The amount to be paid on the rider benefit = $ 50,000.00 X 40% = $20,000.00
</TABLE>
The total Death Benefit would be the amount paid on the Basic Death
Benefit plus the amount paid on the Earnings Enhancement Optional Death Benefit
Rider: $150,000.00 + $20,000.00 = $170,000.00
EXAMPLE 2:
Assume a Purchase Payment of $60,000.00 is made on the Contract Date and
an additional Purchase Payment of $40,000.00 is made one year later. Assume that
all of the money is invested in the Sub-Accounts and that the Account Value is
$150,000.00 just prior to a $20,000.00 withdrawal. The Account Value on the
Death Benefit Date is $130,000.00.
<TABLE>
<S> <C> <C> <C>
The Basic Death Benefit is the greatest of:
Account Value = $130,000.00
Cash Surrender Value = $123,600.00
Adjusted Purchase Payments* = $ 86,666.67
The Basic Death Benefit would therefore = $130,000.00
*Adjusted Purchase Payments can be calculated as follows:
Payments X (Account Value after withdrawal DIVIDED BY Account Value before withdrawal)
$100,000.00 X ($130,000.00 DIVIDED BY $150,000.00)
The benefit under the optional death benefit rider
can be calculated as follows:
The lesser of:
Adjusted Purchase Payments = $ 86,666.67
Account Value -- adjusted Purchase Payments = $ 43,333.33
Amount to use to determine rider benefit: = $ 43,333.33
The amount to be paid on the rider benefit = $ 43,333.33 X 40% = $17,333.33
</TABLE>
The total Death Benefit would be the amount paid on the Basic Death
Benefit plus the amount paid on the Earnings Enhancement Optional Death Benefit
Rider: $130,000.00 + $17,333.33 = $147,333.33.
114
<PAGE>
APPENDIX E
CALCULATION OF DEATH BENEFIT WHEN ALL THREE OPTIONAL DEATH BENEFITS RIDERS ARE
SELECTED
Assume a Purchase Payment of $100,000.00 is made on the Contract Date, no
additional Purchase Payments or withdrawals are made and all of the money is
invested in the Sub-Accounts. In addition, on the Death Benefit Date the Account
Value is $150,000.00, the value of the Purchase Payment accumulated at 5% until
the Death Benefit Date is $160,000.00, and the Maximum Account Anniversary Value
is $170,000.00. The calculation of the death benefit to be paid is as follows:
<TABLE>
<S> <C> <C> <C>
The Death Benefit Amount will be the greatest
of:
Account Value = $150,000.00
Cash Surrender Value = $142,800.00
Total of adjusted Purchase Payments = $100,000.00
5% Premium Roll-Up Rider = $160,000.00
Maximum Account Anniversary Value Rider = $170,000.00
The Death Benefit Amount would therefore = $170,000.00
~ PLUS ~
The Earnings Enhancement Rider benefit is calculated as
follows:
The lesser of:
Adjusted Purchase Payments = $100,000.00
Account Value -- adjusted Purchase
Payments = $ 50,000.00
Amount to use to determine this rider
benefit: = $ 50,000.00
The amount to be paid on the rider benefit = $ 50,000.00 X 40% = $20,000.00
</TABLE>
The total Death Benefit would be the amount paid on the Maximum Account
Anniversary Rider plus the amount paid on the Earnings Enhancement Rider:
$170,000.00 + $20,000.00 = $190,000.00
115
<PAGE>
<TABLE>
<S> <C>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
TELEPHONE:
Toll Free (800) 752-7215
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
AUDITORS
Deloitte & Touche LLP
200 Berkeley Street
Boston, Massachusetts 02116
ACCESS- 1 6/00
</TABLE>
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
JUNE 26, 2000
PROFILE
FUTURITY FOCUS II
VARIABLE AND FIXED
ANNUITY
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU
SHOULD KNOW AND CONSIDER BEFORE PURCHASING THE CONTRACT. THE CONTRACT IS MORE
FULLY DESCRIBED IN THE FULL PROSPECTUS WHICH ACCOMPANIES THIS PROFILE. PLEASE
READ THE PROSPECTUS CAREFULLY.
1. THE FUTURITY FOCUS II ANNUITY
The Futurity Focus II Annuity is a flexible payment deferred annuity
contract ("Contract") designed for use in connection with retirement and
deferred compensation plans, some of which may qualify for favorable federal
income tax treatment. The Contract is intended to help you achieve your
retirement savings or other long-term investment goals.
The Contract has two phases: an Accumulation Phase and an Income Phase.
During the Accumulation Phase, you make payments into the Contract; any
investment earnings under your Contract accumulate on a tax-deferred basis and
are taxed as income only when withdrawn. During the Income Phase, we make
annuity payments in amounts determined in part by the amount of money you have
accumulated under your Contract during the Accumulation Phase. You choose when
the Income Phase begins.
You may choose among 37 variable investment options and a range of fixed
interest options. For a variable investment return you choose one or more
Sub-Accounts in our Variable Account, each of which invests in shares of a
corresponding mutual fund or series thereof (collectively, the "Funds") listed
in Section 4. The value of any portion of your Contract allocated to the
Sub-Accounts will fluctuate up or down depending on the performance of the Funds
you select, and you may experience losses. For a fixed interest rate, you may
choose one or more Guarantee Periods offered in our Fixed Account, each of which
earns its own Guaranteed Interest Rate if you keep your money in that Guarantee
Period for the specified length of time.
The Contract is designed to meet your need for investment flexibility.
Over the life of your Contract, you may allocate amounts among as many as 18 of
the available variable and fixed options. Until we begin making annuity payments
under your Contract, you can, subject to certain limitations, transfer money
between options up to 12 times each year without a transfer charge or adverse
tax consequences.
2. ANNUITY PAYMENTS (THE INCOME PHASE)
Just as you can elect to have your Contract value accumulate on either a
variable or fixed basis, or a combination of both, you can elect to receive
annuity payments on either a variable or fixed basis or both. If you choose to
have any part of your annuity payments come from the Sub-Accounts, the dollar
amount of your annuity payments may fluctuate.
The Contract offers a variety of annuity options. You can select from
among the following methods of receiving either variable or fixed annuity
payments under your Contract: (1) monthly payments continuing for your lifetime
(assuming you are the annuitant); (2) monthly payments for your lifetime, but
with payments continuing to your chosen beneficiary for a specified number of
years after your first payment if you die before the end of the period you have
selected; (3) monthly payments for your lifetime and the life of another person
(usually your spouse) you have chosen; and (4) monthly payments for a specified
number of years, with a cash-out option for variable payments. We may also agree
to other annuity options at our discretion.
Once the Income Phase begins, you cannot change your choice of annuity
payment method.
<PAGE>
3. PURCHASING A CONTRACT
You may purchase a Contract for $20,000 or more, under most circumstances.
You may increase the value of your investment by adding $1,000 or more at any
time during the Accumulation Phase. We may waive these limits. We will not
accept a purchase payment if your account value is over $2 million, or if the
purchase payment would cause your account value to exceed $2 million, unless we
have approved the payment in advance.
4. ALLOCATION OPTIONS
You can allocate your money among Sub-Accounts investing in the following
Funds:
<TABLE>
<S> <C>
AIM VARIABLE INSURANCE FUNDS MFS/SUN LIFE SERIES TRUST
AIM V.I. Capital Appreciation Fund Capital Appreciation Series
AIM V.I. Growth Fund Emerging Growth Series
AIM V.I. Growth and Income Fund Government Securities Series
AIM V.I. International Equity Fund High Yield Series
THE ALGER AMERICAN FUND Massachusetts Investors Growth Stock Series
Growth Portfolio Massachusetts Investors Trust Series
Income and Growth Portfolio New Discovery Series
Small Capitalization Portfolio Total Return Series
GOLDMAN SACHS VARIABLE INSURANCE TRUST Utilities Series
("VIT") SUN CAPITAL ADVISERS TRUST
VIT CORE-SM- Large Cap Growth Fund Sun Capital Blue Chip Mid Cap Fund
VIT CORE-SM- Small Cap Equity Fund Sun Capital Davis Financial Fund
VIT CORE-SM- U.S. Equity Fund Sun Capital Davis Venture Value Fund
VIT Growth and Income Fund Sun Capital Investment Grade Bond Fund
VIT International Equity Fund Sun Capital Investors Foundation Fund
J.P. MORGAN SERIES TRUST II Sun Capital Money Market Fund
J.P. Morgan International Opportunities Sun Capital Real Estate Fund
Portfolio Sun Capital Select Equity Fund
J.P. Morgan Small Company Portfolio Sun Capital Value Equity Fund
J.P. Morgan U.S. Disciplined Equity Sun Capital Value Managed Fund
Portfolio Sun Capital Value Mid Cap Fund
LORD ABBETT SERIES FUND, INC. Sun Capital Value Small Cap Fund
Growth and Income Portfolio
</TABLE>
Market conditions will determine the value of an investment in any Fund.
Each Fund is described in the relevant Fund prospectus.
In addition to these variable options, you may also allocate your money to
one or more of the Guarantee Periods we make available. For each Guarantee
Period, we offer a Guaranteed Interest Rate for the specified length of time.
5. EXPENSES
The charges under the Contracts are as follows:
If your account value is less than $100,000, we impose an annual Account
Fee equal to $50. We will not assess an Account Fee if your Contract is fully
invested in the Fixed Account during the entire Account Year. We will waive the
Account Fee if your Contract value was $100,000 or more on your Account
Anniversary, or if your Account was allocated only to the Fixed Account during
the applicable Account Year. In addition, during both the Accumulation Phase and
the Income Phase, we deduct insurance charges equal to 1.40% per year of the
average daily value of the Contract allocated among the Sub-Accounts. If your
initial purchase payment is greater than $1,000,000, we will decrease the
insurance charges to 1.15%.
2
<PAGE>
If you elect one or more optional death benefit riders, we will deduct,
during the Accumulation Phase, an additional charge per year, depending upon the
number of riders you elect, as follows:
<TABLE>
<CAPTION>
NUMBER OF % OF AVERAGE
RIDERS YOU ELECT DAILY VALUE
---------------- ------------
<S> <C>
1 0.15%
2 0.25%
3 0.40%
</TABLE>
No optional death benefit is offered if you are 80 or older at issue. No
charges for optional death benefit riders are assessed during the Income Phase.
There are no sales charges when you purchase your Contract. If you
withdraw money from your Contract, we impose no withdrawal charge.
If you withdraw, transfer, or annuitize money allocated to a Guarantee
Period more than 30 days before the expiration date of the Guarantee Period, the
amount will be subject to a Market Value Adjustment. This adjustment reflects
the relationship between our current Guaranteed Interest Rates and the
Guaranteed Interest Rate applicable to the amount being withdrawn. Generally, if
your Guaranteed Interest Rate is lower than the relevant current rate, then the
adjustment will decrease your Contract value. Conversely, if your Guaranteed
Interest Rate is higher than the relevant current rate, the adjustment will
increase your Contract value. The Market Value Adjustment will not apply to the
withdrawal of interest credited during the current Account Year, or to transfers
as part of our dollar-cost averaging program.
In addition to the charges we impose under the Contracts, there are
charges (which include management fees and operating expenses) imposed by each
Fund, which range from 0.57% to 1.60% of the average net assets of the Funds,
depending upon which Funds you have selected. The investment adviser has agreed
to waive or reimburse a portion of expenses for some of the Funds; without this
agreement, Fund expenses could be higher. Some of these agreements may be
terminated at any time.
The following chart is designed to help you understand the expenses you
will incur under your Contract, if you invest in one or more of the
Sub-Accounts. The column "Total Annual Expenses" shows the sum of the "Total
Annual Insurance Charges," as defined just above the chart, and the total
expenses (net of any applicable expense reimbursement and/or fee waiver) for
each Fund. The next two columns show two examples of the expenses, in dollars,
you would pay under a Contract. The examples assume that you invested $1,000 in
a Contract which earns 5% annually and that you withdraw your money (1) at the
end of one year or (2) at the end of 10 years. For the first year, the Total
Annual Expenses are deducted, as well as withdrawal charges. For year 10, the
example shows the aggregate of all of the annual expenses deducted for the 10
years, but there is no withdrawal charge.
During the Accumulation Phase, "Total Annual Insurance Charges" of 1.50%
as shown in the table below include insurance charges of 1.40% of your daily net
assets (1.25% for mortality and expense risks and 0.15% for administrative
expenses) plus an additional 0.10%, which is used to represent the $50 annual
Account Fee based on an assumed Contract value of $50,000. The actual impact of
the Account Fee may be greater or less than 0.10%, depending upon the value of
your Contract.
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL TOTAL ANNUAL TOTAL TOTAL EXPENSES
INSURANCE FUND ANNUAL AT END
SUB-ACCOUNT CHARGES EXPENSES EXPENSES 1 YEAR 10 YEARS
----------- ------------ ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund 1.50% 0.73% 2.23% $23 $256
AIM V.I. Growth Fund 1.50% 0.73% 2.23% $23 $256
AIM V.I. Growth and Income Fund 1.50% 0.77% 2.27% $23 $261
AIM V.I. International Equity Fund 1.50% 0.97% 2.47% $25 $281
Alger American Growth Portfolio 1.50% 0.79% 2.29% $23 $263
Alger American Income and Growth Portfolio 1.50% 0.70% 2.20% $22 $253
Alger American Small Capitalization Portfolio 1.50% 0.90% 2.40% $24 $274
Goldman Sachs VIT CORE-SM- Large Cap Growth Fund 1.50% 0.90% 2.40% $24 $274
Goldman Sachs VIT CORE-SM- Small Cap Equity Fund 1.50% 1.00% 2.50% $25 $284
Goldman Sachs VIT CORE-SM- U.S. Equity Fund 1.50% 0.90% 2.40% $24 $274
</TABLE>
(CONTINUED ON NEXT PAGE)
3
<PAGE>
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL TOTAL ANNUAL TOTAL TOTAL EXPENSES
INSURANCE FUND ANNUAL AT END
SUB-ACCOUNT CHARGES EXPENSES EXPENSES 1 YEAR 10 YEARS
----------- ------------ ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Goldman Sachs VIT Growth and Income Fund 1.50% 1.00% 2.50% $25 $284
Goldman Sachs VIT International Equity Fund 1.50% 1.35% 2.85% $29 $318
J.P. Morgan International Opportunities Portfolio 1.50% 1.20% 2.70% $27 $303
J.P. Morgan Small Company Portfolio 1.50% 1.15% 2.65% $27 $298
J.P. Morgan U.S. Disciplined Equity Portfolio 1.50% 0.85% 2.35% $24 $269
Lord Abbett Growth & Income Portfolio 1.50% 0.87% 2.37% $24 $271
MFS/Sun Life Capital Appreciation Series 1.50% 0.76% 2.26% $23 $260
MFS/Sun Life Emerging Growth Series 1.50% 0.75% 2.25% $23 $258
MFS/Sun Life Government Securities Series 1.50% 0.61% 2.11% $21 $244
MFS/Sun Life High Yield Series 1.50% 0.83% 2.33% $24 $267
MFS/Sun Life Massachusetts Investors Growth Stock
Series 1.50% 0.83% 2.33% $24 $267
MFS/Sun Life Massachusetts Investors Trust Series 1.50% 0.59% 2.09% $21 $242
MFS/Sun Life New Discovery Series 1.50% 1.06% 2.56% $26 $290
MFS/Sun Life Total Return Series 1.50% 0.69% 2.19% $22 $252
MFS/Sun Life Utilities Series 1.50% 0.82% 2.32% $24 $266
Sun Capital Blue Chip Mid Cap Fund 1.50% 1.00% 2.50% $25 $284
Sun Capital Davis Financial Fund 1.50% 0.90% 2.40% $24 $274
Sun Capital Davis Venture Value Fund 1.50% 0.90% 2.40% $24 $274
Sun Capital Investment Grade Bond Fund 1.50% 0.75% 2.25% $23 $258
Sun Capital Investors Foundation Fund 1.50% 0.90% 2.40% $24 $274
Sun Capital Money Market Fund 1.50% 0.65% 2.15% $22 $248
Sun Capital Real Estate Fund 1.50% 1.25% 2.75% $28 $308
Sun Capital Select Equity Fund 1.50% 0.90% 2.40% $24 $274
Sun Capital Value Equity Fund 1.50% 0.90% 2.40% $24 $274
Sun Capital Value Managed Fund 1.50% 0.90% 2.40% $24 $274
Sun Capital Value Mid Cap Fund 1.50% 1.00% 2.50% $25 $284
Sun Capital Value Small Cap Fund 1.50% 1.00% 2.50% $25 $284
</TABLE>
If your initial purchase payment is $1,000,000 or more, we will reduce
your insurance charges, during the Accumulation Phase, by 0.25%.
For more detailed information about Contract fees and expenses, please
refer to the fee table and discussion of Contract charges contained in the full
Prospectus which accompanies this Profile.
6. TAXES
Under current federal tax laws, your earnings are not taxed until you take
them out of your Contract. If you take money out, earnings come out first and
are taxed as income. If your Contract is funded with pre-tax or tax-deductible
dollars (such as with a pension or IRA contribution) -- we call this a Qualified
Contract -- your entire withdrawal will be taxable. If you are younger than
59 1/2 when you take money out, you may be charged a 10% federal penalty tax on
the earnings. Annuity payments during the Income Phase are considered in part a
return of your original investment. That portion of each payment is not taxable,
except under a Qualified Contract, in which case the entire payment will be
taxable. In all cases, you should consult with your tax adviser for specific tax
information.
Different laws apply if your Contract is issued in Puerto Rico. Under the
tax laws of Puerto Rico, when an annuity payment is made under your Contract,
your annuitant or any other payee is required to include as gross income the
portion of each annuity payment equal to 3% of the aggregate purchase payments
you made under the Contract. The amount if any, in excess of the included amount
is excluded from gross income. After an amount equal to the aggregate amount
excluded from gross income has been received, all of the annuity payments are
considered to be taxable income.
You should consult with your tax adviser for specific tax information.
7. ACCESS TO YOUR MONEY
You can withdraw or transfer money from your Contract at any time during
the Accumulation Phase without the imposition of the withdrawal charge.
Futhermore, no withdrawal charge is imposed
4
<PAGE>
upon annuitization. However, amounts you withdraw, transfer or annuitize from
the Fixed Account before your Guarantee Period has ended may be subject to a
Market Value Adjustment.
8. PERFORMANCE
If you invest in one or more Sub-Accounts, the value of your Contract will
increase or decrease depending upon the investment performance of the Funds you
choose. The Sub-Accounts have not been in operation for a full calendar year;
therefore no performance information is provided in this Profile.
9. DEATH BENEFIT
If you die before the Contract reaches the Income Phase, the beneficiary
will receive a death benefit. To calculate the death benefit, we use a "Death
Benefit Date," which is the earliest date we have both due proof of death and a
written request specifying the manner of payment.
BASIC DEATH BENEFIT
If you were 85 or younger when we issued your Contract, the death benefit
is the greatest of:
(1) the value of the Contract on the Death Benefit Date;
(2) the amount we would pay in the event of a full surrender of the
Contract on the Death Benefit Date; and
(3) your total purchase payments (adjusted for partial withdrawals)
calculated as of the Death Benefit Date.
If you were 86 or older when we issued your Contract, the death benefit is
equal to the amount set forth in (2) above. Because this amount will reflect any
applicable withdrawal charges and Market Value Adjustment, it may be less than
your account value.
OPTIONAL DEATH BENEFIT RIDERS
Subject to availability in your state, if you are 79 or younger when we
issue your Contract, you may enhance this basic death benefit by electing one or
more of the following optional death benefit riders: the Maximum Anniversary
Account Value Rider, the 5% Premium Roll-Up Rider, and the Earnings Enhancement
Rider.
MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER
If you elect the Maximum Anniversary Account Value Rider, the death
benefit is the greater of:
- any death benefit amounts payable under the "Basic Death
Benefit" (above), or
- your highest Contract value on any Account Anniversary before your 81st
birthday, adjusted for any subsequent purchase payments, partial
withdrawals, and charges made between that Account Anniversary and the
Death Benefit Date.
5% PREMIUM ROLL-UP RIDER
If you elect the 5% Premium Roll-Up Rider, the death benefit is the
greatest of:
- any death benefit amounts payable under the "Basic Death
Benefit" (above), or
- the sum of your total purchase payment plus interest accruals, adjusted
for partial withdrawals.
Under this rider, interest accrues at 5% per year on purchase payments and
transfers to the Variable Account while they remain in the Variable Account. The
5% accruals will continue until the earlier of:
5
<PAGE>
- first day of the month following your 80th birthday, or
- the day the death benefit amount under this rider equals twice the
total of the purchase payments and transferred amounts adjusted for
withdrawals.
Net Purchase Payments under this rider will be adjusted for all partial
withdrawals, as described in "Calculating the Death Benefit."
EARNINGS ENHANCEMENT RIDER
If you elect the Earnings Enhancement Rider and you are 69 or younger when
we issue your Contract, the death benefit is:
- the greatest of any death benefit amounts payable under the "Basic
Death Benefit" (above), plus
- 40% of the lesser of your net purchase payments or your Account Value
minus net purchase payments, calculated as of the Death Benefit Date.
If you elect the Earnings Enhancement Rider, and you are between the ages
of 70 and 79 when we issue your Contract, the death benefit is:
- the greatest of any death benefit amounts payable under the "Basic
Death Benefit" (above), plus
- 25% of the lesser of your net purchase payment or your Account Value
minus net purchase payments, calculated as of the Death Benefit Date.
SELECTING MULTIPLE DEATH BENEFIT RIDERS
If you elect more than one death benefit rider, the death benefit will be
calculated as follows:
1) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH 5% PREMIUM
ROLL-UP RIDER: The death benefit will equal the greater of the death
benefit under the Maximum Anniversary Account Value Rider or the death
benefit under the 5% Premium Roll-Up Rider.
2) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH EARNINGS
ENHANCEMENT RIDER: The death benefit will equal the death benefit under
the Maximum Anniversary Account Value Rider, PLUS the amount calculated
under the Earnings Enhancement Rider. The death benefit under the
Earnings Enhancement Rider is calculated using the Account Value before
the application of the Maximum Anniversary Account Rider.
3) EARNINGS ENHANCEMENT RIDER COMBINED WITH 5% PREMIUM ROLL-UP RIDER: The
death benefit will equal the death benefit under the 5% Premium Roll-Up
Rider, PLUS the amount calculated under the Earnings Enhancement Rider.
The death benefit under the Earnings Enhancement Rider is calculated
using the Account Value before the application of the 5% Premium Roll-Up
Rider.
4) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH BOTH THE 5%
PREMIUM ROLL-UP RIDER AND THE EARNINGS ENHANCEMENT RIDER: The death
benefit will equal the greater of the death benefit under the Maximum
Anniversary Account Value Rider or the death benefit under the 5%
Premium Roll-Up Rider, PLUS the amount calculated under the Earnings
Enhancement Rider. The death benefit under the Earnings Enhancement
Rider is calculated using the account value before the application of
the 5% Premium Roll-Up Rider and that of the Maximum Anniversary Account
Value Rider.
If your spouse is the sole beneficiary, your spouse may elect to continue
the Contract. The death benefit amount described above will be your new account
value as of the Death Benefit Date. For purposes of calculating future death
benefits, your spouse's age and the original issue date of the Contract will be
used to determine applicable expense and death benefit amounts.
6
<PAGE>
10. OTHER INFORMATION
FREE LOOK. Depending upon applicable state or federal law, if you cancel
your Contract within 10 days after receiving it we will send you the value of
your Contract as of the day we received your cancellation request (this may be
more or less than the original purchase payment) and we will not deduct a
withdrawal charge. However, based upon applicable state or federal law, we will
refund the full amount of any purchase payment(s) we receive and the "free look"
period may be greater than 10 days.
NO PROBATE. In most cases, when you die, the beneficiary will receive the
death benefit without going through probate. However, avoiding probate does not
mean that the beneficiary will not have a tax liability as a result of receiving
the death benefit.
WHO SHOULD PURCHASE A CONTRACT? The Contract is designed for those seeking
long-term tax-deferred accumulation of assets and annuity features, generally
for retirement or other long-term investment purposes. The tax-deferred feature
is most attractive to purchasers in high federal and state income tax brackets.
You should note that qualified retirement investments automatically provide tax
deferral regardless of whether or not the underlying contract is an annuity. You
should not buy a Contract if you are looking for a short-term investment or if
you do not wish to risk a decrease in the value of your investment.
CONFIRMATIONS AND QUARTERLY STATEMENTS. You will receive a confirmation or
an acknowledgment of transactions within your Contract, except for those
transactions which are part of an automated program, such as Dollar-Cost
Averaging, Asset Allocation, Systematic Withdrawal and/or Portfolio Rebalancing.
On a quarterly basis, you will receive a complete statement of your transactions
over the past quarter and a summary of your Account values at the end of that
period.
ADDITIONAL FEATURES. The Contract offers the following additional
convenient features, which you may choose at no extra charge. These features may
be started or discontinued at any time by either you or the Company; however, we
may require up to 30 days notice.
DOLLAR-COST AVERAGING -- This program lets you invest gradually in up to
12 Sub-Accounts.
ASSET ALLOCATION -- This program rebalances your Account balance based on
the terms of the program. Different asset allocation models may be available
over the lifetime of the Contract; however, only one program can be in effect at
any one time.
SYSTEMATIC WITHDRAWAL AND INTEREST OUT PROGRAMS -- These programs allow
you to receive monthly, quarterly, semi-annual or annual payments during the
Accumulation Phase.
PORTFOLIO REBALANCING PROGRAM -- Under this program, we automatically
reallocate your investments in the Sub-Accounts to maintain the proportions you
select. You can elect rebalancing on a quarterly, semi-annual or annual basis.
11. INQUIRIES
If you would like more information about buying a Contract, please contact
your broker or registered representative. If you have any other questions,
please contact us at:
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 9133
BOSTON, MASSACHUSETTS 02117
TELEPHONE: TOLL FREE (888) 786-2435
7
<PAGE>
PROSPECTUS
JUNE 26, 2000
FUTURITY FOCUS II
Sun Life Assurance Company of Canada (U.S.) and Sun Life of Canada (U.S.)
Variable Account F offer the flexible payment deferred annuity contracts and
certificates described in this Prospectus to groups and individuals.
You may choose among 37 variable investment options and a range of fixed
options. The variable options are Sub-Accounts in the Variable Account, each of
which invests in one of the following mutual funds or series thereof:
<TABLE>
<S> <C>
AIM VARIABLE INSURANCE FUNDS MFS/SUN LIFE SERIES TRUST
AIM V.I. Capital Appreciation Fund Capital Appreciation Series
AIM V.I. Growth Fund Emerging Growth Series
AIM V.I. Growth and Income Fund Government Securities Series
AIM V.I. International Equity Fund High Yield Series
THE ALGER AMERICAN FUND Massachusetts Investors Growth Stock Series
Growth Portfolio Massachusetts Investors Trust Series
Income and Growth Portfolio New Discovery Series
Small Capitalization Portfolio Total Return Series
GOLDMAN SACHS VARIABLE INSURANCE TRUST ("VIT") Utilities Series
VIT CORE-SM- Large Cap Growth Fund SUN CAPITAL ADVISERS TRUST
VIT CORE-SM- Small Cap Equity Fund Sun Capital Blue Chip Mid Cap Fund
VIT CORE-SM- U.S. Equity Fund Sun Capital Davis Financial Fund
VIT Growth and Income Fund Sun Capital Davis Venture Value Fund
VIT International Equity Fund Sun Capital Investment Grade Bond Fund
J.P. MORGAN SERIES TRUST II Sun Capital Investors Foundation Fund
J.P. Morgan International Opportunities Sun Capital Money Market Fund
Portfolio Sun Capital Real Estate Fund
J.P. Morgan Small Company Portfolio Sun Capital Select Equity Fund
J.P. Morgan U.S. Disciplined Equity Portfolio Sun Capital Value Equity Fund
LORD ABBETT SERIES FUND, INC. Sun Capital Value Managed Fund
Growth and Income Portfolio Sun Capital Value Mid Cap Fund
Sun Capital Value Small Cap Fund
</TABLE>
The fixed account options are available for specified time periods, called
Guarantee Periods, and pay interest at a guaranteed rate for each period.
PLEASE READ THIS PROSPECTUS AND THE FUND PROSPECTUSES CAREFULLY BEFORE
INVESTING AND KEEP THEM FOR FUTURE REFERENCE. THEY CONTAIN IMPORTANT INFORMATION
ABOUT THE CONTRACT AND THE FUNDS.
We have filed a Statement of Additional Information dated June 26, 2000
(the "SAI") with the Securities and Exchange Commission (the "SEC"), which is
incorporated by reference in this Prospectus. The table of contents for the SAI
is on page 104 of this Prospectus. You may obtain a copy without charge by
writing to us at the address shown below (which we sometimes refer to as our
"Annuity Mailing Address") or by telephoning (888) 786-2435. In addition, the
SEC maintains a website (http://www.sec.gov) that contains the SAI, material
incorporated by reference, and other information regarding companies that file
with the SEC.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY US MEANS RECEIPT AT THE FOLLOWING
ADDRESS:
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 9133
BOSTON, MASSACHUSETTS 02117
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Special Terms 4
Expense Summary 4
Summary of Contract Expenses 4
Underlying Fund Annual Expenses 5
Example 7
The Annuity Contract 8
Communicating To Us About Your Contract 8
Sun Life Assurance Company of Canada (U.S.) 9
The Variable Account 9
Variable Account Options: The Funds 9
The Fixed Account 12
The Fixed Account Options: The Guarantee Periods 13
The Accumulation Phase 13
Issuing Your Contract 13
Amount and Frequency of Purchase Payments 13
Allocation of Net Purchase Payments 14
Your Account 14
Your Account Value 14
Variable Account Value 14
Fixed Account Value 15
Transfer Privilege 16
Waivers; Reduced Charges; Special Guaranteed Interest
Rates 17
Optional Programs 17
Withdrawals and Market Value Adjustment 18
Cash Withdrawals 18
Market Value Adjustment 19
Contract Charges 20
Account Fee 20
Administrative Expense Charge 20
Mortality and Expense Risk Charge 21
Charges for Optional Death Benefit Riders 21
Premium Taxes 21
Fund Expenses 21
Modification in the Case of Group Contracts 21
Death Benefit 21
Amount of Death Benefit 22
The Basic Death Benefit 22
Optional Death Benefit Riders 22
Spousal Continuance 23
Calculating the Death Benefit 24
Method of Paying Death Benefit 24
Non-Qualified Contracts 24
Selection and Change of Beneficiary 25
Payment of Death Benefit 25
Due Proof of Death 25
The Income Phase -- Annuity Provisions 25
Selection of the Annuitant or Co-Annuitant 25
Selection of the Annuity Commencement Date 26
Annuity Options 26
Selection of Annuity Option 27
Amount of Annuity Payments 27
Exchange of Variable Annuity Units 28
Account Fee 28
Annuity Payment Rates 28
Annuity Options as Method of Payment for Death Benefit 29
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Other Contract Provisions 29
Exercise of Contract Rights 29
Change of Ownership 29
Voting of Fund Shares 30
Periodic Reports 30
Substitution of Securities 31
Change in Operation of Variable Account 31
Splitting Units 31
Modification 31
Discontinuance of New Participants 32
Reservation of Rights 32
Right to Return 32
Tax Considerations 32
U.S. Federal Tax Considerations 32
DEDUCTIBILITY OF PURCHASE PAYMENTS 33
PRE-DISTRIBUTION TAXATION OF CONTRACTS 33
DISTRIBUTIONS AND WITHDRAWALS FROM NON-QUALIFIED
CONTRACTS 33
DISTRIBUTION AND WITHDRAWALS FROM QUALIFIED
CONTRACTS 33
WITHHOLDING 34
INVESTMENT DIVERSIFICATION AND CONTROL 34
TAX TREATMENT OF THE COMPANY AND THE VARIABLE
ACCOUNT 34
QUALIFIED RETIREMENT PLANS 34
PENSION AND PROFIT-SHARING PLANS 35
TAX-SHELTERED ANNUITIES 35
INDIVIDUAL RETIREMENT ACCOUNTS 35
ROTH IRAS 35
Puerto Rico Tax Considerations 36
Administration of the Contract 36
Distribution of the Contract 36
Performance Information 37
Available Information 38
Incorporation of Certain Documents by Reference 38
Additional Information About the Company 39
General 39
Selected Financial Data 39
Cautionary Statement 40
Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year Ended
December 31, 1999 41
Management's Discussion and Analysis of Financial
Condition and Results of Operations--Quarterly Period
Ending March 31, 2000 47
Capital Resources 50
Other Matters 50
Quantitative and Qualitative Disclosures About Market
Risk 51
Reinsurance 53
Reserves 53
Investments 53
Competition 54
Employees 54
Properties 54
State Regulation 54
Legal Proceedings 55
Accountants 55
Financial Statements 55
Table of Contents of Statement of Additional Information 104
Appendix A -- Glossary 106
Appendix B -- Market Value Adjustment 109
Appendix C -- Calculation of Basic Death Benefit 111
Appendix D -- Calculation of Earnings Enhancement Optional
Death Benefit Rider 112
Appendix E -- Calculation of Death Benefit When All Three
Optional Death Benefit Riders are Selected 113
</TABLE>
3
<PAGE>
SPECIAL TERMS
Your Contract is a legal document that uses a number of specially defined
terms. We explain most of the terms that we use in this Prospectus in the
context where they arise, and some are self-explanatory. In addition, for
convenient reference, we have compiled a list of these terms in the Glossary
included at the back of this Prospectus as Appendix A. If, while you are reading
this Prospectus, you come across a term that you do not understand, please refer
to the Glossary for an explanation.
EXPENSE SUMMARY
The purpose of the following table is to help you understand the costs and
expenses that you will bear directly and indirectly under a Contract WHEN YOU
ALLOCATE MONEY TO THE VARIABLE ACCOUNT. The table reflects expenses of the
Variable Account as well as of each Fund. The table should be considered
together with the narrative provided under the heading "Contract Charges" in
this Prospectus, and with the Funds' prospectuses. In addition to the expenses
listed below, we may deduct premium taxes, where required by state law.
SUMMARY OF CONTRACT EXPENSES
<TABLE>
<S> <C>
TRANSACTION EXPENSES:
Sales Load Imposed on Purchase Payments..................... $ 0
Transfer Fee (1)............................................ $ 15
ANNUAL ACCOUNT FEE per Contract or Certificate (2).......... $ 50
VARIABLE ACCOUNT ANNUAL EXPENSES (as a percentage of average
Variable Account assets)
</TABLE>
<TABLE>
<CAPTION>
FOR CONTRACTS WITH AN INITIAL FOR CONTRACTS WITH AN INITIAL
PURCHASE PAYMENT PURCHASE PAYMENT
LESS THAN $1,000,000: OF $1,000,000 OR MORE:
<S> <C> <C> <C>
Mortality and Expense Risks Charge...... 1.25% Mortality and Expense Risks Charge...... 1.00%
Administrative Expenses Charge.......... 0.15% Administrative Expenses Charge.......... 0.15%
==== ====
Total Variable Annuity Annual Total Variable Annuity Annual
Expenses (3)............................ 1.40% Expenses (3)............................ 1.15%
</TABLE>
------------------------
(1) We impose no fee upon transfers; however, we reserve the right to impose up
to $15 per transfer. In addition, a Market Value Adjustment may be imposed
on amounts transferred from or within the Fixed Account.
(2) The annual Account Fee will never exceed $50.
(3) An additional charge will apply during the Accumulation Phase if you elect
one or more of the optional death benefit riders. For more information, see
"Charges for Optional Death Benefit Riders."
4
<PAGE>
UNDERLYING FUND ANNUAL EXPENSES (1)
(AS A PERCENTAGE OF FUND NET ASSETS)
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT OTHER ANNUAL
FEES (AFTER EXPENSES (AFTER EXPENSES (AFTER
REIMBURSEMENT)(2) REIMBURSEMENT)(2) REIMBURSEMENT)(2)
----------------- ----------------- -----------------
<S> <C> <C> <C>
AIM V.I. Capital Appreciation Fund............ 0.62% 0.11% 0.73%
AIM V.I. Growth Fund.......................... 0.63% 0.10% 0.73%
AIM V.I. Growth and Income Fund............... 0.61% 0.16% 0.77%
AIM V.I. International Equity Fund............ 0.75% 0.22% 0.97%
Alger American Growth Portfolio............... 0.75% 0.04% 0.79%
Alger American Income and Growth Portfolio.... 0.62% 0.08% 0.70%
Alger American Small Capitalization
Portfolio.................................... 0.85% 0.05% 0.90%
Goldman Sachs VIT CORE-SM- Large Cap Growth
Fund (3)..................................... 0.70% 0.20% 0.90%
Goldman Sachs VIT CORE-SM- Small Cap Equity
Fund (3)..................................... 0.75% 0.25% 1.00%
Goldman Sachs VIT CORE-SM- U.S. Equity Fund
(3).......................................... 0.70% 0.20% 0.90%
Goldman Sachs VIT Growth and Income Fund (3).. 0.75% 0.25% 1.00%
Goldman Sachs VIT International Equity Fund
(3).......................................... 1.00% 0.35% 1.35%
J.P. Morgan International Opportunities
Portfolio (4)................................ 0.60% 0.60% 1.20%
J.P. Morgan Small Company Portfolio (4)....... 0.60% 0.55% 1.15%
J.P. Morgan U.S. Disciplined Equity Portfolio
(4).......................................... 0.35% 0.50% 0.85%
Lord Abbett Growth and Income Portfolio....... 0.50% 0.01% 0.51%
MFS/Sun Life Capital Appreciation Series
(5).......................................... 0.71% 0.05% 0.76%
MFS/Sun Life Emerging Growth Series........... 0.70% 0.05% 0.75%
MFS/Sun Life Government Securities Series..... 0.55% 0.06% 0.61%
MFS/Sun Life High Yield Series (5)............ 0.75% 0.08% 0.83%
MFS/Sun Life Massachusetts Investors Growth
Stock Series................................. 0.75% 0.08% 0.83%
MFS/Sun Life Massachusetts Investors Trust
Series....................................... 0.55% 0.04% 0.59%
MFS/Sun Life New Discovery Series (5)......... 0.90% 0.16% 1.06%
MFS/Sun Life Total Return Series.............. 0.65% 0.04% 0.69%
MFS/Sun Life Utilities Series (5)............. 0.75% 0.06% 0.81%
Sun Capital Blue Chip Mid Cap Fund (6)(7)..... 0.80% 0.20% 1.00%
Sun Capital Davis Financial Fund (8).......... 0.75% 0.15% 0.90%
Sun Capital Davis Venture Value Fund (8)...... 0.75% 0.15% 0.90%
Sun Capital Investment Grade Bond Fund (6).... 0.60% 0.15% 0.75%
Sun Capital Investors Foundation Fund
(6)(7)....................................... 0.75% 0.15% 0.90%
Sun Capital Money Market Fund (6)............. 0.50% 0.15% 0.65%
Sun Capital Real Estate Fund (6).............. 0.95% 0.30% 1.25%
Sun Capital Select Equity Fund (6)(7)......... 0.75% 0.15% 0.90%
Sun Capital Value Equity Fund (9)............. 0.80% 0.10% 0.90%
Sun Capital Value Managed Fund (9)............ 0.80% 0.10% 0.90%
Sun Capital Value Mid Cap Fund (9)............ 0.80% 0.20% 1.00%
Sun Capital Value Small Cap Fund (9).......... 0.80% 0.20% 1.00%
</TABLE>
------------------------
(1) The information relating to Fund expenses was provided by the Funds and we
have not independently verified it. You should consult the Fund prospectuses
for more information about Fund expenses.
(2) For all Funds, except the Sun Capital Davis Financial Fund, the Sun Capital
Davis Venture Value Fund, the Sun Capital Value Equity Fund, the Sun Capital
Value Managed Fund, the Sun Capital Value Mid Cap Fund, and the Sun Capital
Value Small Cap Fund, "Management Fees," "Other Expenses" and "Total Fund
Annual Expenses" are based on actual expenses for the fiscal year ended
December 31, 1999, net of any applicable expense reimbursement or waiver.
Expense figures
5
<PAGE>
shown for the Sun Capital Davis Financial Fund, the Sun Capital Davis
Venture Value Fund, the Sun Capital Value Equity Fund, the Sun Capital Value
Managed Fund, the Sun Capital Value Mid Cap Fund, and the Sun Capital Value
Small Cap Fund are estimates for the year 2000, based on the applicable
expense reimbursement waiver. No actual expense figures are shown for these
Funds because they commenced operations in July, 2000, and therefore, have
less than 12 months of investment experience.
(3) The investment advisers for the Goldman Sachs VIT Funds have voluntarily
agreed to waive or reimburse a portion of the management fees and/or
operating expenses, resulting in a reduction of the total expenses. In
particular, the investment advisers to the Goldman Sachs VIT CORE-SM- Large
Capital Growth Fund, the Goldman Sachs VIT CORE-SM- Small Cap Equity Fund,
the Goldman Sachs VIT CORE-SM- U.S. Equity Fund, the Goldman Sachs VIT
Growth and Income Fund and the Goldman Sachs VIT International Equity Fund
have voluntarily agreed to reduce or limit certain "Other Expenses" of such
Funds (excluding management fees, taxes, interest and brokerage fees,
litigation, indemnification and other extraordinary expenses) to the extent
such expenses exceed 0.20%, 0.25%, 0.20%, 0.25%, and 0.35% per annum of such
Funds' average daily net assets, respectively. The expenses of the Goldman
Sachs VIT Funds are estimated for the fiscal year ended December 31, 2000.
Absent any such waiver or reimbursement, estimated "Management Fees,"
estimated "Other Expenses," and estimated "Total Fund Annual Expenses" for
the year ended December 31, 2000 will be: 0.70%, 0.42%, and 1.12% for the
Goldman Sachs VIT CORE-SM- Large Cap Growth Fund; 0.75%, 0.75%, and 1.50%
for the Goldman Sachs VIT CORE-SM- Small Cap Equity Fund; 0.70%, 0.20%, and
0.90% for the Goldman Sachs VIT CORE-SM- U.S. Equity Fund; 0.75%, 0.47%, and
1.22% for the Goldman Sachs VIT Growth and Income Fund; and 1.00%, 0.77%,
and 1.77% for the Goldman Sachs VIT International Equity Fund. Fee waivers
and expense reimbursements for the Goldman Sachs VIT Funds may be
discontinued at any time.
(4) An affiliate of the adviser has agreed to reimburse the Fund to the extent
certain expenses exceed the following percentages of the Fund's average
daily net assets through fiscal year 1999: 0.85% for the J.P. Morgan U.S.
Disciplined Equity Portfolio; 1.20% for the J.P. Morgan International
Opportunities Portfolio; and 1.15% for the J.P. Morgan Small Company
Portfolio. Absent this reimbursement, "Total Fund Annual Expenses" would
have been 0.87% for the J.P. Morgan U.S. Disciplined Equity Portfolio, 1.98%
for the J.P. Morgan International Opportunities Portfolio, and 2.57% for the
J.P. Morgan Small Company Portfolio.
(5) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into such other
arrangements and directed brokerage arrangement (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected in the table. Had these fees been taken into account, "Total Fund
Annual Expenses" would have been: 0.75% for the MFS/Sun Life Capital
Appreciation Series; 0.82% for the MFS/Sun Life High Yield Series; 1.05% for
the MFS/Sun Life New Discovery Series; and 0.80% for the MFS/Sun Life
Utilities Series.
(6) The investment adviser for the Sun Capital Funds has voluntarily agreed to
waive or reimburse a portion of the management fees and/or operating
expenses, resulting in a reduction of the total expenses. For the year ended
December 31, 1999, the investment adviser waived all investment advisory
fees. Absent any such waiver or reimbursement, "Management Fees," "Other
Expenses," and "Total Fund Annual Expenses" for the year ended December 31,
1999 were: 0.80%, 3.31%, and 4.11% for the Sun Capital Blue Chip Mid Cap
Fund; 2.70%, 1.38%, and 1.98% for the Sun Capital Investment Grade Bond
Fund; 0.75%, 4.37%, and 5.12% for the Sun Capital Investors Foundation Fund;
0.50%, 2.20%, and 2.70% for the Sun Capital Money Market Fund; 0.95%, 2.44%,
and 3.39% for the Sun Capital Real Estate Fund; and 0.75%, 3.50%, and 4.25%
for the Sun Capital Select Equity Fund. Fee waivers and expense
reimbursements for the Sun Capital Funds may be discontinued at any time
after May 1, 2001. To the extent that the expense ratio of any Fund in the
Sun Capital Advisers Trust falls below the Fund's expense limit, the Fund's
adviser reserves the right to be reimbursed for management fees waived and
Fund expenses paid by it during the prior two years.
(7) The management fee for each of the Sun Capital Blue Chip Mid Cap Fund, the
Sun Capital Investors Foundation Fund, and the Sun Capital Select Equity
Fund decreases to 0.75%, 0.70%, and 0.70%, respectively, as the daily net
assets of each Fund exceed $300 million.
(8) The management fee for each of the Sun Capital Davis Financial Fund and the
Sun Capital Davis Venture Value Fund decreases to 0.70% as the daily net
assets of each Fund exceed $500 million.
6
<PAGE>
(9) The management fee for each of the Sun Capital Value Equity Fund, the Sun
Capital Value Managed Fund, the Sun Capital Value Mid Cap Fund, and the Sun
Capital Value Small Cap Fund decreases to 0.75% as the daily net assets of
each Fund reach between $400 million and $800 million, and decreases to
0.70% as the daily net assets of each Fund exceed $800 million.
EXAMPLE
If you do or do not surrender your Contract at the end of the applicable
time period, you would pay the following expenses on a $1,000 investment,
assuming an average Contract size of $50,000, a 5% annual return and no optional
death benefit riders have been elected:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund.......................... $23 $70 $119 $256
AIM V.I. Growth Fund........................................ $23 $70 $119 $256
AIM V.I. Growth and Income Fund............................. $23 $71 $122 $261
AIM V.I. International Equity Fund.......................... $25 $77 $132 $281
Alger American Growth Portfolio............................. $23 $72 $123 $263
Alger American Income and Growth Portfolio.................. $22 $69 $118 $253
Alger American Small Capitalization Portfolio............... $24 $75 $128 $274
Goldman Sachs VIT CORE-SM- Large Cap Growth Fund............ $24 $75 $128 $274
Goldman Sachs VIT CORE-SM- Small Cap Equity Fund............ $25 $78 $133 $284
Goldman Sachs VIT CORE-SM- U.S. Equity Fund................. $24 $75 $128 $274
Goldman Sachs VIT Growth and Income Fund.................... $25 $78 $133 $284
Goldman Sachs VIT International Equity Fund................. $29 $88 $150 $318
J.P. Morgan International Opportunities Portfolio........... $27 $84 $143 $303
J.P. Morgan Small Company Portfolio......................... $27 $82 $141 $298
J.P. Morgan U.S. Disciplined Equity Portfolio............... $24 $73 $126 $269
Lord Abbett Growth and Income Portfolio..................... $24 $74 $127 $271
MFS/Sun Life Capital Appreciation Series.................... $23 $71 $121 $260
MFS/Sun Life Emerging Growth Series......................... $23 $70 $120 $258
MFS/Sun Life Government Securities Series................... $21 $66 $113 $244
MFS/Sun Life High Yield Series.............................. $24 $73 $125 $267
MFS/Sun Life Massachusetts Investors Growth Stock Series.... $24 $73 $125 $267
MFS/Sun Life Massachusetts Investors Trust Series........... $21 $65 $112 $242
MFS/Sun Life New Discovery Series........................... $26 $80 $136 $290
MFS/Sun Life Total Return Series............................ $22 $69 $117 $252
MFS/Sun Life Utilities Series............................... $24 $72 $124 $266
Sun Capital Blue Chip Mid Cap Fund.......................... $25 $78 $133 $284
Sun Capital Davis Financial Fund............................ $24 $75 $128 $274
Sun Capital Davis Venture Value Fund........................ $24 $75 $128 $274
Sun Capital Investment Grade Bond Fund...................... $23 $70 $120 $258
Sun Capital Investors Foundation Fund....................... $24 $75 $128 $274
Sun Capital Money Market Fund............................... $22 $67 $115 $248
Sun Capital Real Estate Fund................................ $28 $85 $145 $308
Sun Capital Select Equity Fund.............................. $24 $75 $128 $274
Sun Capital Value Equity Fund............................... $24 $75 $128 $274
Sun Capital Value Managed Fund.............................. $24 $75 $128 $274
Sun Capital Value Mid Cap Fund.............................. $25 $78 $133 $284
Sun Capital Value Small Cap Fund............................ $25 $78 $133 $284
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR
FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
7
<PAGE>
THE ANNUITY CONTRACT
Sun Life Assurance Company of Canada (U.S.) (the "Company", "we" or "us")
and Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") offer
the Contract to groups and individuals for use in connection with their
retirement plans. The Contract is available on a group basis and, in certain
states, may be available on an individual basis. We issue an Individual Contract
directly to the individual owner of the Contract. We issue a Group Contract to
the Owner, covering all individuals participating under the Group Contract; each
individual receives a Certificate that evidences his or her participation under
the Group Contract.
In this Prospectus, unless we state otherwise, we refer to both the owners
of Individual Contracts and participating individuals under Group Contracts as
"Participants" and we address all Participants as "you"; we use the term
"Contracts" to include Individual Contracts, Group Contracts, and Certificates
issued under Group Contracts. For the purpose of determining benefits under both
Individual Contracts and Group Contracts, we establish an Account for each
Participant, which we will refer to as "your" Account or a "Participant
Account."
Your Contract provides a number of important benefits for your retirement
planning. It has an Accumulation Phase, during which you make payments under the
Contract and allocate them to one or more Variable Account or Fixed Account
options, and an Income Phase, during which we make annuity payments based on the
amount you have accumulated. Your Contract provides tax deferral, so that you do
not pay taxes on your earnings under your Contract until you withdraw them. It
provides a basic death benefit if you die during the Accumulation Phase. You may
enhance the basic death benefit by electing one or more optional death benefit
riders and paying an additional charge for each optional death benefit rider you
elect. Finally, if you so elect, during the Income Phase we will make annuity
payments to you or someone else for life or for another period that you choose.
You choose these benefits on a variable or fixed basis or a combination of
both. When you choose Variable Account investment options or a Variable Annuity
option, your benefits will be responsive to changes in the economic environment,
including inflationary forces and changes in rates of return available from
different types of investments. With these variable options, you assume all
investment risk under your Contract. When you choose a Guarantee Period in our
Fixed Account or a Fixed Annuity option, we assume the investment risk, except
in the case of early withdrawals in the Accumulation Phase, where you bear the
risk of unfavorable interest rate changes. You also bear the risk that the
interest rates we will offer in the future and the rates we will use in
determining your Fixed Annuity might not exceed our minimum guaranteed rate,
which is 3% per year during the Accumulation Phase and 2.5% per year during the
Income Phase, compounded annually.
The Contract is designed for use in connection with retirement and
deferred compensation plans, some of which qualify for favorable federal income
tax treatment under Sections 401, 403, 408 or 408A of the Internal Revenue Code.
The Contract is also designed so that it may be used in connection with certain
non-tax-qualified retirement plans, such as payroll savings plans and such other
groups (trusteed or nontrusteed) as may be eligible under applicable law. We
refer to Contracts used with plans that receive favorable tax treatment as
"Qualified Contracts," and all other Contracts as "Non-Qualified Contracts."
COMMUNICATING TO US ABOUT YOUR CONTRACT
All materials sent to us, including Purchase Payments, must be sent to our
Annuity Mailing Address as set forth on the first page of this Prospectus. For
all telephone communications, you must call (888) 786-2435
Unless this Prospectus states differently, we will consider all materials
sent to us and all telephone communications to be received on the date we
actually receive them at our Annuity Mailing Address. However, we will consider
all financial transactions, including Purchase Payments, withdrawal requests and
transfer instructions, to be received on the next Business Day if we receive
them (1) on a day that is not a Business Day or (2) after 4:00 p.m., Eastern
Time.
When we specify that notice to us must be in writing, we reserve the
right, at our sole discretion, to accept notice in another form.
8
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We are a stock life insurance company incorporated under the laws of
Delaware on January 12, 1970. We do business in 48 states, the District of
Columbia, and Puerto Rico, and we have an insurance company subsidiary that does
business in New York. Our Executive Office mailing address is One Sun Life
Executive Park, Wellesley Hills, Massachusetts 02481.
We are an indirect wholly-owned subsidiary of Sun Life Assurance Company
of Canada ("Sun Life (Canada)"). Sun Life (Canada) 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 Sun Life (Canada) and the Company. Sun Life Financial, a
corporation organized in Canada, is a reporting company under the Securities
Exchange Act of 1934 with common shares listed on the Toronto, New York, London,
and Manila stock exchanges.
THE VARIABLE ACCOUNT
We established the Variable Account as a separate account on July 13,
1989, pursuant to a resolution of our Board of Directors. The Variable Account
funds the Contract and various other variable annuity and variable life
insurance product contracts which we offer. These other products may have
features, benefits and charges that are different from those under the Contract.
Under Delaware insurance law and the Contract, the income, gains or losses
of the Variable Account are credited to or charged against the assets of the
Variable Account without regard to the other income, gains, or losses of the
Company. These assets are held in relation to the Contract and other variable
annuity and variable life insurance contracts that provide benefits that vary in
accordance with the investment performance of the Variable Account. Although the
assets maintained in the Variable Account will not be charged with any
liabilities arising out of any other business we conduct, all obligations
arising under a Contract, including the promise to make annuity payments, are
general corporate obligations of the Company.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account invests exclusively in shares of a specific Fund. All amounts
allocated to the Variable Account will be used to purchase Fund shares as
designated by you at their net asset value. Any and all distributions made by
the Funds with respect to the shares held by the Variable Account will be
reinvested to purchase additional Fund shares at their net asset value.
Deductions will be made from the Variable Account for cash withdrawals, annuity
payments, death benefits, Account Fees, Contract charges against the assets of
the Variable Account for the assumption of mortality and expense risks,
administrative expenses and any applicable taxes. The Variable Account will be
fully invested in Fund shares at all times.
VARIABLE ACCOUNT OPTIONS:
THE FUNDS
The Contract offers Sub-Accounts that invest in a number of Fund
investment options, which are briefly discussed below. Each Fund is a mutual
fund registered under the Investment Company Act of 1940, or a separate series
of shares of such a mutual fund.
MORE COMPREHENSIVE INFORMATION ABOUT THE FUNDS, INCLUDING A DISCUSSION OF
THEIR MANAGEMENT, INVESTMENT OBJECTIVES, EXPENSES, AND POTENTIAL RISKS, IS FOUND
IN THE CURRENT PROSPECTUSES FOR THE FUNDS (THE "FUND PROSPECTUSES"). THE FUND
PROSPECTUSES SHOULD BE READ IN CONJUNCTION WITH THIS PROSPECTUS BEFORE YOU
INVEST. A COPY OF EACH FUND PROSPECTUS, AS WELL AS A STATEMENT OF ADDITIONAL
INFORMATION FOR EACH FUND, MAY BE OBTAINED WITHOUT CHARGE FROM THE COMPANY BY
CALLING (888) 786-2435 OR BY WRITING TO SUN LIFE ASSURANCE COMPANY OF CANADA
(U.S.), C/O RETIREMENT PRODUCTS AND SERVICES, P.O. BOX 9133, BOSTON
MASSACHUSETTS 02117.
The Funds currently available are:
AIM VARIABLE INSURANCE FUNDS (advised by A I M Advisors, Inc.)
AIM V.I. CAPITAL APPRECIATION FUND seeks growth of capital by investing
principally in common stocks or companies which the Fund's portfolio
managers believe are likely to benefit from new or innovative products,
services or processes, as well as those that have experienced above-
average, long-term growth in earnings and have excellent prospects for
future growth.
9
<PAGE>
AIM V.I. GROWTH FUND seeks to achieve growth of capital by investing in
seasoned and better-capitalized companies considered to have strong
earnings momentum.
AIM V.I. GROWTH AND INCOME FUND seeks to achieve growth of capital with a
secondary objective of current income.
AIM V.I. INTERNATIONAL EQUITY FUND seeks to achieve long-term growth of
capital by investing in a diversified portfolio of international equity
securities whose issuers are considered to have strong earnings momentum.
THE ALGER AMERICAN FUND (advised by Fred Alger Management, Inc.)
ALGER AMERICAN GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of companies which have market
capitalizations of $1 billion or more.
ALGER AMERICAN INCOME AND GROWTH PORTFOLIO seeks primarily to provide a
high level of dividend income by investing in dividend paying equity
securities. Capital appreciation is a secondary objective.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO seeks long-term capital
appreciation. It invests primarily in the equity securities of small
companies with market capitalizations within the range of the Russell 2000
Growth Index or the S&P SmallCap 600 Index.
GOLDMAN SACHS VARIABLE INSURANCE TRUST ("VIT") (advised by Goldman Sachs Asset
Management, a unit of the Investment Management Division of Goldman, Sachs & Co.
("Goldman Sachs"), except for Goldman Sachs International Equity Fund, which is
advised by Goldman Sachs Asset Management International, an affiliate of Goldman
Sachs)
GOLDMAN SACHS VIT CORE-SM- LARGE CAP GROWTH FUND seeks long-term growth of
capital through a broadly diversified portfolio of equity securities of
large cap U.S. issuers that are expected to have better prospects for
earnings growth than the growth rate of the general domestic economy.
Dividend income is a secondary consideration.
GOLDMAN SACHS VIT CORE-SM- SMALL CAP EQUITY FUND seeks long-term growth of
capital through a broadly diversified portfolio of equity securities of
U.S. issuers which are included in the Russell 2000 Index at the time of
investment.
GOLDMAN SACHS VIT CORE-SM- U.S. EQUITY FUND seeks long-term growth of
capital and dividend income through a broadly diversified portfolio of
large cap and blue chip equity securities representing all major sectors of
the U.S. economy.
GOLDMAN SACHS VIT GROWTH AND INCOME FUND seeks long-term growth of capital
and growth of income through investments in equity securities that are
considered to have favorable prospects for capital appreciation and/or
dividend paying ability.
GOLDMAN SACHS VIT INTERNATIONAL EQUITY FUND seeks long-term capital
appreciation through investments in equity securities of companies that are
organized outside the U.S. or whose securities are principally traded
outside the U.S.
J.P. MORGAN SERIES TRUST II (advised by J.P. Morgan Investment Management Inc.)
J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO seeks to provide a high
total return from a portfolio of equity securities of foreign companies.
J.P. MORGAN SMALL COMPANY PORTFOLIO seeks to provide a high total return
from a portfolio of small company stocks.
J.P. MORGAN U.S. DISCIPLINED EQUITY PORTFOLIO seeks to provide a high total
return from a portfolio of selected equity securities.
LORD ABBETT SERIES FUND, INC. (advised by Lord Abbett & Co.)
GROWTH AND INCOME PORTFOLIO seeks to provide long-term growth of capital
and income without excessive fluctuation in market value.
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MFS/SUN LIFE SERIES TRUST (advised by Massachusetts Financial Services Company,
an affiliate of the Company)
CAPITAL APPRECIATION SERIES will seek to maximize capital appreciation by
investing in securities of all types, with major emphasis on common stocks.
EMERGING GROWTH SERIES will seek long-term growth of capital.
GOVERNMENT SECURITIES SERIES will seek current income and preservation of
capital by investing in U.S. Government and U.S. Government-related
securities.
HIGH YIELD SERIES will seek high current income and capital appreciation by
investing primarily in certain low rated or unrated fixed income securities
(possibly with equity features) of U.S. and foreign issuers (also known as
"junk bonds").
MASSACHUSETTS INVESTORS GROWTH STOCK SERIES will seek to provide long-term
growth of capital and future income rather than current income.
MASSACHUSETTS INVESTORS TRUST SERIES will seek long-term growth of capital
and future income while providing more current dividend income than is
normally obtainable from a portfolio of only growth stocks.
NEW DISCOVERY SERIES will seek capital appreciation.
TOTAL RETURN SERIES will mainly seek to obtain above-average income
(compared to a portfolio entirely invested in equity securities) consistent
with prudent employment of capital; its secondary objective is to take
advantage of opportunities for growth of capital and income since many
securities offering a better than average yield may also possess growth
potential.
UTILITIES SERIES will seek capital growth and current income (income above
that available from a portfolio invested entirely in equity securities) by
investing under normal market conditions, at least 65% of its assets in
equity and debt securities of both domestic and foreign companies in the
utilities industry.
SUN CAPITAL ADVISERS TRUST (advised by Sun Capital Advisers, Inc., an affiliate
of the Company. Wellington Management Company, LLP serves as investment
subadviser to Sun Capital Blue Chip Mid Cap Fund, Sun Capital Investors
Foundation Fund and Sun Capital Select Equity Fund; Davis Selected Advisers,
L.P. serves as investment subadviser to Sun Capital Davis Financial Fund and Sun
Capital Davis Venture Value Fund; OpCap Advisors serves as investment subadviser
to Sun Capital Value Equity Fund, Sun Capital Value Managed Fund, Sun Capital
Value Mid Cap Fund, and Sun Capital Value Small Cap Fund)
SUN CAPITAL BLUE CHIP MID CAP FUND seeks long-term capital growth by
investing primarily in a diversified portfolio of common stocks and other
equity securities of U.S. companies with market capitalizations within the
range represented by the Standard & Poor's Mid Cap 400 Index.
SUN CAPITAL DAVIS FINANCIAL FUND seeks growth of capital by investing
primarily in the common stock of financial service companies.
SUN CAPITAL DAVIS VENTURE VALUE FUND seeks growth of capital by investing
primarily in the common stock of U.S. companies with market capitalizations
of at least $5 billion.
SUN CAPITAL INVESTORS FOUNDATION FUND seeks long-term capital growth by
investing primarily in a diversified portfolio of common stocks and other
equity securities of U.S. companies with market capitalizations generally
within the range represented by the Standard & Poor's 500 Index.
Investments are selected using a combination of fundamental analysis and
quantitative tools.
SUN CAPITAL INVESTMENT GRADE BOND FUND seeks high current income consistent
with relative stability of principal by investing at least 80% of its
assets in investment grade bonds. The Fund may invest up to 20% of its
assets in lower rated or unrated bonds (also known as high yield or junk
bonds).
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SUN CAPITAL MONEY MARKET FUND seeks to maximize current income, consistent
with maintaining liquidity and preserving capital, by investing exclusively
in high quality U.S. dollar-denominated money market securities.
SUN CAPITAL REAL ESTATE FUND primarily seeks long-term capital growth and,
secondarily, seeks current income and growth of income. The Fund invests at
least 80% of its assets in securities of real estate investment trusts and
other real estate companies.
SUN CAPITAL SELECT EQUITY FUND seeks long-term capital growth by investing
in 20 to 40 common stocks and other equity securities of large
capitalization U.S. companies selected primarily from the Standard & Poor's
500 Index.
SUN CAPITAL VALUE EQUITY FUND seeks long-term capital appreciation through
investment in a diversified portfolio of equity securities selected on the
basis of a value oriented approach to investing.
SUN CAPITAL VALUE MANAGED FUND seeks to achieve growth of capital over time
through investment in a portfolio consisting of common stocks, bonds and
cash equivalents, the percentages of which will vary based on the portfolio
manager's assessments of the relative outlook for such investments.
SUN CAPITAL VALUE MID CAP FUND seeks long-term capital appreciation through
investment in a diversified portfolio of equity securities. The portfolio
will invest primarily in companies with market capitalizations of between
$500 million and $8 billion at time of purchase.
SUN CAPITAL VALUE SMALL CAP FUND seeks capital appreciation through
investment in a diversified portfolio of equity securities of companies
with market capitalizations of under $1.5 billion at time of purchase.
The Funds may also be available to registered separate accounts offering
variable annuity and variable life products of other affiliated and unaffiliated
insurance companies, as well as to the Variable Account and other separate
accounts of the Company. Although we do not anticipate any disadvantages to
this, there is a possibility that a material conflict may arise between the
interests of the Variable Account and one or more of the other separate accounts
participating in the Funds. A conflict may occur due to a change in law
affecting the operations of variable life and variable annuity separate
accounts, differences in the voting instructions of the Participants and Payees
and those of other companies, or some other reason. In the event of conflict, we
will take any steps necessary to protect Participants and Payees, including
withdrawal of the Variable Account from participation in the underlying Funds
which are involved in the conflict or substitution of shares of other Funds.
Certain of the investment advisers to the Funds may reimburse us for
administrative costs in connection with administering the Funds as options under
the Contracts. These amounts are not charged to the Funds or Participants, but
are paid from assets of the advisers. Certain Funds may reimburse us from their
assets for distribution costs pursuant to the terms of their Rule 12b-1 plans.
Certain publically available mutual funds may have similar investment
goals and principal investment policies and risks as one or more of the Funds,
and may be managed by a Fund's portfolio manager(s). While a Fund may have many
similarities to these other funds, its investment performance will differ from
their investment performance. This is due to a number of differences between a
Fund and these similar products, including differences in sales charges, expense
ratios and cash flows.
THE FIXED ACCOUNT
The Fixed Account is made up of all the general assets of the Company
other than those allocated to any separate account. Amounts you allocate to
Guarantee Periods become part of the Fixed Account, and are available to fund
the claims of all classes of our customers, including claims for benefits under
the Contracts.
We will invest the assets of the Fixed Account in those assets we choose
that are allowed by applicable state insurance laws. In general, these laws
permit investments, within specified limits and subject to certain
qualifications, in federal, state and municipal obligations, corporate bonds,
preferred and common stocks, real estate mortgages, real estate and certain
other investments. We intend to invest primarily in investment-grade fixed
income securities (I.E., rated by a nationally recognized rating service within
the 4 highest grades) or instruments we believe are of comparable quality.
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We are not obligated to invest amounts allocated to the Fixed Account
according to any particular strategy, except as may be required by applicable
state insurance laws. You will not have a direct or indirect interest in the
Fixed Account investments.
THE FIXED ACCOUNT OPTIONS:
THE GUARANTEE PERIODS
You may elect one or more Guarantee Period(s) from those we make available
from time to time. We publish Guaranteed Interest Rates for each Guarantee
Period offered. We may change the Guaranteed Interest Rates we offer from time
to time, but no Guaranteed Interest Rate will ever be less than 3% per year,
compounded annually. Also, once we have accepted your allocation to a particular
Guarantee Period, we promise that the Guaranteed Interest Rate applicable to
that allocation will not change for the duration of the Guarantee Period.
We determine Guaranteed Interest Rates at our discretion. We do not have a
specific formula for establishing the rates for different Guarantee Periods. Our
determination will be influenced by the interest rates on fixed income
investments in which we may invest amounts allocated to the Guarantee Periods.
We will also consider other factors in determining these rates, including
regulatory and tax requirements, sales commissions and administrative expenses
borne by us, general economic trends and competitive factors. We cannot predict
the level of future interest rates.
We may from time to time at our discretion offer special interest rate for
new Purchase Payments that are higher than the rates we are then offering for
renewals or transfers.
Early withdrawals from your allocation to a Guarantee Period, including
cash withdrawals, transfers and commencement of an annuity option, may be
subject to a Market Value Adjustment, which could decrease or increase the value
of your Account. See "Withdrawals and Market Value Adjustment."
THE ACCUMULATION PHASE
During the Accumulation Phase of your Contract, you make payments into
your Account, and your earnings accumulate on a tax-deferred basis. The
Accumulation Phase begins with our acceptance of your first Purchase Payment and
ends the Business Day before your Annuity Commencement Date. The Accumulation
Phase will end sooner if you surrender your Contract or die before the Annuity
Commencement Date.
ISSUING YOUR CONTRACT
When you purchase a Contract, a completed Application and the initial
Purchase Payment are sent to us for acceptance. When we accept an Individual
Contract, we issue the Contract to you. When we accept a Group Contract, we
issue the Contract to the Owner; we issue a Certificate to you as a Participant.
We will credit your initial Purchase Payment to your Account within 2
Business Days of receiving your completed Application. If your Application is
not complete, we will notify you. If we do not have the necessary information to
complete the Application within 5 Business Days, we will send your money back to
you or ask your permission to retain your Purchase Payment until the Application
is made complete. Then we will apply the Purchase Payment within 2 Business Days
of when the Application is complete.
AMOUNT AND FREQUENCY OF PURCHASE PAYMENTS
The amount of Purchase Payments may vary; however, we will not accept an
initial Purchase Payment of less than $20,000, and each additional Purchase
Payment must be at least $1,000, unless we waive these limits. In addition, we
will not accept a Purchase Payment if your Account Value is over $2 million, or
if the Purchase Payment would cause your Account Value to exceed $2 million,
unless we have approved the Payment in advance. Within these limits, you may
make Purchase Payments at any time during the Accumulation Phase.
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ALLOCATION OF NET PURCHASE PAYMENTS
You may allocate your Purchase Payments among the different Sub-Accounts
and Guarantee Periods we offer, but any allocation to a Guarantee Period must be
at least $1,000. Over the life of your Contract, you may allocate amounts among
as many as 18 of the available investment options.
In your Application, you may specify the percentage of each Purchase
Payment to be allocated to each Sub-Account or Guarantee Period. These
percentages are called your allocation factors. You may change the allocation
factors for future Payments by sending us notice of the change in a form
acceptable to us, as required. We will use your new allocation factors for the
first Purchase Payment we receive with or after we have received notice of the
change, and for all future Purchase Payments, until we receive another change
notice.
Although it is currently not our practice, we may deduct applicable
premium taxes or similar taxes from your Purchase Payments (see "Contract
Charges -- Premium Taxes"). In that case, we will credit your Net Purchase
Payment, which is the Purchase Payment minus the amount of those taxes.
YOUR ACCOUNT
When we accept your first Purchase Payment, we establish an Account for
you, which we maintain throughout the Accumulation Phase of your Contract.
YOUR ACCOUNT VALUE
Your Account Value is the sum of the value of the 2 components of your
Contract: the Variable Account portion of your Contract ("Variable Account
Value") and the Fixed Account portion of your Contract ("Fixed Account Value").
These 2 components are calculated separately, as described below under "Variable
Account Value" and "Fixed Account Value."
VARIABLE ACCOUNT VALUE
VARIABLE ACCUMULATION UNITS
In order to calculate your Variable Account Value, we use a measure called
a Variable Accumulation Unit for each Sub-Account. Your Variable Account Value
is the sum of your Account Value in each Sub-Account, which is the number of
your Variable Accumulation Units for that Sub-Account times the value of each
Unit.
VARIABLE ACCUMULATION UNIT VALUE
The value of each Variable Accumulation Unit in a Sub-Account reflects the
net investment performance of that Sub-Account. We determine that value once on
each day that the New York Stock Exchange is open for trading, at the close of
trading, which is currently 4:00 p.m., Eastern Time. (The close of trading is
determined by the New York Stock Exchange.) We also may determine the value of
Variable Accumulation Units of a Sub-Account on days the Exchange is closed if
there is enough trading in securities held by that Sub-Account to materially
affect the value of the Variable Accumulation Units. Each day we make a
valuation is called a "Business Day." The period that begins at the time
Variable Accumulation Units are valued on a Business Day and ends at that time
on the next Business Day is called a Valuation Period. On days other than
Business Days, the value of a Variable Accumulation Unit does not change.
To measure these values, we use a factor -- which we call the Net
Investment Factor -- which represents the net return on the Sub-Account's
assets. At the end of any Valuation Period, the value of a Variable Accumulation
Unit for a Sub-Account is equal to the value of that Sub-Account's Variable
Accumulation Units at the end of the previous Valuation Period, multiplied by
the Net Investment Factor. We calculate the Net Investment Factor by dividing
(1) the net asset value of a Fund share held in the Sub-Account at the end of
that Valuation Period, plus the per share amount of any dividend or capital
gains distribution made by that Fund during the Valuation Period, by (2) the net
asset value per share of the Fund share at the end of the previous Valuation
Period; we then deduct a factor representing the mortality and expense risk
charge and administrative expense charge for each day in the Valuation Period.
See "Contract Charges."
For a hypothetical example of how we calculate the value of a Variable
Accumulation Unit, see the Statement of Additional Information.
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CREDITING AND CANCELING VARIABLE ACCUMULATION UNITS
When we receive an allocation to a Sub-Account either from a Net Purchase
Payment or a transfer of Account Value, we credit that amount to your Account in
Variable Accumulation Units. Similarly, we cancel Variable Accumulation Units
when you transfer or withdraw amounts from a Sub-Account, or when we deduct
certain charges under the Contract. We determine the number of Units credited or
canceled by dividing the dollar amount by the Variable Accumulation Unit value
for that Sub-Account at the end of the Valuation Period during which the
transaction or charge is effective.
FIXED ACCOUNT VALUE
Your Fixed Account value is the sum of all amounts allocated to Guarantee
Periods, either from Net Purchase Payments, transfers or renewals, plus interest
credited on those amounts, and minus withdrawals, transfers out of Guarantee
Periods, and any deductions for charges under the Contract taken from your Fixed
Account Value.
A Guarantee Period begins the day we apply your allocation and ends when
the number of calendar years (or months if the Guarantee Period is less than one
year) in the Guarantee Period (measured from the end of the calendar month in
which the amount was allocated to the Guarantee Period) have elapsed. The last
day of the Guarantee Period is its Renewal Date.
Each additional Purchase Payment, transfer or renewal credited to your
Fixed Account Value will result in a new Guarantee Period with its own Renewal
Date. Amounts allocated at different times to Guarantee Periods of the same
duration may have different Renewal Dates.
CREDITING INTEREST
We credit interest on amounts allocated to a Guarantee Period at the
applicable Guaranteed Interest Rate for the duration of the Guarantee Period.
During the Guarantee Period, we credit interest daily at a rate that yields the
Guaranteed Interest Rate on an annual effective basis.
GUARANTEE AMOUNTS
Each separate allocation you make to a Guarantee Period, together with
interest credited thereon, is called a Guarantee Amount. Each Guarantee Amount
is treated separately for purposes of determining the Market Value Adjustment. A
Guarantee Period that will extend beyond your maximum Annuity Commencement Date
will result in an application of a Market Value Adjustment upon annuitization or
withdrawals. Each new allocation to a Guarantee Period must be at least $1,000.
RENEWALS
We will notify you in writing between 45 and 75 days before the Renewal
Date for any Guarantee Amount. A new Guarantee Period of the same duration will
begin automatically for that Guarantee Amount on the first day following the
Renewal Date, unless before the Renewal Date we receive:
(1) written notice from you electing a different Guarantee Period from
among those we then offer, or
(2) instructions to transfer the Guarantee Amount to one or more
Sub-Accounts, in accordance with the transfer privilege provisions of
the Contract (see "Transfer Privilege").
A Guarantee Amount will not renew into a Guarantee Period that will extend
beyond your Maximum Annuity Commencement Date. Unless you notify us otherwise,
we will automatically renew your Guarantee Amount into the next available
Guarantee Period.
EARLY WITHDRAWALS
If you withdraw, transfer, or annuitize an allocation to a Guarantee
Period 30 days prior to the Renewal Date, we will apply a Market Value
Adjustment to the transaction. This could result in an increase or a decrease of
your Account Value, depending on interest rates at the time. You bear the risk
that you will receive less than your principal if the Market Value Adjustment
applies.
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TRANSFER PRIVILEGE
PERMITTED TRANSFERS
During the Accumulation Phase, you may transfer all or part of your
Account Value to one or more Sub-Accounts or Guarantee Periods then available,
subject to the following restrictions:
- You may not make more than 12 transfers in any Account Year;
- The amount transferred from a Sub-Account must be at least $1,000,
unless you are transferring your entire balance in that Sub-Account;
- Your Account Value remaining in a Sub-Account must be at least $1,000;
- The amount transferred from a Guarantee Period must be the entire
Guarantee Amount, except for transfers of interest credited during the
current Account Year;
- At least 30 days must elapse between transfers to or from Guarantee
Periods;
- Transfers to or from Sub-Accounts are subject to terms and conditions
that may be imposed by the Funds; and
- We impose additional restrictions on market timers, which are further
described below.
These restrictions do not apply to transfers made under an approved
dollar-cost averaging program.
There is usually no charge imposed on transfers; however, we reserve the
right to impose a transfer charge of $15 for each transfer. Transfers out of a
Guarantee Period more than 30 days before the Renewal Date or any time after the
Renewal Date will be subject to the Market Value Adjustment described below.
Under current law, there is no tax liability for transfers.
REQUESTS FOR TRANSFERS
You may request transfers in writing or by telephone. The telephone
transfer privilege is available automatically, and does not require your written
election. We will require personal identifying information to process a request
for a transfer made by telephone. We will not be liable for following
instructions communicated by telephone that we reasonably believe are genuine.
Your transfer request will be effective as of the close of the Business
Day if we receive your transfer request before the earlier of (a) 4:00 p.m.
Eastern Time on a Business Day or (b) the close of the New York Stock Exchange
on days that the Stock Exchange closes before 4:00 p.m. Otherwise it will be
effective on the next Business Day.
MARKET TIMERS
The Contracts are not designed for professional market timing
organizations or other entities using programmed and frequent transfers. If you
wish to employ such strategies, you should not purchase a Contract. Accordingly,
transfers may be subject to restrictions if exercised by a market timing firm or
any other third party authorized to initiate transfer transactions on behalf of
multiple Participants. In imposing such restrictions, we may, among other
things, not accept (1) the transfer instructions of any agent acting under a
power of attorney on behalf of more than one Participant, or (2) the transfer
instructions of individual Participants who have executed preauthorized transfer
forms that are submitted at the same time by market timing firms or other third
parties on behalf of more than one Participant. We will not impose these
restrictions unless our actions are reasonably intended to prevent the use of
such transfers in a manner that will disadvantage or potentially impair the
Contract rights of other Participants.
In addition, the Funds have reserved the right to temporarily or
permanently refuse exchange requests from the Variable Account if, in the
judgment of a Fund's investment adviser, a Fund would be unable to invest
effectively in accordance with its investment objective and policies, or would
otherwise potentially be adversely affected. In particular, a pattern of
exchanges that coincide with a market timing strategy may be disruptive to a
Fund and therefore may be refused. Accordingly, the Variable Account may not be
in a position to effectuate transfers and may refuse transfer requests without
prior notice. We also reserve the right, for similar reasons, to refuse or delay
exchange requests involving transfers to or from the Fixed Account.
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WAIVERS; REDUCED CHARGES; SPECIAL GUARANTEED INTEREST RATES
We may reduce or waive the mortality and expense risk charges, the
administrative service fee or the annual Account Fee, credit additional amounts,
or grant Special Guaranteed Interest Rates in certain situations. These
situations may include sales of Contracts (1) where selling and/or maintenance
costs associated with the Contracts are reduced, such as the sale of several
Contracts to the same Participant, sales of large Contracts, and certain group
sales, and (2) to officers, directors and employees of the Company or its
affiliates, registered representatives and employees of broker-dealers with a
current selling agreement with the Company and affiliates of such
representatives and broker-dealers, employees of affiliated asset management
firms, and persons who have retired from such positions ("Eligible Employees")
and immediate family members of Eligible Employees. Eligible Employees and their
immediate family members may also purchase a Contract without regard to minimum
Purchase Payment requirements.
OPTIONAL PROGRAMS
DOLLAR-COST AVERAGING
Dollar-cost averaging allows you to invest gradually, over time, in up to
12 Sub-Accounts. You may select a dollar-cost averaging program at no extra
charge by allocating a minimum of $1,000 to a designated Sub-Account or to a
Guarantee Period we make available in connection with the program. Amounts
allocated to the Fixed Account under the program will earn interest at a rate
declared by the Company for the Guarantee Period you select. Previously applied
amounts may not be transferred to a Guarantee Period made available in
connection with this program. At regular time intervals, we will transfer the
same amount automatically to one or more Sub-Accounts that you choose, up to a
maximum of 12 Sub-Accounts. The program continues until your Account Value
allocated to the program is depleted or you elect to stop the program. The final
amount transferred from the Fixed Account will include all interest earned.
No Market Value Adjustment (either positive or negative) will apply to
amounts automatically transferred from the Fixed Account under the dollar-cost
averaging program. However, if you discontinue or alter the program prior to
completion, amounts remaining in the Fixed Account will be transferred to the
Money Market Fund investment option under the Contract, unless you instruct us
otherwise, and the Market Value Adjustment will be applied. Any new allocation
of a Purchase Payment to the program will be treated as commencing a new
dollar-cost averaging program and is subject to the $1,000 minimum.
The main objective of a dollar-cost averaging program is to minimize the
impact of short-term price fluctuations on Account Value. In general, since you
transfer the same dollar amount to the variable investment options at set
intervals, dollar-cost averaging allows you to purchase more Variable
Accumulation Units (and, indirectly, more Fund shares) when prices are low and
fewer Variable Accumulation Units (and, indirectly, fewer Fund shares) when
prices are high. Therefore, you may achieve a lower average cost per Variable
Accumulation Unit over the long term. A dollar-cost averaging program allows you
to take advantage of market fluctuations. However, it is important to understand
that a dollar-cost averaging program does not assure a profit or protect against
loss in a declining market. We do not allow transfers into any of the Guarantee
Periods.
ASSET ALLOCATION
One or more asset allocation programs may be available in connection with
the Contract, at no extra charge. Asset allocation is the process of investing
in different asset classes -- such as equity funds, fixed income funds, and
money market funds -- depending on your personal investment goals, tolerance for
risk, and investment time horizon. By spreading your money among a variety of
asset classes, you may be able to reduce the risk and volatility of investing,
although there are no guarantees, and asset allocation does not insure a profit
or protect against loss in a declining market.
Currently, you may select one of 3 asset allocation models, each of which
represents a combination of Sub-Accounts with a different level of risk. The
available models are: the conservative asset allocation model, the moderate
asset allocation model, and the aggressive asset allocation model. Each model
allocates a different percentage of Account Value to Sub-Accounts investing in
the various asset classes, with the conservative asset allocation model
allocating the lowest percentage to Sub-Accounts investing in the equity asset
class and the aggressive asset allocation model allocating the highest
percentage to the equity asset class. These asset allocation models, as well as
the terms and conditions
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of the asset allocation program, are fully described in a separate brochure. We
may add or delete such programs in the future.
If you elect an asset allocation program, we will automatically allocate
your Purchase Payments among the Sub-Accounts represented in the model you
choose. By electing an asset allocation program, you thereby authorize us to
automatically reallocate your investment options that participate in the asset
allocation program on a quarterly basis, or as determined by the terms of the
Asset Allocation Program, to reflect the current composition of the model you
have selected, without further instruction, until we receive notification that
you wish to terminate the program or choose a different model.
SYSTEMATIC WITHDRAWAL AND INTEREST OUT PROGRAMS
If you have an Account Value of $10,000 or more, you may select our
Systematic Withdrawal Program or our Interest Out Program.
Under the Systematic Withdrawal Program, you determine the amount and
frequency of regular withdrawals you would like to receive from your Fixed
Account Value and/or Variable Account Value and we will effect them
automatically; a Market Value Adjustment may be applicable upon withdrawal.
Under the Interest Out Program, we automatically pay you or reinvest interest
credited for all Guarantee Periods you have chosen. The withdrawals under these
programs may be subject to surrender charges or a Market Value Adjustment. They
may also be included as income and subject to a 10% federal tax penalty. You
should consult your tax adviser before choosing these options.
You may change or stop either program at any time, by written notice to
us.
PORTFOLIO REBALANCING PROGRAM
Under the Portfolio Rebalancing Program, we transfer funds among all
Sub-Accounts to maintain the percentage allocation you have selected among these
Sub-Accounts. At your election, we will make these transfers on a quarterly,
semi-annual or annual basis.
Portfolio Rebalancing does not permit transfers to or from any Guarantee
Period.
WITHDRAWALS AND MARKET VALUE ADJUSTMENT
CASH WITHDRAWALS
REQUESTING A WITHDRAWAL
At any time during the Accumulation Phase, you may withdraw in cash all or
any portion of your Account Value. To make a withdrawal, you must send us a
written request at our Annuity Mailing Address. Your request must specify
whether you want to withdraw the entire amount of your Account or, if less, the
amount you wish to receive.
When you make a withdrawal, we consider the oldest Purchase Payment that
you have not already withdrawn to be withdrawn first, then the second oldest
Purchase Payments, and so forth. Once all Purchase Payments are withdrawn, the
balance withdrawn is considered to be accumulated value.
We do not deduct any sales charge from your Purchase Payments when they
are made, nor do we impose a withdrawal charge (known as a "contingent deferred
sales charge") on amounts you withdraw.
However, all withdrawals from your Fixed Account Value may be subject to a
Market Value Adjustment (see "Market Value Adjustment"). Withdrawals also may
have adverse income tax consequences, including a 10% penalty tax (see "Tax
Considerations"). You should carefully consider these tax consequences before
requesting a cash withdrawal.
FULL WITHDRAWALS
If you request a full withdrawal, we calculate the amount we will pay you
as follows: We start with the total value of your Account at the end of the
Valuation Period during which we receive your withdrawal request; we deduct the
Account Fee for the Account Year in which the withdrawal is made; and finally,
we add or subtract the amount of any Market Value Adjustment applicable to your
Fixed Account Value.
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A full withdrawal results in the surrender of your Contract, and
cancellation of all rights and privileges under your Contract.
PARTIAL WITHDRAWALS
If you request a partial withdrawal, we will pay you the actual amount
specified in your request and then adjust the value of your Account by deducting
the amount paid, and adding or deducting any Market Value Adjustment applicable
to amounts withdrawn from the Fixed Account.
You may specify the amount you want withdrawn from each Sub-Account and/or
Guarantee Amount to which your Account is allocated. If you do not so specify,
we will deduct the total amount you request pro rata, based on your Account
Value at the end of the Valuation Period during which we receive your request.
If you request a partial withdrawal that would result in your Account
Value being reduced to an amount less than the Account Fee for the Account Year
in which you make the withdrawal, we will treat it as a request for a full
withdrawal.
TIME OF PAYMENT
We will pay you the applicable amount of any full or partial withdrawal
within 7 days after we receive your withdrawal request, except in cases where we
are permitted, and choose, to defer payment under the Investment Company Act of
1940 and applicable state insurance law. Currently, we may defer payment of
amounts you withdraw from the Variable Account only for the following periods:
- When the New York Stock Exchange is closed (except weekends and
holidays) or when trading on the New York Stock Exchange is restricted;
- When it is not reasonably practical to dispose of securities held by a
Fund or to determine the value of the net assets of a Fund, because an
emergency exists; or
- When an SEC order permits us to defer payment for the protection of
Participants.
We also may defer payment of amounts you withdraw from the Fixed Account
for up to 6 months from the date we receive your withdrawal request. We do not
pay interest on the amount of any payments we defer.
WITHDRAWAL RESTRICTIONS FOR QUALIFIED PLANS
If your Contract is a Qualified Contract, you should carefully check the
terms of your retirement plan for limitations and restrictions on cash
withdrawals.
Special restrictions apply to withdrawals from Contracts used for
Section 403(b) annuities (see "Tax Considerations -- Tax-Sheltered Annuities."
MARKET VALUE ADJUSTMENT
If permitted under the laws of your state, we will apply a Market Value
Adjustment if you withdraw or transfer amounts from your Fixed Account Value
more than 30 days before the end of the applicable Guarantee Period. For this
purpose, using Fixed Account Value to provide an annuity is considered a
withdrawal, and the Market Value Adjustment will apply. However, we will not
apply the Market Value Adjustment to automatic transfers to a Sub-Account from a
Guarantee Period as part of our dollar-cost averaging program.
We apply the Market Value Adjustment separately to each Guarantee Amount
in the Fixed Account, that is to each separate allocation you have made to a
Guarantee Period together with interest credited on that allocation. However, we
do not apply the adjustment to the amount of interest credited during your
current Account Year. Any withdrawal from a Guarantee Amount is attributed first
to such interest.
A Market Value Adjustment may decrease, increase or have no effect on your
Account Value. This will depend on changes in interest rates since you made your
allocation to the Guarantee Period and the length of time remaining in the
Guarantee Period. In general, if the Guaranteed Interest Rate we currently
declare for Guarantee Periods equal to the balance of your Guarantee Period (or
your entire Guarantee Period for Guarantee Periods of less than one year) is
higher than your Guaranteed Interest Rate, the Market Value Adjustment is likely
to decrease your Account Value. If our current
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Guaranteed Interest Rate is lower, the Market Value Adjustment is likely to
increase your Account Value.
We determine the amount of the Market Value Adjustment by multiplying the
amount that is subject to the adjustment by the following formula:
N/12
1 + I
( -------- ) -1
1 + J + b
where:
I is the Guaranteed Interest Rate applicable to the Guarantee Amount from
which you withdraw, transfer or annuitize;
J is the Guaranteed Interest Rate we declare at the time of your
withdrawal, transfer or annuitization for Guarantee Periods equal to the length
of time remaining in the Guarantee Period applicable to your Guarantee Amount,
rounded to the next higher number of complete years, for Guarantee Periods of
one year or more. For any Guarantee Periods of less than one year, J is the
Guaranteed Interest Rate we declare at the time of your withdrawal, transfer or
annuitization for a Guarantee Period of the same length as your Guarantee
Period. If, at that time, we do not offer the applicable Guarantee Period we
will use an interest rate determined by straight-line interpolation of the
Guaranteed Interest Rates for the Guarantee Periods we do offer;
N is the number of complete months remaining in your Guarantee Period; and
b is a factor that currently is 0%, but that in the future we may increase
to up to 0.25%. Any increase would be applicable only to Participants who
purchase their Contracts after the date of that increase.
We will apply the Market Value Adjustment to the amount being withdrawn
after deduction of any Account Fee, if applicable, but before we impose any
withdrawal charge on the amount withdrawn.
For examples of how we calculate the Market Value Adjustment, see
Appendix B.
CONTRACT CHARGES
ACCOUNT FEE
During the Accumulation Phase of your Contract, we will deduct from your
Account an annual Account Fee of $50 to help cover the administrative expenses
we incur related to the issuance of Contracts and the maintenance of Accounts.
We deduct the Account Fee on each Account Anniversary. The annual Account Fee
will never exceed $50. We deduct the Account Fee pro rata from each Sub-Account
and each Guarantee Period, based on the allocation of your Account Value on your
Account Anniversary.
We will not charge the Account Fee if:
(1) your Account has been allocated only to the Fixed Account during the
applicable Account Year; or
(2) your Account Value is $100,000 or more on your Account Anniversary.
If you make a full withdrawal of your Account, we will deduct the full
amount of the Account Fee at the time of the withdrawal. In addition, on the
Annuity Commencement Date we will deduct a pro rata portion of the Account Fee
to reflect the time elapsed between the last Account Anniversary and the day
before the Annuity Commencement Date.
After the Annuity Commencement Date, we will deduct an annual Account Fee
of $50 in the aggregate in equal amounts from each Variable Annuity payment we
make during the year. We do not deduct any Account Fee from Fixed Annuity
payments.
ADMINISTRATIVE EXPENSE CHARGE
We deduct an administrative expense charge from the assets of the Variable
Account at an annual effective rate equal to 0.15% during both the Accumulation
Phase and the Income Phase. This charge is designed to reimburse us for expenses
we incur in administering the Contracts, Participant Accounts and the Variable
Account that are not covered by the annual Account Fee.
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MORTALITY AND EXPENSE RISK CHARGE
During both the Accumulation Phase and the Income Phase, we deduct a
mortality and expense risk charge from the assets of the Variable Account at an
effective annual rate equal to 1.25%, if your initial Purchase Payment was less
than $1,000,000, or 1.00% if your initial Purchase Payment was $1,000,000 or
more. The mortality risk we assume arises from our contractual obligation to
continue to make annuity payments to each Annuitant, regardless of how long the
Annuitant lives and regardless of how long all Annuitants as a group live. This
obligation assures each Annuitant that neither the longevity of fellow
Annuitants nor an improvement in life expectancy generally will have an adverse
effect on the amount of any annuity payment received under the Contract. The
mortality risk also arises from our contractual obligation to pay a death
benefit upon the death of the Participant prior to the Annuity Commencement
Date. The expense risk we assume is the risk that the annual Account Fee and
administrative expense charge we assess under the Contract may be insufficient
to cover the actual total administrative expenses we incur. If the amount of the
charge is insufficient to cover the mortality and expense risks, we will bear
the loss. If the amount of the charge is more than sufficient to cover the
risks, we will make a profit on the charge. We may use this profit for any
proper corporate purpose, including the payment of marketing and distribution
expenses for the Contract.
CHARGES FOR OPTIONAL DEATH BENEFIT RIDERS
If you elect an optional death benefit rider, we will deduct a charge from
the assets of the Variable Account based upon the number of optional death
benefits riders you elect, as follows:
<TABLE>
<CAPTION>
NUMBER OF % OF
RIDERS YOU AVERAGE
ELECT DAILY VALUE
---------- -----------
<S> <C>
1 0.15%
2 0.25%
3 0.40%
</TABLE>
PREMIUM TAXES
Some states and local jurisdictions impose a premium tax on us that is
equal to a specified percentage of the Purchase Payments you make. In many
states there is no premium tax. We believe that the amounts of applicable
premium taxes currently range from 0% to 3.5%. You should consult a tax adviser
to find out if your state imposes a premium tax and the amount of any tax.
In order to reimburse us for the premium tax we may pay on Purchase
Payments, our policy is to deduct the amount of such taxes from the amount you
apply to provide an annuity at the time of annuitization. However, we reserve
the right to deduct the amount of any applicable tax from your Account at any
time, including at the time you make a Purchase Payment or make a full or
partial withdrawal. We do not make any profit on the deductions we make to
reimburse premium taxes.
FUND EXPENSES
There are fees and charges deducted from each Fund. These fees and
expenses are described in the Fund prospectuses and related Statements of
Additional Information.
MODIFICATION IN THE CASE OF GROUP CONTRACTS
For Group Contracts, we may modify the annual Account Fee, the
administrative expense charge and the mortality and expense risk charge upon
notice to Owners. However, such modification will apply only with respect to
Participant Accounts established after the effective date of the modification.
DEATH BENEFIT
If the Covered Person dies during the Accumulation Phase, we will pay a
death benefit to your Beneficiary, using the payment method elected (a single
cash payment or one of our Annuity Options). If the Beneficiary is not living on
the date of death of the Covered Person, we will pay the death benefit in one
sum to your estate. We do not pay a death benefit if the Covered Person dies
during the Income Phase. However, the Beneficiary will receive any annuity
payments provided under an Annuity Option that is in effect. If your Contract
names more than one Covered Person, we will pay the death benefit upon the first
death of such Covered Persons.
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AMOUNT OF DEATH BENEFIT
To calculate the amount of the death benefit, we use a "Death Benefit
Date." The Death Benefit Date is the date we receive proof of the death of the
Covered Person in an acceptable form ("Due Proof of Death") if you have elected
a death benefit payment method before the death of the Covered Person and it
remains in effect. Otherwise, the Death Benefit Date is the later of the date we
receive Due Proof of Death or the date we receive the Beneficiary's election of
either payment method or, if the Beneficiary is your spouse, Contract
continuation. If we do not receive the Beneficiary's election within 60 days
after we receive Due Proof of Death, we reserve the right to provide a lump sum
to your Beneficiary.
The amount of the death benefit is determined as of the Death Benefit
Date.
THE BASIC DEATH BENEFIT
In general, if you were 85 or younger on your Contract Date (the date we
accepted your first Purchase Payment), the death benefit will be the greatest of
the following amounts:
1. Your Account Value for the Valuation Period during which the Death
Benefit Date occurs;
2. The amount we would pay if you had surrendered your entire Account on
the Death Benefit Date; and
3. Your total Purchase Payments (adjusted for partial withdrawals as
described in "Calculating the Death Benefit") as of the Death Benefit
Date.
For examples of how to calculate this basic death benefit, see
Appendix C.
If you were 86 or older on your Contract Date, the death benefit is equal
to amount (2) above. Because this amount will reflect any applicable withdrawal
charges and Market Value Adjustment, it may be less than your Account Value.
OPTIONAL DEATH BENEFIT RIDERS
Subject to availability in your state, you may enhance the "Basic Death
Benefit" by electing one or more of the following optional death benefit riders.
You must make your election before the date on which your Contract becomes
effective. You will pay a charge for each optional death benefit rider you
elect. (For a description of these charges, see "Charges for Optional Death
Benefit Riders.") The Maximum Anniversary Account Value Rider, the 5% Premium
Roll-Up Rider, and the Earnings Enhancement Rider are available only if you are
younger than 80 on the Contract Date. Any optional death benefit election may
not be changed after the Contract is issued. For a complete description of how
the death benefits under the optional death benefit riders are calculated, see
"Calculating the Death Benefit."
MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER
Under this rider, the death benefit will be the greater of:
- any of the death benefit amounts payable under the "Basic Death
Benefit" (above), or
- your highest Account Value on any Account Anniversary before your 81st
birthday, adjusted for any subsequent Purchase Payments, partial
withdrawals and charges made between that Account Anniversary and the
Death Benefit Date.
5% PREMIUM ROLL-UP RIDER
Under this rider, the death benefit will be the greater of:
- any of the death benefit amounts payable under the "Basic Death
Benefit" (above), or
- the sum of your total Purchase Payments plus interest accruals,
adjusted for partial withdrawals.
Under this rider, interest accrues at a rate of 5% per year on Purchase
Payments and transfers to the Variable Account while they remain in the Variable
Account. The 5% interest accruals will continue until the earlier of:
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- the first day of the month following your 80th birthday, or
- the day the death benefit amount under this rider equals twice the
total of your Purchase Payments and transferred amounts, adjusted for
withdrawals.
Net Purchase Payments under this rider will be adjusted for all partial
withdrawals, as described in "Calculating the Death Benefit."
EARNINGS ENHANCEMENT RIDER
Under this rider, if you are 69 or younger on your Contract Date, the
death benefit will be:
- the greatest of any of the death benefit amounts payable under the
"Basic Death Benefit" (above), plus
- 40% of the lesser of your net Purchase Payments or your Account Value
minus net Purchase Payments, calculated as of the Death Benefit Date.
If you are between the ages of 70 and 79 on your Contract Date, the death
benefit will be:
- the greatest of any of the death benefit amounts payable under the
"Basic Death Benefit" (above), plus
- 25% of the lesser of your net Purchase Payments or your Account Value
minus net Purchase Payments, calculated as of the Death Benefit Date.
For examples of how the death benefit is calculated under the Earnings
Enhancement Rider, see Appendix D.
SELECTING MULTIPLE DEATH BENEFIT RIDERS
If you elect more than one optional death benefit rider, the death benefit
will be calculated as follows:
1) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH 5% PREMIUM
ROLL-UP RIDER: The death benefit will equal the greater of the death
benefit under the Maximum Anniversary Account Value Rider or the death
benefit under the 5% Premium Roll-Up Rider.
2) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH EARNINGS
ENHANCEMENT RIDER: The death benefit will equal the death benefit under
the Maximum Anniversary Account Value Rider, PLUS the amount calculated
under the Earnings Enhancement Rider. The death benefit under the
Earnings Enhancement Rider is calculated using the Account Value before
the application of the Maximum Anniversary Account Rider.
3) EARNINGS ENHANCEMENT RIDER COMBINED WITH 5% PREMIUM ROLL-UP RIDER: The
death benefit will equal the death benefit under the 5% Premium Roll-Up
Rider, PLUS the amount calculated under the Earnings Enhancement Rider.
The death benefit under the Earnings Enhancement Rider is calculated
using the Account Value before the application of the 5% Premium Roll-Up
Rider.
4) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER, THE 5% PREMIUM ROLL-UP RIDER
AND THE EARNINGS ENHANCEMENT RIDER: The death benefit will equal the
GREATER of the death benefit under the Maximum Anniversary Account Value
Rider or the death benefit under the 5% Premium Roll-Up Rider, PLUS the
amount calculated under the Earnings Enhancement Rider. The death
benefit under the Earnings Enhancement Rider is calculated using the
Account Value before the application of the 5% Premium Roll-Up Rider or
the Maximum Anniversary Account Value Rider.
SPOUSAL CONTINUANCE
If your spouse is your Beneficiary, upon your death your spouse may elect
to continue the Contract as the Participant, rather than receive the death
benefit amount. In that case, we will not pay a death benefit, but the
Contract's Account Value will be equal to your Contract's death benefit amount,
as defined under the "Basic Death Benefit" or any optional death benefit rider
you have selected. All Contract provisions, including any optional death benefit
riders you have selected, will continue as if your spouse had purchased the
Contract on the Death Benefit Date with a deposit equal
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to the death benefit amount. For purposes of calculating death benefits and
expenses from that date forward, your spouse's age on the original effective
date of the Contract will be used.
CALCULATING THE DEATH BENEFIT
In calculating the death benefit amount payable under option (3) of the
"Basic Death Benefit" or any of the optional death benefit riders, any partial
withdrawals will reduce the death benefit amount to an amount equal to the death
benefit amount immediately before the withdrawal multiplied by the ratio of the
Account Value immediately after the withdrawal to the Account Value immediately
before the withdrawal.
If the death benefit is the amount payable under options (2) or (3) of the
"Basic Death Benefit" or under any of the optional death benefit riders, your
Account Value may be increased by the excess, if any, of that amount over option
(1) of the "Basic Death Benefit." Any such increase will be allocated to the
Sub-Accounts in proportion to your Account Value in those Sub-Accounts on the
Death Benefit Date. Such increase will be made only if the Beneficiary elects to
annuitize, elects to defer annuitization, or elects to continue the Contract.
Also, any portion of this new Account Value attributed to the Fixed Account will
be transferred to the available Money Market Fund investment option (without the
application of a Market Value Adjustment). If your spouse, as the named
Beneficiary, elects to continue the Contract after your death, your spouse may
transfer any such Fixed Account portion back to the Fixed Account and begin a
new Guarantee Period.
METHOD OF PAYING DEATH BENEFIT
The death benefit may be paid in a single cash payment or as an annuity
(either fixed, variable or a combination), under one or more of our Annuity
Options. We describe the Annuity Options in this Prospectus under "The Income
Phase -- Annuity Provisions."
During the Accumulation Phase, you may elect the method of payment for the
death benefit. If no such election is in effect on the date of your death, the
Beneficiary may elect either a single cash payment or an annuity. If the
Beneficiary is your spouse, the Beneficiary may elect to continue the Contract.
These elections are made by sending us a completed election form, which we will
provide. If we do not receive the Beneficiary's election within 60 days after we
receive Due Proof of Death, we will pay the death benefit in a single cash
payment.
If we pay the death benefit in the form of an Annuity Option, the
Beneficiary becomes the Annuitant/Payee under the terms of that Annuity Option.
NON-QUALIFIED CONTRACTS
If your Contract is a Non-Qualified Contract, special distribution rules
apply to the payment of the death benefit. The amount of the death benefit must
be distributed either (1) as a lump sum within 5 years after your death, or
(2) if in the form of an annuity, over a period not greater than the life or
expected life of the "designated beneficiary" within the meaning of
Section 72(s) of the Internal Revenue Code, with payments beginning no later
than one year after your death.
The person you have named as Beneficiary under your Contract, if any, will
be the "designated beneficiary." If the named Beneficiary is not living and no
contingent beneficiary has been named, the Annuitant automatically becomes the
designated beneficiary.
If the designated beneficiary is your surviving spouse, your spouse may
continue the Contract in his or her own name as Participant. To make this
election, your spouse must give us written notification within 60 days after we
receive Due Proof of Death. The special distribution rules will then apply on
the death of your spouse. To understand what happens when your spouse continues
the Contract, see "Spousal Continuance," above.
During the Income Phase, if the Annuitant dies, the remaining value of the
Annuity Option in place must be distributed at least as rapidly as the method of
distribution under that option.
If the Participant is not a natural person, these distribution rules apply
on a change in, or the death of, either the Annuitant or the Co-Annuitant.
Payments made in contravention of these special rules would adversely
affect the treatment of the Contracts as annuity contracts under the Internal
Revenue Code. Neither you nor the Beneficiary may exercise rights that would
have that effect.
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SELECTION AND CHANGE OF BENEFICIARY
You select your Beneficiary in your Application. You may change your
Beneficiary at any time by sending us written notice on our required form,
unless you previously made an irrevocable Beneficiary designation. A new
Beneficiary designation is not effective until we record the change.
PAYMENT OF DEATH BENEFIT
Payment of the death benefit in cash will be made within 7 days of the
Death Benefit Date, except if we are permitted to defer payment in accordance
with the Investment Company Act of 1940. If an Annuity Option is elected, the
Annuity Commencement Date will be the first day of the second calendar month
following the Death Benefit Date, and your Account will remain in effect until
the Annuity Commencement Date.
DUE PROOF OF DEATH
We accept any of the following as proof of any person's death:
- An original certified copy of an official death certificate;
- An original certified copy of a decree of a court of competent
jurisdiction as to the finding of death; or
- Any other proof we find satisfactory.
THE INCOME PHASE -- ANNUITY PROVISIONS
During the Income Phase, we make regular monthly annuity payments to the
Annuitant.
The Income Phase of your Contract begins with the Annuity Commencement
Date. On that date, we apply your Account Value, adjusted as described below,
under the Annuity Option(s) you have selected, and we make the first annuity
payment.
Once the Income Phase begins, no lump sum settlement option or cash
withdrawals are permitted, except pursuant to Annuity Option D, Monthly Payments
for a Specified Period Certain, as described below under the heading "Annuity
Options," and you cannot change the Annuity Option selected. You may request a
full withdrawal before the Annuity Commencement Date, which will be subject to
all charges applicable on withdrawals (see "Withdrawals and Market Value
Adjustment").
SELECTION OF THE ANNUITANT OR CO-ANNUITANT
You select the Annuitant in your Application. The Annuitant is the person
who receives annuity payments during the Income Phase and on whose life these
payments are based. In your Contract, the Annuity Option(s) refer to the
Annuitant as the "Payee." If you name someone other than yourself as Annuitant
and the Annuitant dies before the Income Phase, you become the Annuitant.
In a Non-Qualified Contract, if you name someone other than yourself as
Annuitant, you may also select a Co-Annuitant, who will become the new Annuitant
if the original Annuitant dies before the Income Phase. If both the Annuitant
and Co-Annuitant die before the Income Phase, you become the Annuitant. If you
have named both an Annuitant and a Co-Annuitant, you may designate one of them
to become the sole Annuitant as of the Annuity Commencement Date, if both are
living at that time. If you have not made that designation on the 30th day
before the Annuity Commencement Date, and both the Annuitant and the
Co-Annuitant are still living, the Co-Annuitant will become the Annuitant.
When an Annuity Option has been selected as the method of paying the death
benefit, the Beneficiary is the Payee of the annuity payment.
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SELECTION OF THE ANNUITY COMMENCEMENT DATE
You select the Annuity Commencement Date in your Application. The
following restrictions apply to the date you may select:
- The earliest possible Annuity Commencement Date is the first day of the
first month following your first Account Anniversary.
- The latest possible Annuity Commencement Date is the first day of the
month following the Annuitant's 95th birthday or, if there is a
Co-Annuitant, the 95th birthday of the younger of the Annuitant and
Co-Annuitant.
- The Annuity Commencement Date must always be the first day of a month.
You may change the Annuity Commencement Date from time to time by sending
us written notice, with the following additional limitations:
- We must receive your notice at least 30 days before the current Annuity
Commencement Date.
- The new Annuity Commencement Date must be at least 30 days after we
receive the notice.
There may be other restrictions on your selection of the Annuity
Commencement Date imposed by your retirement plan or applicable law. In most
situations, current law requires that for a Qualified Contract, certain minimum
distributions must commence no later than April 1 following the year the
Annuitant reaches age 70 1/2 (or, for Qualified Contracts other than IRAs, no
later than April 1 following the year the Annuitant retires, if later than the
year the Annuitant reaches age 70 1/2).
ANNUITY OPTIONS
We offer the following Annuity Options for payments during the Income
Phase. Each Annuity Option may be selected for a Variable Annuity, a Fixed
Annuity, or a combination of both. We may also agree to other settlement
options, at our discretion.
ANNUITY OPTION A -- LIFE ANNUITY
We provide monthly payments during the lifetime of the Annuitant. Annuity
payments stop when the Annuitant dies. There is no provision for continuation of
any payments to a Beneficiary.
ANNUITY OPTION B -- LIFE ANNUITY WITH 60, 120, 180 OR 240 MONTHLY PAYMENTS
CERTAIN
We make monthly payments during the lifetime of the Annuitant. In
addition, we guarantee that the Beneficiary will receive monthly payments for
the remainder of the period certain, if the Annuitant dies during that period.
The election of a longer period results in smaller monthly payments. If no
Beneficiary is designated, we pay the discounted value of the remaining payments
in one sum to the Annuitant's estate. The Beneficiary may also elect to receive
the discounted value of the remaining payments in one sum. The discount rate for
a Variable Annuity will be the assumed interest rate in effect; the discount
rate for a Fixed Annuity will be based on the interest rate we used to determine
the amount of each payment.
ANNUITY OPTION C -- JOINT AND SURVIVOR ANNUITY
We make monthly payments during the lifetime of the Annuitant and another
person you designate and during the lifetime of the survivor of the two. We stop
making payments when the survivor dies. There is no provision for continuance of
any payments to a Beneficiary.
ANNUITY OPTION D -- MONTHLY PAYMENTS FOR A SPECIFIED PERIOD CERTAIN
We make monthly payments for a specified period of time from 5 to 30
years, as you elect. If payments under this option are paid on a variable
annuity basis, the Annuitant may elect to receive, at any time, some or all of
the discounted value of the remaining payments, less any applicable withdrawal
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charge; the discount rate for this purpose will be the assumed interest rate in
effect. If the Annuitant dies during the period selected, the remaining income
payments are made as described under Annuity Option B. The election of this
Annuity Option may result in the imposition of a penalty tax. The 5- to 9-year
period certain is not available if your Account has been issued within the past
7 years.
SELECTION OF ANNUITY OPTION
You select one or more of the Annuity Options, which you may change from
time to time during the Accumulation Phase, as long as we receive your selection
or change in writing at least 30 days before the Annuity Commencement Date. If
we have not received your written selection on the 30th day before the Annuity
Commencement Date, you will receive Annuity Option B, for a life annuity with
120 monthly payments certain.
You may specify the proportion of your Adjusted Account Value you wish to
provide a Variable Annuity or a Fixed Annuity. Under a Variable Annuity, the
dollar amount of payments will vary, while under a Fixed Annuity, the dollar
amount of payments will remain the same. If you do not specify a Variable
Annuity or a Fixed Annuity, your Adjusted Account Value will be divided between
Variable Annuities and Fixed Annuities in the same proportions as your Account
Value was divided between the Variable and Fixed Accounts on the Annuity
Commencement Date. You may allocate your Adjusted Account Value applied to a
Variable Annuity among the Sub-Accounts, or we will use your existing
allocations.
There may be additional limitations on the options you may elect under
your particular retirement plan or applicable law.
REMEMBER THAT THE ANNUITY OPTIONS MAY NOT BE CHANGED ONCE ANNUITY PAYMENTS
BEGIN.
AMOUNT OF ANNUITY PAYMENTS
ADJUSTED ACCOUNT VALUE
The Adjusted Account Value is the amount we apply to provide a Variable
Annuity and/or a Fixed Annuity. We calculate Adjusted Account Value by taking
your Account Value on the Business Day just before the Annuity Commencement Date
and making the following adjustments:
- We deduct a proportional amount of the Account Fee, based on the
fraction of the current Account Year that has elapsed.
- If applicable, we apply the Market Value Adjustment to your Account
Value in the Fixed Account, which may result in a deduction, an
addition, or no change.
- We deduct any applicable premium tax or similar tax if not previously
deducted.
- On the Annuity Commencement Date, we will exchange your Account's
Variable Annuity Units for Annuitization Units which have an annual
mortality and expense risk charge of 1.40% of your average daily net
assets (1.15% if your initial Purchase Payment was $1,000,000 or more).
VARIABLE ANNUITY PAYMENTS
Variable Annuity payments may vary each month. We determine the dollar
amount of the first payment using the portion of your Adjusted Account Value
applied to a Variable Annuity and the Annuity Payment Rates in your Contract,
which are based on an assumed interest rate of 3% per year, compounded annually.
See "Annuity Payment Rates."
To calculate the remaining payments, we convert the amount of the first
payment into Annuity Units for each Sub-Account; we determine the number of
those Annuity Units by dividing the portion of the first payment attributable to
the Sub-Account by the Annuity Unit Value of that Sub-Account for the Valuation
Period ending just before the Annuity Commencement Date. This number of Annuity
Units for each Sub-Account will remain constant (unless the Annuitant requests
an exchange of Annuity Units). However, the dollar amount of the next Variable
Annuity payment -- which is the sum of
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the number of Annuity Units for each Sub-Account times its Annuity Unit Value
for the Valuation Period ending just before the date of the payment -- will
increase, decrease, or remain the same, depending on the net investment return
of the Sub-Accounts.
If the net investment return of the Sub-Accounts selected is the same as
the assumed interest rate of 3%, compounded annually, the payments will remain
level. If the net investment return exceeds the assumed interest rate, payments
will increase and, conversely, if it is less than the assumed interest rate,
payments will decrease.
Please refer to the Statement of Additional Information for more
information about calculating Variable Annuity Units and Variable Annuity
payments, including examples of these calculations.
FIXED ANNUITY PAYMENTS
Fixed Annuity payments are the same each month. We determine the dollar
amount of each Fixed Annuity payment using the fixed portion of your Adjusted
Account Value and the applicable Annuity Payment Rates. These will be either
(1) the rates in your Contract, which are based on a minimum guaranteed interest
rate of 2.5% per year, compounded annually, or (2) new rates we have published
and are using on the Annuity Commencement Date, if they are more favorable. See
"Annuity Payment Rates."
MINIMUM PAYMENTS
If your Adjusted Account Value is less than $2,000, or the first annuity
payment for any Annuity Option is less than $20, we will pay the Adjusted
Account Value to the Annuitant in one payment.
EXCHANGE OF VARIABLE ANNUITY UNITS
During the Income Phase, the Annuitant may exchange Annuity Units in one
Sub-Account for Annuity Units in another Sub-Account, up to 12 times each
Account Year. To make an exchange, the Annuitant sends us, at our Annuity
Mailing Address, a written request stating the number of Annuity Units in the
Sub-Account he or she wishes to exchange and the new Sub-Account for which
Annuity Units are requested. The number of new Annuity Units will be calculated
so the dollar amount of an annuity payment on the date of the exchange would not
be affected. To calculate this number, we use Annuity Unit values for the
Valuation Period during which we receive the exchange request.
Before exchanging Annuity Units in one Sub-Account for those in another,
the Annuitant should carefully review the Fund prospectuses for the investment
objectives and risk disclosure of the Funds in which the Sub-Accounts invest.
During the Income Phase, we permit only exchanges among Sub-Accounts. No
exchanges to or from a Fixed Annuity are permitted.
ACCOUNT FEE
During the Income Phase, we deduct the annual Account Fee of $50 in equal
amounts from each Variable Annuity payment. We do not deduct the annual Account
Fee from Fixed Annuity payments.
ANNUITY PAYMENT RATES
The Contracts contain Annuity Payment Rates for each Annuity Option
described in this Prospectus. The rates show, for each $1,000 applied, the
dollar amount of (a) the first monthly Variable Annuity payment based on the
assumed interest rate specified in the applicable Contract (3% per year,
compounded annually), and (b) the monthly Fixed Annuity payment, when this
payment is based on the minimum guaranteed interest rate specified in the
Contract (at least 2.5% per year, compounded annually). We may change these
rates under Group Contracts for Accounts established after the effective date of
such change (see "Other Contract Provisions -- Modification").
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The Annuity Payment Rates may vary according to the Annuity Option elected
and the adjusted age of the Annuitant. The Contracts also describe the method of
determining the adjusted age of the Annuitant. The mortality table used in
determining the Annuity Payment Rates for Annuity Options A, B and C is the
Annuity 2000 Table.
ANNUITY OPTIONS AS METHOD OF PAYMENT FOR DEATH BENEFIT
You or your Beneficiary may also select one or more Annuity Options to be
used in the event of the covered person's death before the Income Phase, as
described under the "Death Benefit" section of this Prospectus. In that case,
your Beneficiary will be the Annuitant. The Annuity Commencement Date will be
the first day of the second month beginning after the Death Benefit Date.
OTHER CONTRACT PROVISIONS
EXERCISE OF CONTRACT RIGHTS
An Individual Contract belongs to the individual to whom the Contract is
issued. A Group Contract belongs to the Owner. In the case of a Group Contract,
the Owner may expressly reserve all Contract rights and privileges; otherwise,
each Annuitant will be entitled to exercise such rights and privileges. In any
case, such rights and privileges can be exercised without the consent of the
Beneficiary (other than an irrevocably designated Beneficiary) or any other
person. Such rights and privileges may be exercised only during the lifetime of
the Annuitant before the Annuity Commencement Date, except as the Contract
otherwise provides.
The Annuitant becomes the Payee on and after the Annuity Commencement
Date. The Beneficiary becomes the Payee on the death of the Participant prior to
the Annuity Commencement Date, or on the death of the Annuitant after the
Annuity Commencement Date. Such Payee may thereafter exercise such rights and
privileges, if any, of ownership which continue.
CHANGE OF OWNERSHIP
Ownership of a Qualified Contract may not be transferred except to:
(1) the Annuitant; (2) a trustee or successor trustee of a pension or profit
sharing trust which is qualified under Section 401 of the Internal Revenue Code;
(3) the employer of the Annuitant, provided that the Qualified Contract after
transfer is maintained under the terms of a retirement plan qualified under
Section 403(a) of the Internal Revenue Code for the benefit of the Annuitant;
(4) the trustee or custodian of an individual retirement account plan qualified
under Section 408 of the Internal Revenue Code for the benefit of the
Participants under a Group Contract; or (5) as otherwise permitted from time to
time by laws and regulations governing the retirement or deferred compensation
plans for which a Qualified Contract may be issued. Subject to the foregoing, a
Qualified Contract may not be sold, assigned, transferred, discounted or pledged
as collateral for a loan or as security for the performance of an obligation or
for any other purpose to any person other than the Company.
The Owner of a Non-Qualified Contract may change the ownership of the
Contract prior to the Annuity Commencement Date; and each Participant, in like
manner, may change the ownership interest in a Contract. A change of ownership
will not be binding on us until we receive written notification. When we receive
such notification, the change will be effective as of the date on which the
request for change was signed by the Owner or Participant, as appropriate, but
the change will be without prejudice to us on account of any payment we make or
any action we take before receiving the change. If you change the Owner of a
Non-Qualified Contract, you will become immediately liable for the payment of
taxes on any gain realized under the Contract prior to the change of ownership,
including possible liability for a 10% federal excise tax.
Change of ownership may affect the availability of optional death benefit
riders or the expenses incurred by the election of any optional death benefit
riders.
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VOTING OF FUND SHARES
We will vote Fund shares held by the Sub-Accounts at meetings of
shareholders of the Funds or in connection with similar solicitations, but will
follow voting instructions received from persons having the right to give voting
instructions. During the Accumulation Phase, you will have the right to give
voting instructions, except in the case of a Group Contract where the Owner has
reserved this right. During the Income Phase, the Payee -- that is the Annuitant
or Beneficiary entitled to receive benefits -- is the person having such voting
rights. We will vote any shares attributable to us and Fund shares for which no
timely voting instructions are received in the same proportion as the shares for
which we receive instructions from Owners, Participants and Payees, as
applicable.
Owners of Qualified Contracts issued on a group basis may be subject to
other voting provisions of the particular plan and of the Investment Company Act
of 1940. Employees who contribute to plans that are funded by the Contracts may
be entitled to instruct the Owners as to how to instruct us to vote the Fund
shares attributable to their contributions. Such plans may also provide the
additional extent, if any, to which the Owners shall follow voting instructions
of persons with rights under the plans. If no voting instructions are received
from any such person with respect to a particular Participant Account, the Owner
may instruct the Company as to how to vote the number of Fund shares for which
instructions may be given.
Neither the Variable Account nor the Company is under any duty to provide
information concerning the voting instruction rights of persons who may have
such rights under plans, other than rights afforded by the Investment Company
Act of 1940, or any duty to inquire as to the instructions received or the
authority of Owners, Participants or others, as applicable, to instruct the
voting of Fund shares. Except as the Variable Account or the Company has actual
knowledge to the contrary, the instructions given by Owners under Group
Contracts and Payees will be valid as they affect the Variable Account, the
Company and any others having voting instruction rights with respect to the
Variable Account.
All Fund proxy material, together with an appropriate form to be used to
give voting instructions, will be provided to each person having the right to
give voting instructions at least 10 days prior to each meeting of the
shareholders of the Fund. We will determine the number of Fund shares as to
which each such person is entitled to give instructions as of the record date
set by the Fund for such meeting, which is expected to be not more than 90 days
prior to each such meeting. Prior to the Annuity Commencement Date, the number
of Fund shares as to which voting instructions may be given to the Company is
determined by dividing the value of all of the Variable Accumulation Units of
the particular Sub-Account credited to the Participant Account by the net asset
value of one Fund share as of the same date. On or after the Annuity
Commencement Date, the number of Fund shares as to which such instructions may
be given by a Payee is determined by dividing the reserve held by the Company in
the Sub-Account with respect to the particular Payee by the net asset value of a
Fund share as of the same date. After the Annuity Commencement Date, the number
of Fund shares as to which a Payee is entitled to give voting instructions will
generally decrease due to the decrease in the reserve.
PERIODIC REPORTS
During the Accumulation Period we will send you, or such other person
having voting rights, at least once during each Account Year, a statement
showing the number, type and value of Accumulation Units credited to your
Account and the Fixed Accumulation Value of your Account, which statement shall
be accurate as of a date not more than 2 months previous to the date of mailing.
These periodic statements contain important information concerning your
transactions with respect to your Contract. It is your obligation to review each
such statement carefully and to report to us, at the address or telephone number
provided on the statement, any errors or discrepancies in the information
presented therein within 60 days of the date of such statement. Unless we
receive notice of any such error or discrepancy from you within such period, we
may not be responsible for correcting the error or discrepancy.
In addition, every person having voting rights will receive such reports
or prospectuses concerning the Variable Account and the Funds as may be required
by the Investment Company Act of 1940
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and the Securities Act of 1933. We will also send such statements reflecting
transactions in your Account as may be required by applicable laws, rules and
regulations.
Upon request, we will provide you with information regarding fixed and
variable accumulation values.
SUBSTITUTION OF SECURITIES
Shares of any or all Funds may not always be available for investment
under the Contract. We may add or delete Funds or other investment companies as
variable investment options under the Contract. We may also substitute for the
shares held in any Sub-Account shares of another Fund or shares of another
registered open-end investment company or unit investment trust, provided that
the substitution has been approved, if required, by the SEC. In the event of any
substitution pursuant to this provision, we may make appropriate endorsement to
the Contract to reflect the substitution.
CHANGE IN OPERATION OF VARIABLE ACCOUNT
At our election and subject to any necessary vote by persons having the
right to give instructions with respect to the voting of Fund shares held by the
Sub-Accounts, the Variable Account may be operated as a management company under
the Investment Company Act of 1940 or it may be deregistered under the
Investment Company Act of 1940 in the event registration is no longer required.
Deregistration of the Variable Account requires an order by the SEC. In the
event of any change in the operation of the Variable Account pursuant to this
provision, we may make appropriate endorsement to the Contract to reflect the
change and take such other action as may be necessary and appropriate to effect
the change.
SPLITTING UNITS
We reserve the right to split or combine the value of Variable
Accumulation Units, Annuity Units or any of them. In effecting any such change
of unit values, strict equity will be preserved and no change will have a
material effect on the benefits or other provisions of the Contract.
MODIFICATION
Upon notice to the Participant, in the case of an Individual Contract, and
the Owner and Participant(s), in the case of a Group Contract (or the Payee(s)
during the Income Phase), we may modify the Contract if such modification:
(i) is necessary to make the Contract or the Variable Account comply with any
law or regulation issued by a governmental agency to which the Company or the
Variable Account is subject; (ii) is necessary to assure continued qualification
of the Contract under the Internal Revenue Code or other federal or state laws
relating to retirement annuities or annuity contracts; (iii) is necessary to
reflect a change in the operation of the Variable Account or the Sub-Account(s)
(see "Change in Operation of Variable Account"); (iv) provides additional
Variable Account and/or fixed accumulation options; or (v) as may otherwise be
in the best interests of Owners, Participants, or Payees, as applicable. In the
event of any such modification, we may make appropriate endorsement in the
Contract to reflect such modification.
In addition, upon notice to the Owner, we may modify a Group Contract to
change the withdrawal charges, Account Fee, mortality and expense risk charges,
administrative expense charges, the tables used in determining the amount of the
first monthly variable annuity and fixed annuity payments and the formula used
to calculate the Market Value Adjustment, provided that such modification
applies only to Participant Accounts established after the effective date of
such modification. In order to exercise our modification rights in these
particular instances, we must notify the Owner of such modification in writing.
The notice shall specify the effective date of such modification which must be
at least 60 days following the date we mail notice of modification. All of the
charges and the annuity tables which are provided in the Group Contract prior to
any such modification will remain in effect permanently, unless improved by the
Company, with respect to Participant Accounts established prior to the effective
date of such modification.
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DISCONTINUANCE OF NEW PARTICIPANTS
We may limit or discontinue the acceptance of new Applications and the
issuance of new Certificates under a Group Contract by giving 30 days prior
written notice to the Owner. This will not affect rights or benefits with
respect to any Participant Accounts established under such Group Contract prior
to the effective date of such limitation or discontinuance.
RESERVATION OF RIGHTS
We reserve the right, to the extent permitted by law, to: (1) combine any
2 or more variable accounts; (2) add or delete Funds, sub-series thereof or
other investment companies and corresponding Sub-Accounts; (3) add or remove
Guarantee Periods available at any time for election by a Participant; and (4)
restrict or eliminate any of the voting rights of Participants (or Owners) or
other persons who have voting rights as to the Variable Account. Where required
by law, we will obtain approval of changes from Participants or any appropriate
regulatory authority. In the event of any change pursuant to this provision, we
may make appropriate endorsement to the Contract to reflect the change.
RIGHT TO RETURN
If you are not satisfied with your Contract, you may return it by mailing
or delivering it to us at our Annuity Mailing Address, as shown on the cover of
this Prospectus, within 10 days after it was delivered to you. When we receive
the returned Contract, it will be cancelled and we will refund to you your
Account Value. If applicable state law requires, we will return the full amount
of any Purchase Payment(s) we received. State law may also require us to give
you a longer "free look" period or allow you to return the Contract to your
sales representative.
If you are establishing an Individual Retirement Account ("IRA"), the
Internal Revenue Code requires that we give you a disclosure statement
containing certain information about the Contract and applicable legal
requirements. We must give you this statement on or before the date the IRA is
established. If we give you the disclosure statement before the seventh day
preceding the date the IRA is established, you will not have any right of
revocation under the Code. If we give you the disclosure statement at a later
date, then you may give us a notice of revocation at any time within 7 days
after your Contract Date. Upon such revocation, we will refund your Purchase
Payment(s). This right of revocation with respect to an IRA is in addition to
the return privilege set forth in the preceding paragraph. We allow a
Participant establishing an IRA a "ten day free-look," notwithstanding the
provisions of the Internal Revenue Code.
TAX CONSIDERATIONS
This section describes general federal income tax consequences based upon
our understanding of current federal tax laws. Actual federal tax consequences
may vary depending on, among other things, the type of retirement plan with
which you use and where the site where your Contract was issued. Also,
legislation affecting the current tax treatment of annuity contracts could be
enacted in the future and could apply retroactively to Contracts that you
purchased before the date of enactment. We do not make any guarantee regarding
the federal, state, or local tax status of any Contract or any transaction
involving any Contract. You should consult a qualified tax professional for
advice before purchasing a Contract or executing any other transaction (such as
a rollover, distribution, withdrawal or payment) involving a Contract.
U.S. FEDERAL TAX CONSIDERATIONS
The following discussion applies only to those Contracts issued in the
United States. For a discussion of tax considerations effecting Contracts issued
in Puerto Rico, see "Puerto Rico Tax Considerations," below.
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DEDUCTIBILITY OF PURCHASE PAYMENTS
For federal income tax purposes, Purchase Payments made under
Non-Qualified Contracts are not deductible.
PRE-DISTRIBUTION TAXATION OF CONTRACTS
Generally, an increase in the value of a Contract will not give rise to
tax, prior to distribution.
However, corporate (or other non-natural person) Owners of, and
Participants under, a Non-Qualified Contract incur current tax, regardless of
distribution, on Contract value increases. Such current taxation does not apply,
though, to (i) immediate annuities, which the Internal Revenue Code (the "Code")
defines as a single premium contract with an annuity commencement date within
one year of the date of purchase, or (ii) any Contract that the non-natural
person holds as agent for a natural person (such as where a bank or other entity
holds a Contract as trustee under a trust agreement).
You should note that qualified retirement investments generally provide
tax deferral regardless of whether the underlying contract is an annuity.
DISTRIBUTIONS AND WITHDRAWALS FROM NON-QUALIFIED CONTRACTS
The Account Value will include an amount attributable to Purchase
Payments, the return of which is not taxable, and an amount attributable to
investment earnings, the return of which is taxable at ordinary income rates.
The relative portions of a distribution that derive from nontaxable Purchase
Payments and taxable investment earnings depend upon the timing of the
distribution.
If you withdraw less than your entire Account Value under a Non-Qualified
Contract before the Annuity Commencement Date, you must treat the withdrawal
first as a return of investment earnings. You may treat only withdrawals in
excess of the amount of the Account Value attributable to investment earnings as
a return of Purchase Payments. Account Value amounts assigned or pledged as
collateral for a loan will be treated as if withdrawn from the Contract.
If a Payee receives annuity payments under a Non-Qualified Contract after
the Annuity Commencement Date, however, the Payee treats a portion of each
payment as a nontaxable return of Purchase Payments. In general, the nontaxable
portion of such a payment bears the same ratio to the total payment as the
Purchase Payments bear to the Payee's expected return under the Contract. The
remainder of the payment constitutes a taxable return of investment earnings.
Once the Payee has received nontaxable payments in an amount equal to total
Purchase Payments, all future distributions constitute fully taxable ordinary
income. If the Annuitant dies before the Payee recovers the full amount of
Purchase Payments, the Payee may deduct an amount equal to unrecovered Purchase
Payments.
Upon the transfer of a Non-Qualified Contract by gift (other than to the
Participant's spouse), the Participant must treat an amount equal to the Account
Value minus the total amount paid for the Contract as income.
A penalty tax of 10% may apply to taxable cash withdrawals and lump-sum
payments from Non-Qualified Contracts. This penalty will not apply in certain
circumstances, such as distributions pursuant to the death of the Participant or
distributions under an immediate annuity (as defined above), or after age
59 1/2.
DISTRIBUTIONS AND WITHDRAWALS FROM QUALIFIED CONTRACTS
Generally, distributions from a Qualified Contract will constitute fully
taxable ordinary income. Also, a 10% penalty tax will, except in certain
circumstances, apply to distributions prior to age 59 1/2.
Distributions from a Qualified Contract are not subject to current
taxation or a 10% penalty, however, if:
- the distribution is a hardship distribution or part of a series of
payments for life or for a specified period of 10 years or more (an
"eligible rollover distribution"), and
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- the Participant or Payee rolls over the distribution (with or without
actually receiving the distribution) into a qualified retirement plan
eligible to receive the rollover.
Only you or your spouse may elect to roll over a distribution to an
eligible retirement plan.
WITHHOLDING
In the case of an eligible rollover distribution (as defined above) from a
Qualified Contract (other than from a Contract issued for use with an individual
retirement account), we (or the plan administrator) must withhold and remit to
the U.S. Government 20% of the distribution, unless the Participant or Payee
elects to make a direct rollover of the distribution to another qualified
retirement plan that is eligible to receive the rollover; however, only you or
your spouse may elect a direct rollover. In the case of a distribution from
(i) a Non-Qualified Contract, (ii) a Qualified Contract issued for use with an
individual retirement account, or (iii) a Qualified Contract where the
distribution is not an eligible rollover distribution, we will withhold and
remit to the U.S. Government a part of the taxable portion of each distribution
unless, prior to the distribution, the Participant or Payee provides us his or
her taxpayer identification number and instructs us (in the manner prescribed)
not to withhold. The Participant or Payee may credit against his or her federal
income tax liability for the year of distribution any amounts that we (or the
plan administrator) withhold.
INVESTMENT DIVERSIFICATION AND CONTROL
The Treasury Department has issued regulations that prescribe investment
diversification requirements for mutual fund series underlying nonqualified
variable contracts. Contracts must comply with these regulations to qualify as
annuities for federal income tax purposes. Contracts that do not meet the
guidelines are subject to current taxation on annual increases in value. We
believe that each Fund available as an investment option under the Contract
complies with these regulations. The preamble to the regulations states that the
Internal Revenue Service may promulgate guidelines under which an owner's
excessive control over investments underlying the contract will preclude the
contract from qualifying as an annuity for federal tax purposes. We cannot
predict whether such guidelines, if in fact promulgated, will be retroactive. We
reserve the right to modify the Contract and/or the Variable Account to the
extent necessary to comply with any such guidelines, but cannot assure that such
modifications would satisfy any retroactive guidelines.
TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT
As a life insurance company under the Code, we will record and report
operations of the Variable Account separately from other operations. The
Variable Account will not, however, constitute a regulated investment company or
any other type of taxable entity distinct from our other operations. We will not
incur tax on the income of the Variable Account (consisting primarily of
interest, dividends, and net capital gains) if we use this income to increase
reserves under Contracts participating in the Variable Account.
QUALIFIED RETIREMENT PLANS
You may use Qualified Contracts with several types of qualified retirement
plans. Because tax consequences will vary with the type of qualified retirement
plan and the plan's specific terms and conditions, we provide below only brief,
general descriptions of the consequences that follow from using Qualified
Contracts in connection with various types of qualified retirement plans. We
stress that the rights of any person to any benefits under these plans may be
subject to the terms and conditions of the plans themselves, regardless of the
terms of the Qualified Contracts that you are using. These terms and conditions
may include restrictions on, among other things, ownership, transferability,
assignability, contributions and distributions.
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PENSION AND PROFIT-SHARING PLANS
Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of retirement plans for
employees. The Tax Equity and Fiscal Responsibility Act of 1982 eliminated most
differences between qualified retirement plans of corporations and those of
self-employed individuals. Self-employed persons, as a general rule, may
therefore use Qualified Contracts as a funding vehicle for their retirement
plans.
TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees
of certain types of charitable, educational and scientific organizations
specified in Section 501(c)(3) of the Code to purchase annuity contracts and,
subject to certain limitations, exclude the amount of purchase payments from
gross income for tax purposes. The Code imposes restrictions on cash withdrawals
from Section 403(b) annuities.
If the Contracts are to receive tax-deferred treatment, cash withdrawals
of amounts attributable to salary reduction contributions (other than
withdrawals of accumulation account value as of December 31, 1988) may be made
only when the Participant attains age 59 1/2, separates from service with the
employer, dies or becomes disabled (within the meaning of Section 72(m)(7) of
the Code). These restrictions apply to (i) any post-1988 salary reduction
contributions, (ii) any growth or interest on post-1988 salary reduction
contributions, and (iii) any growth or interest on pre-1989 salary reduction
contributions that occurs on or after January 1, 1989. It is permissible,
however, to withdraw post-1988 salary reduction contributions in cases of
financial hardship. While the Internal Revenue Service has not issued specific
rules defining financial hardship, we expect that to qualify for a hardship
distribution, the Participant must have an immediate and heavy bona fide
financial need and lack other resources reasonably available to satisfy the
need. Hardship withdrawals (as well as certain other premature withdrawals) will
be subject to a 10% tax penalty, in addition to any withdrawal charge applicable
under the Contracts. Under certain circumstances the 10% tax penalty will not
apply if the withdrawal is for medical expenses.
Under the terms of a particular Section 403(b) plan, the Participant may
be entitled to transfer all or a portion of the Account Value to one or more
alternative funding options. Participants should consult the documents governing
their plan and the person who administers the plan for information as to such
investment alternatives.
INDIVIDUAL RETIREMENT ACCOUNTS
Sections 219 and 408 of the Code permit eligible individuals to contribute
to an individual retirement program, including Simplified Employee Pension
Plans, Employer/Association of Employees Established Individual Retirement
Account Trusts, and Simple Retirement Accounts. Such IRAs are subject to
limitations on contribution levels, the persons who may be eligible, and on the
time when distributions may commence. In addition, certain distributions from
some other types of retirement plans may be placed in an IRA on a tax-deferred
basis. If we sell Contracts for use with IRAs, the Internal Revenue Service or
other agency may impose supplementary information requirements. We will provide
purchasers of the Contracts for such purposes with any necessary information.
You will have the right to revoke the Contract under certain circumstances, as
described in the section of this Prospectus entitled "Right to Return."
ROTH IRAS
Section 408A of the Code permits an individual to contribute to an
individual retirement program called a Roth IRA. Unlike contributions to a
traditional IRA under Section 408 of the Code, contributions to a Roth IRA are
not tax-deductible. Provided certain conditions are satisfied, distributions are
generally tax-free. Like traditional IRAs, Roth IRAs are subject to limitations
on contribution amounts and the timing of distributions. If an individual
converts a traditional IRA into a Roth IRA the full amount of the IRA is
included in taxable income. The Internal Revenue Service and other
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agencies may impose special information requirements with respect to Roth IRAs.
We will provide the necessary information for Contracts issued in connection
with Roth IRAs.
PUERTO RICO TAX CONSIDERATIONS
Puerto Rico tax laws with respect to qualified retirement plans described
in this Prospectus vary significantly from those discussed above under "U.S.
Federal Tax Considerations." Although we currently offer the Contract in Puerto
Rico in connection with qualified retirement plans, the text of this Prospectus
under the heading "U.S. Federal Tax Considerations" dealing with such qualified
retirement plans is inapplicable to Puerto Rico and should be disregarded.
The following discussion applies if your Contract is issued in Puerto
Rico:
Under Section 1022 of the Puerto Rico Internal Revenue Code of 1994, as
amended (the "1994 Code"), the Contract offered by this Prospectus is considered
an annuity contract. The 1994 Code provides that no income tax is payable on
increases in value of accumulation shares of annuity units credited to a
variable annuity contract until payments are made to the annuitant or other
payee under such contract.
If any annuity distributions are made under an annuity contract, the
annuitant or other payee will be required to include as gross income the portion
of each payment equal to 3% of the aggregate premiums or other consideration
paid for the annuity. The amount, if any, in excess of the included amount is
excluded from gross income. After an amount equal to the aggregate amount
excluded from gross income has been received up to your investment, all of the
annuity payments are considered to be taxable income.
In the event payment under a Contract is made in a lump sum, the amount of
the payment would be included in the gross income of the Annuitant or other
Payee to the extent of the Annuitant's aggregate premiums or other consideration
paid.
For further information regarding the income tax consequences of owning a
Contract, you should consult a qualified tax adviser.
ADMINISTRATION OF THE CONTRACT
We perform certain administrative functions relating to the Contract,
Participant Accounts, and the Variable Account. These functions include, but are
not limited to, maintaining the books and records of the Variable Account and
the Sub-Accounts; maintaining records of the name, address, taxpayer
identification number, Contract number, Participant Account number and type, the
status of each Participant Account and other pertinent information necessary to
the administration and operation of the Contract; processing Applications,
Purchase Payments, transfers and full and partial withdrawals; issuing Contracts
and Certificates; administering annuity payments; furnishing accounting and
valuation services; reconciling and depositing cash receipts; providing
confirmations; providing toll-free customer service lines; and furnishing
telephonic transfer services.
DISTRIBUTION OF THE CONTRACT
We offer the Contract on a continuous basis. Contracts are sold by
licensed insurance agents in those states where the Contract may be lawfully
sold. Such agents will be registered representatives of broker-dealers
registered under the Securities Exchange Act of 1934 who are members of the
National Association of Securities Dealers, Inc. and who have entered into
distribution agreements with the Company and the general distributor, Clarendon
Insurance Agency, Inc. ("Clarendon"), One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02481. Clarendon, a wholly-owned subsidiary of the Company,
is registered with the SEC under the Securities Exchange Act of 1934 as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc.
Commissions and other distribution compensation will be paid by the
Company to the selling agents and will not be more than 2.50% of Purchase
Payments. In addition, after the first Account Year, broker-dealers who have
entered into distribution agreements with the Company may receive an
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annual renewal commission of no more than 1.00% of the Participant's Account
Value. In addition to commissions, the Company may, from time to time, pay or
allow additional promotional incentives, in the form of cash or other
compensation. We reserve the right to offer these additional incentives only to
certain broker-dealers that sell or are expected to sell during specified time
periods certain minimum amounts of Contracts or Certificates or other contracts
offered by the Company. Promotional incentives may change at any time.
Commissions may be waived or reduced in connection with certain transactions
described in this Prospectus under the heading "Waivers; Reduced Charges;
Special Guaranteed Interest Rates."
PERFORMANCE INFORMATION
From time to time the Variable Account may publish reports to
shareholders, sales literature and advertisements containing performance
information relating to the Sub-Accounts. This information may include
standardized and non-standardized "Average Annual Total Return," "Cumulative
Growth Rate" and "Compound Growth Rate." We may also advertise "yield" and
"effective yield" for some Sub-Accounts.
Average Annual Total Return measures the net income of the Sub-Account and
any realized or unrealized gains or losses of the Fund in which it invests, over
the period stated. Average Annual Total Return figures are annualized and
represent the average annual percentage change in the value of an investment in
a Sub-Account over that period. Standardized Average Annual Total Return
information covers the period after the Variable Account was established or, if
shorter, the life of the Fund. Non-standardized Average Annual Total Return
covers the life of each Fund, which may predate the Variable Account. Cumulative
Growth Rate represents the cumulative change in the value of an investment in
the Sub-Account for the period stated, and is arrived at by calculating the
change in the Accumulation Unit Value of a Sub-Account between the first and the
last day of the period being measured. The difference is expressed as a
percentage of the Accumulation Unit Value at the beginning of the base period.
"Compound Growth Rate" is an annualized measure, calculated by applying a
formula that determines the level of return which, if earned over the entire
period, would produce the cumulative return.
Average Annual Total Return figures assume an initial Purchase Payment of
$1,000 and reflect all applicable withdrawal and Contract charges. The
Cumulative Growth Rate and Compound Growth Rate figures that we advertise do not
reflect withdrawal charges or the annual Account Fee, although such figures do
reflect all recurring charges. Results calculated without withdrawal and/or
certain Contract charges will be higher. We may also use other types of rates of
return that do not reflect withdrawal and Contract charges.
The performance figures used by the Variable Account are based on the
actual historical performance of the underlying Funds for the specified periods,
and the figures are not intended to indicate future performance. For periods
before the date the Contracts became available, we calculate the performance
information for the Sub-Accounts on a hypothetical basis. To do this, we reflect
deductions of the current Contract fees and charges from the historical
performance of the corresponding Funds.
Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (7-day period for the Money Market
Sub-Account available for investment under the Contract), expressed as a
percentage of the value of the Sub-Account's Accumulation Units. Yield is an
annualized figure, which means that we assume that the Sub-Account generates the
same level of net income over a one-year period and compound that income on a
semi-annual basis. We calculate the effective yield for the available Money
Market Sub-Account similarly, but include the increase due to assumed
compounding. The Money Market Sub-Account's effective yield will be slightly
higher than its yield as a result of its compounding effect.
The Variable Account may also from time to time compare its investment
performance to various unmanaged indices or other variable annuities and may
refer to certain rating and other organizations in its marketing materials. More
information on performance and our computations is set forth in the Statement of
Additional Information.
37
<PAGE>
The Company may also advertise the ratings and other information assigned
to it by independent industry ratings organizations. Some of these organizations
are A.M. Best, Moody's Investor's Service, Standard and Poor's Insurance Rating
Services, and Duff and Phelps. Each year A.M. Best reviews the financial status
of thousands of insurers, culminating in the assignment of Best's rating. These
ratings reflect A.M. Best's current opinion of the relevant financial strength
and operating performance of an insurance company in comparison to the norms of
the life/health industry. Best's ratings range from A++ to F. Standard and
Poor's and Duff and Phelps' ratings measure the ability of an insurance company
to meet its obligations under insurance policies it issues. These two ratings do
not measure the insurance company's ability to meet non-policy obligations.
Ratings in general do not relate to the performance of the Sub-Accounts.
We may also advertise endorsements from organizations, individuals or
other parties that recommend the Company or the Contracts. We may occasionally
include in advertisements (1) comparisons of currently taxable and tax deferred
investment programs, based on selected tax brackets; or (2) discussions of
alternative investment vehicles and general economic conditions.
AVAILABLE INFORMATION
The Company and the Variable Account have filed with the SEC registration
statements under the Securities Act of 1933 relating to the Contracts. This
Prospectus does not contain all of the information contained in the registration
statements and their exhibits. For further information regarding the Variable
Account, the Company and the Contracts, please refer to the registration
statements and their exhibits.
In addition, the Company is subject to the informational requirements of
the Securities Exchange Act of 1934. We file reports and other information with
the SEC to meet these requirements. You can inspect and copy this information
and our registration statements at the SEC's public reference facilities at the
following locations: WASHINGTON, D.C. -- 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549; CHICAGO, ILLINOIS -- 500 West Madison Street, Chicago,
IL 60661; NEW YORK, NEW YORK -- 7 World Trade Center, 13th Floor, New York, NY
10048. The Washington, D.C. office will also provide copies by mail for a fee.
You may also find these materials on the SEC's website (http:// www.sec.gov).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1999 and the Report on Form 10-Q for the Quarterly Period Ended March 31, 2000,
filed with the SEC, are incorporated by reference in this Prospectus. Any
statement contained in a document we incorporate by reference is deemed modified
or superceded to the extent that a later filed document, including this
Prospectus, shall modify or supercede that statement. Any statement so modified
or superceded shall not be deemed, except as so modified or superceded, to
constitute part of this Prospectus.
The Company will furnish, without charge, to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of the document referred to above which has been incorporated by reference
in this Prospectus, other than exhibits to such document (unless such exhibits
are specifically incorporated by reference in this Prospectus). Requests for
such document should be directed to the Secretary, Sun Life Assurance Company of
Canada (U.S.), One Sun Life Executive Park, Wellesley Hills, Massachusetts
02481, telephone (800) 225-3950.
38
<PAGE>
ADDITIONAL INFORMATION ABOUT THE COMPANY
GENERAL
The Company is engaged in the sale of individual variable life insurance,
group life and disability insurance, and individual and group fixed and variable
annuities. These contracts are sold in both the tax-qualified and
non-tax-qualified markets. These products are distributed through individual
insurance agents, insurance brokers and broker-dealers.
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 has changed its basis of accounting to generally accepted accounting
principles ("GAAP") effective January 1, 2000 and has filed its Quarterly Report
on Form 10-Q for the period ended March 31, 2000 in accordance with GAAP.
The Company has restated its financial statements originally filed in its
Annual Report on Form 10-K in accordance with GAAP. These financial statements
are included in this Prospectus and are referred to in Management's Discussion
and Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1999. See Note 13 to the Consolidated Financial Statements of the
Company for a reconcilation of statutory surplus to GAAP equity and statutory
net income to GAAP net income.
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the audited Consolidated Financial Statements and the Notes
thereto included in this Prospectus beginning on page 56 and the Unaudited
Consolidated Financial Statements and the Notes thereto included in this
Prospectus beginning on page 90.
<TABLE>
<CAPTION>
FOR THE FOR THE YEAR ENDED DECEMBER 31,
QUARTER ENDED ---------------------------------------
MARCH 31, 2000 1999 1998 1997
-------------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues
Premiums and other revenue............. $ 81,286 $ 262,603 $ 382,477 $ 406,883
Net investment income and realized
gains................................ 80,013 367,296 464,226 552,380
----------- ----------- ----------- -----------
161,299 629,899 846,703 959,263
----------- ----------- ----------- -----------
Benefits and expenses
Policyholder benefits.................. 80,259 334,890 588,108 672,350
Other expenses......................... 38,471 212,197 233,663 190,105
----------- ----------- ----------- -----------
118,730 547,087 821,771 862,455
----------- ----------- ----------- -----------
Operating gain........................... 42,569 82,812 24,932 96,808
Federal income tax expense............... 14,899 29,080 10,768 35,338
----------- ----------- ----------- -----------
Net income............................... $ 27,670 $ 53,732 $ 14,164 $ 61,470
=========== =========== =========== ===========
Assets................................... $22,485,834 $21,484,913 $18,248,262 $17,335,515
=========== =========== =========== ===========
Surplus notes............................ $ 565,000 $ 565,000 $ 565,000 $ 565,000
=========== =========== =========== ===========
</TABLE>
The Company has not restated the financial statements for 1996 and 1995;
therefore, the selected financial data on a statutory basis of accounting for
the Company as presented in its Annual
39
<PAGE>
Report on Form 10-K for the year ended December 31, 1999 and for the quarter
ended March 31, 2000 are shown below.
<TABLE>
<CAPTION>
FOR THE FOR THE YEAR ENDED DECEMBER 31,
QUARTER ENDED -------------------------------------------------------------------
MARCH 31, 2000 1999 1998 1997 1996 1995
-------------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Premiums, annuity
deposits and other
revenue............. $ 732,607 $ 2,869,250 $ 2,581,463 $ 2,623,629 $ 2,215,322 $ 1,883,901
Net investment income
and realized
gains............... 32,681 190,844 187,208 298,121 310,172 315,966
----------- ----------- ----------- ----------- ----------- -----------
765,288 3,060,094 2,768,671 2,921,750 2,525,494 2,199,867
----------- ----------- ----------- ----------- ----------- -----------
Benefits and expenses
Policyholder
benefits............ 673,927 2,706,121 2,416,950 2,579,104 2,232,528 1,995,208
Other expenses........ 60,681 239,136 214,607 206,065 175,342 150,937
----------- ----------- ----------- ----------- ----------- -----------
734,608 2,945,257 2,631,557 2,785,169 2,407,870 2,146,145
----------- ----------- ----------- ----------- ----------- -----------
Operating gain.......... 30,680 114,837 137,114 136,581 117,624 53,722
Federal income tax
expense (benefit)..... 9,275 24,479 11,713 7,339 (5,400) 17,807
----------- ----------- ----------- ----------- ----------- -----------
Net income.............. $ 21,405 $ 90,358 $ 125,401 $ 129,242 $ 123,024 $ 35,915
=========== =========== =========== =========== =========== ===========
Assets.................. $20,898,166 $19,948,155 $16,902,621 $15,925,357 $13,621,952 $12,359,683
=========== =========== =========== =========== =========== ===========
Surplus notes........... $ 565,000 $ 565,000 $ 565,000 $ 565,000 $ 315,000 $ 650,000
=========== =========== =========== =========== =========== ===========
</TABLE>
See discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CAUTIONARY STATEMENT
This following discussions include 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, 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.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- YEAR ENDED DECEMBER 31, 1999
RESULTS OF OPERATIONS
The following table provides a summary of income from operations by
segment, which is discussed more fully below.
NET INCOME FROM CONTINUING OPERATIONS BY SEGMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Wealth Management........................................... $59.7 $ 60.0 $60.7
Individual Protection....................................... (0.1) (46.5) (3.2)
Group Protection............................................ 0.4 1.3 (0.8)
Corporate................................................... (6.2) (0.7) 4.8
----- ------ -----
$53.7 $ 14.1 $61.5
===== ====== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO 1998:
NET INCOME
Net income increased by $28.2 million to $42.4 million in 1999, reflecting
an increase of $39.6 million in income from continuing operations, an increase
of $0.9 million in income from discontinued operations, and $12.3 million
after-tax loss from the sales of Massachusetts Casualty Insurance Company
("MCIC") and New London Trust F.S.B. ("NLT") which occurred in 1999.
NET INCOME FROM CONTINUING OPERATIONS BY SEGMENT
The Company's income from operations reflects the operations of its 4
business segments: the Wealth Management segment, the Individual Protection
segment, the Group Protection segment and the Corporate segment.
WEALTH MANAGEMENT SEGMENT
The Wealth Management segment focuses on the savings and retirement needs
of individuals preparing for retirement or 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 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 of the Company.
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.
41
<PAGE>
through independent managers. In 1997, the Company decided to no longer market
group pension and GIC products.
Net income decreased by $0.3 million to $59.7 million in 1999 as compared
to 1998. The increase in fee and other income, due to increased business, was
partially offset by higher operating expenses, resulting from both increased
business and continued investment in the Futurity distribution network. In
addition, the loss of earnings from the GICs, which block of business is
declining, contributed to the minor decline in earnings. Following are the major
factors affecting the Wealth Management segment's results in 1999 as compared to
1998:
- Fee and other income increased primarily as a result of higher variable
annuity account balances. Fee income was higher by approximately $37
million in 1999 compared to 1998. 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 $3.8 billion,
or 31%, since January 1, 1999.
- Net deposits of annuity products increased by $53 million to $290
million compared with 1998. The increase in net deposits results
primarily from significant increases in new deposits offset by
increased variable annuity surrenders in 1999. Management believes the
increase in new deposits is mainly a 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 decreased
in 1999. The Company believes this decline was a consequence of the
heightened interest in the DCA programs in 1999.
Total new deposits to fixed and variable annuities increased by $479
million to $2,746 million in 1999. Sales of the Futurity line of
products represented $341 million or 12% of total annuity deposits in
1999, an increase of $219 million from 1998. The Company expects that
sales of 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 continue
to respond favorably to introductions of new Futurity products and
product enhancements.
The surrenders are primarily related 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.
The Company is implementing a conservation program with the aim of
improving asset retention.
- There has been a shift in demand to variable account products from
general account products. Most sales are either DCA or variable
deposits. 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 approximately $26
million in 1999 compared to 1998. This decline in average general
account assets primarily reflects the Company's decision in 1997 to no
longer market group pension and GIC products and as a consequence, a
declining block of in-force business as GICs mature and are
surrendered.
- Policyholder benefits (the major elements of which are interest
credited to contractholder deposits and annuity benefits) decreased by
approximately $12.6 million in 1999 as compared to 1998. This is less
than the decrease in investment income as the surrenders of maturing
42
<PAGE>
GIC contracts on which the Company earns a positive 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.
- Other operating expenses increased by $9.0 million reflecting the
increased volumes of both new business and inforce business and
continued investment in the growth of the Futurity products wholesale
distribution network.
- Amortization of deferred policy acquisition costs increased by $6.8
million primarily reflecting the impact of the increased variable
annuity gross profits due to significant asset appreciation during
1999, and the resulting increase in fee income.
INDIVIDUAL PROTECTION SEGMENT
The Company currently markets individual variable life insurance products.
These products include a variable universal life product marketed to the
company-owned life insurance ("COLI") market, which product was introduced in
late 1997. In September 1999, the Company introduced a new variable life product
as part of the Futurity product portfolio.
Prior to 1999, the Individual Protection segment consisted of two main
elements, internal reinsurance and other life products.
INTERNAL REINSURANCE
In recent years, the Company has had various reinsurance agreements with
Sun Life (Canada). In some of these arrangements, Sun Life (Canada) has
reinsured the mortality risks of individual life policies sold in prior years by
the Company. These agreements, in the aggregate, had an immaterial effect on net
income in the years 1998 and 1999. Under another reinsurance agreement, which
became effective January 1, 1991 and terminated October 1, 1998, the Company
reinsured certain individual life insurance contracts issued by Sun Life
(Canada). Prior to its termination, this agreement had the effect of increasing
income from operations by approximately $16.5 million in 1998. In addition, the
effect of terminating this agreement was to decrease 1998 net income by
approximately $64.0 million as the termination payment made was greater than the
net reserves (reserves assumed less deferred policy acquisition costs) held
under the agreement. Because this agreement terminated in 1998, it had no effect
on income from operations in 1999.
Other Life Products
Net income associated with the other life products directly issued by the
Company from the Individual Protection segment decreased by approximately $0.5
million from 1998.
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 decreased by
$0.9 million from 1998 primarily due to unfavorable claims experience in the
group life product.
CORPORATE SEGMENT
The Corporate segment includes the unallocated capital of the Company, its
debt financing and items not otherwise attributable to the other segments.
Net income for the Corporate segment decreased by $5.5 million to ($6.2)
million. This decrease reflected lower net investment income, mainly from lower
assets due to dividend payments in 1999 of $80 million and in 1998 of $50
million, and increased operational expenses. Income taxes in 1999
43
<PAGE>
reflected an income tax benefit associated with tax operating losses with
subsidiaries not allocated to the operating segments.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997:
NET INCOME
Net income decreased by $116.3 million to $14.2 million in 1998,
reflecting a decrease of $47.4 million in income from continuing operations and
a decrease of $68.9 million in income from discontinued operations. On December
24, 1997 the Company transferred through a dividend its investment in MFS. Net
income of MFS in 1997 included in income from discontinued operations was $61.9
million. Net income from NLT and MCIC, which were both sold during 1999,
included in income from discontinued operations was $.1 million in 1998 and $7.1
million in 1997.
NET INCOME FROM CONTINUING OPERATIONS BY SEGMENT
WEALTH MANAGEMENT SEGMENT
Net income decreased by $0.7 million to $60.0 million in 1998 as compared
to 1997. Increased fee and other income was mainly offset by higher operating
expenses. Both fee income and operating expenses increased as a result of the
increased business. In addition the start-up of the Company's own wholesaling
distribution network for the Futurity product line increased operating expenses
during 1998. Also impacting net income was the loss of earnings from GICs, which
block of business declined. Following are the major factors affecting the Wealth
Management segment's results in 1998 as compared to 1997:
- Fee and other income increased primarily as a result of higher variable
annuity account balances. Fee income was higher by approximately $29
million in 1998 compared to 1997. 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 increased by approximately $2.8 billion or 30%
since January 1, 1998.
- Net deposits of annuity products decreased by $131 million to $237
million compared with 1997. The decrease in net deposits resulted from
both a decrease in new deposits and increased variable annuity
surrenders in 1998. Management believes the decrease in new deposits is
mainly a result increased competition in the marketplace. In particular
the competition in the DCA programs has intensified. During the fourth
quarter of 1998, the Company introduced a higher DCA rate and a new
six-month DCA program. While fixed annuity account deposits decreased,
deposits directly into variable accounts increased in 1998. The Company
believes the increase in variable deposits was a consequence of both
the continuing strong growth in equity markets generally and the
continuing strong performance of the investment funds underlying the
Company's variable annuity products.
Total new deposits to fixed and variable annuities decreased by $53
million to $2,267 million in 1998. Sales of the new Futurity line of products
represented $122 million or 5% of total annuity deposits in 1998. The Company
expects that sales of 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 continue to respond favorably to
introductions of new Futurity products and product enhancements.
The surrenders are primarily related to older products which are no longer
actively marketed and particularly those for which the surrender charge period
has expired. 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.
44
<PAGE>
- There has been a shift in demand to variable account products from
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. Net investment income and
realized gains for the Wealth Management segment decreased by
approximately $72 million in 1998 as compared to 1997. This decline in
average general account assets primarily reflects the Company's
decision in 1997 to no longer market group pension and GIC products and
as a consequence, a declining block of in-force business as GICs mature
and are surrendered.
- Policyholder benefits (the major elements of which are interest
credited to contractholder deposits and annuity benefits) decreased by
approximately $62 million in 1998 as compared to 1997. This is less
than the decrease in investment income as the surrenders of maturing
GIC contracts on which the Company earns a positive spread were
partially replaced by sales of annuities under the Company's DCA
programs.
- Other operating expenses increased by $16.0 million reflecting the
increased volumes of both new business and inforce business and
expenses associated with the startup of the Futurity product line and a
new distribution network dedicated to marketing the Futurity products.
Enhancements were made to the technology infrastructure to support the
growth in business.
- Amortization of deferred policy acquisition costs increased by $4.0
million primarily reflecting the impact of increased variable annuity
gross profits due to significant asset appreciation during 1998, and
the resulting increase in fee income.
INDIVIDUAL PROTECTION SEGMENT
Prior to 1999, the Individual Protection segment consisted of two main
elements, internal reinsurance and other life products.
INTERNAL REINSURANCE
In recent years, the Company has had various reinsurance agreements with
Sun Life (Canada). In some of these arrangements, Sun Life (Canada) has
reinsured the mortality risks of individual life policies sold in prior years by
the Company. These agreements, in the aggregate, had an immaterial effect on net
income in the years 1998 and 1997. Under another reinsurance agreement, which
became effective January 1, 1991 and terminated October 1, 1998, the Company
reinsured certain individual life insurance contracts issued by Sun Life
(Canada). Prior to its termination, this agreement had the effect of increasing
income from operations by approximately $16.5 million in 1998. In addition, the
effect of terminating this agreement was to decrease 1998 net income by
approximately $64.0 million as the termination payment made was greater than the
net reserves (reserves assumed less deferred policy acquisition costs) held
under the agreement. This resulted in a net loss on the reinsurance in 1998 of
$47.5 million as compared to a loss of $7.6 million in 1997.
OTHER LIFE PRODUCTS
Net income associated with the other life products directly issued by the
Company from the Individual Protection segment decreased by approximately $3.3
million from 1997. The decrease reflects primarily higher death benefit
payments, increased operating expenses associated with growth of the COLI
business and increased amortization of deferred policy acquisition costs.
GROUP PROTECTION SEGMENT
Net income from the Group Protection segment of $1.3 million in 1998
increased by $2.1 million from 1997 primarily due to favorable claims
experience. The claims experience in the disability products was poor in 1997
due to a greater number of claims. Claims returned to more normal levels in
1998.
45
<PAGE>
CORPORATE SEGMENT
Net income for the Corporate segment decreased by $5.5 million to ($0.7)
million. This decrease reflected lower net investment income, from both lower
interest rates and lower assets from dividend payments in 1998 of $50 million,
increased interest expense and increased operational expenses.
FINANCIAL CONDITION AND LIQUIDITY
ASSETS
The Company's total assets comprise those held in its general account and
those held in its separate accounts. General account assets support general
account liabilities. Separate accounts are investment vehicles for the Company's
variable life and annuity contracts. Policyholders may choose from among various
investment options offered under these contracts according to their individual
needs and preferences. Policyholders assume the investment risks associated with
these choices. State insurance law provides that separate account asset equal to
reserves and other liabilities are not available to fund the liabilities of the
general account.
The following table summarizes significant changes in asset balances
during 1999. The changes are discussed below.
<TABLE>
<CAPTION>
ASSETS ($ IN MILLIONS)
-------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998 % CHANGE 1999/1998
----------------- ----------------- ------------------
<S> <C> <C> <C>
General account assets...................... $ 5,361.6 $ 5,945.3 (10.9)
Separate account assets..................... 16,123.3 12,302.9 31.1
--------- --------- -----
Total assets................................ $21,484.9 $18,248.2 17.7
========= ========= =====
</TABLE>
General account assets decreased by 10.9% in 1999, but variable separate
account assets increased by 31.1%. This growth in variable separate accounts as
compared to the general account reflects 2 main factors: (1) appreciation of the
funds held in the variable separate accounts exceeded that of the funds held in
the general account; and (2) annuity deposits into variable accounts, including
transfers under the DCA programs, have increased, while annuity deposits into
fixed 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
account 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 represented essentially all of general account
assets at December 31, 1999. 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 amounted to
$2,677.3 million, representing 59.0% of the Company's total cash plus invested
assets ("total portfolio") at December 31, 1999, and included both public and
private issues. It is the Company's policy to acquire only investment-grade
securities. As a result, the overall quality of the fixed maturity portfolio is
high. At December 31, 1999, only 6.0% of the fixed maturity portfolio was
invested in below-investment-grade securities. Short-term investments of $177.2
million in fixed maturity securities represented 3.9% of the total portfolio.
The Company's mortgage holdings amounted to $931.4 million at December 31, 1999,
representing 20.5% of the total portfolio. All mortgage holdings at December 31,
1999 were in good standing. The Company believes that the high quality of its
mortgage portfolio is largely attributable to its stringent underwriting
standards. At December 31, 1999, investment real estate amounted to $95.1
million, representing about 2.1% 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 $67.9 million,
representing about 1.5% of the portfolio. Cash and cash equivalents of $550.3
million at December 31, 1999 represented about 12.1% of the total portfolio.
46
<PAGE>
LIABILITIES
As with assets, the proportion of variable separate account liabilities to
total liabilities has been increasing. Most of the Company's liabilities
comprise reserves for life insurance and for annuity contracts and deposit
funds. The Company expects the declining trend in general account liabilities to
continue, because it believes that net maturities will continue to exceed sales
for the fixed contracts associated with these liabilities. This trend stems
mainly from the Company's 1997 decision to discontinue selling group pension and
GIC contracts and to focus its marketing efforts on its combination
fixed/variable annuity products.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- QUARTERLY PERIOD ENDED MARCH 31, 2000
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO 1999:
NET INCOME
Net income increased by $31.9 million to $27.7 million in the first three
months of 2000, reflecting an increase of $7.1 million in income from continuing
operations, a decrease of $0.8 million in income from discontinued operations,
and $25.6 million of after-tax loss from the sale of Massachusetts Casualty
Insurance Company which occurred in 1999.
NET INCOME FROM OPERATIONS BY SEGMENT
The following table provides a summary of income from operations by
segment, which is discussed more fully below.
NET INCOME FROM OPERATIONS BY SEGMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-------------------
2000 1999 $ CHANGE % CHANGE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Wealth Management.......................................... $32.6 $18.1 $14.5 80.1%
Individual Protection...................................... (.1) -- (.1) --
Group Protection........................................... .6 .4 .2 50.0%
Corporate.................................................. (5.4) 2.1 (7.5) (357.1%)
----- ----- ----- ------
$27.7 $20.6 $ 7.1 34.5%
===== ===== ===== ======
</TABLE>
WEALTH MANAGEMENT SEGMENT
Net income increased by $14.5 million to $32.6 million in the first three
months of 2000 primarily due to the increased volume of in-force business.
Following are the major factors affecting the Wealth Management segment's
results in the first 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 $19 million in
the first three 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 almost $5 billion since January 1, 1999.
- Net deposits of annuity products decreased by $99 million compared with
the first quarter of 1999. The decrease in net deposits results
primarily from increases in variable annuity surrenders in 2000. The
surrenders are primarily related to older products which are no longer
47
<PAGE>
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. The
Company is implementing a conservation program with the aim of
improving asset retention.
- Total new deposits to fixed and variable annuities increased by $26
million to $669 million in 2000. Sales of the Futurity line of products
represented $155 million of total annuity deposits in 2000, an increase
of $96 million from the same three month period in 1999. The Company
expects that sales of 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 continue
to respond favorably to introductions of new Futurity products and
product enhancements.
- There has been a shift in demand to variable account products from
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. Net investment income and
realized gains for the Wealth Management segment decreased by $20
million for the first three months of 2000 as compared to the same
period in 1999. This decline in average general account assets
primarily reflects the Company's decision in 1997 to no longer market
group pension and GIC products and as a consequence, a declining block
of in-force business as GICs mature and are surrendered.
- Policyholder benefits (the major elements of which are interest
credited to contractholder deposits and annuity benefits) decreased by
approximately $5.4 million in the three months ended March 31, 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 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.
- Underwriting, acquisition and other operating expenses increased by
$4.0 million reflecting the increased volumes of both new business and
inforce business.
- Amortization of deferred policy acquisition costs decreased by $21.6
million primarily reflecting the impact of the increased variable
annuity assets, due to significant appreciation during the latter part
of 1999 and through the first quarter of 2000, and the resulting
increase in expected future gross profits from increased fee income.
Since future gross profits are expected to be higher, the current
amortization of deferred policy acquisition costs is lower.
INDIVIDUAL PROTECTION SEGMENT
The Company currently markets individual variable life insurance products.
These products include a variable universal life product marketed to the
company-owned life insurance ("COLI") market, which product was 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 that
the Company's variable life business will grow and become more significant in
the future.
Net income from the Individual Protection segment decreased by $0.1
million from the same period in 1999.
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
48
<PAGE>
in the state of New York through a subsidiary. Net income from the Group
Protection segment increased by $0.2 million from the same period in 1999
primarily due to favorable claims experience.
CORPORATE SEGMENT
The Corporate segment includes the unallocated capital of the Company, its
debt financing, and items not otherwise attributable to the other segments.
In the first three months of 2000, income from operations for the
Corporate segment decreased by $7.5 million to a ($5.4) million net loss. This
decrease reflected lower net investment income, mainly from lower assets due to
dividend payments in 1999 of $75 million, increased operational expenses and
increased income taxes. Income taxes in 1999 reflected an income tax benefit
associated with tax operating losses with subsidiaries not allocated to the
operating segments.
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 three months of 2000. The changes are discussed below.
<TABLE>
<CAPTION>
ASSETS
(IN MILLIONS)
---------------------------------- % CHANGE
MARCH 31, 2000 DECEMBER 31, 1999 2000/1999
-------------- ----------------- ---------
<S> <C> <C> <C>
General Account Assets............................... $ 5,187.0 $ 5,361.6 (3.3)
Separate Account Assets.............................. 17,298.8 16,123.3 7.3
--------- --------- ----
Total Assets......................................... $22,485.8 $21,484.9 4.7
========= ========= ====
</TABLE>
General account assets decreased by 3.3% in the first three months of
2000, but variable separate account assets increased by 7.3%. This 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 account; and annuity deposits
into variable accounts, including transfers under the DCA programs have
increased, while annuity deposits into fixed 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 account 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 represented essentially all of general account
assets at March 31, 2000. Major types of invested asset holdings included fixed
maturity securities, short-term investment mortgages, real estate and other
invested assets. The Company's fixed maturity securities comprised 70.5% of the
Company's portfolio at March 31, 2000, and included both public and private
issues. It is the Company's policy to acquire only investment-grade securities.
As a result, the overall quality of the fixed maturity portfolio is high. At
March 31, 2000, only 5.1% of the fixed maturity portfolio was rated
below-investment-grade. Short-term investments in fixed maturity securities
represented 2.1% of the total portfolio. The Company's mortgage holdings
amounted to $898.1 million at March 31, 2000, representing 22.3% of the total
portfolio. All mortgage holdings at March 31, 2000 were in good
49
<PAGE>
standing. The Company believes that the high quality of its mortgage portfolio
is largely attributable to its stringent underwriting standards. At March 31,
2000, investment real estate amounted to $94.3 million, representing about 2.3%
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 $68.3 million, representing about 1.7% of the
portfolio. These holdings comprised mainly leveraged lease investments.
LIABILITIES
As with assets, the proportion of variable separate account liabilities to
total liabilities has been increasing. Most of the Company's liabilities
comprise reserves for life insurance and for annuity contracts and deposit
funds. The Company expects the declining trend in general account liabilities to
continue, because it believes that net maturities will continue to exceed sales
for the fixed contracts associated with these liabilities. This trend stems
mainly from the Company's 1997 decision to discontinue selling group pension and
GIC contracts and to focus its marketing efforts on its combination
fixed/variable annuity products.
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 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 "liquifiable" assets to its total demand liabilities. Liquifiable assets
comprise cash and assets that could quickly be converted to cash should the need
arise. These assets include short-term investments and other current assets and
investment-grade bonds. The Company's policy is to maintain a liquidity ratio in
excess of 100%, and it did so through December 31, 1999. 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
Sun Life (Canada), the Company's ultimate parent as of December 31, 1999,
completed its demutualization on March 22, 2000. As a result of the
demutualization, a new holding company, Sun
50
<PAGE>
Life Financial Services of Canada, Inc. ("SLF"), is now the ultimate parent of
Sun Life (Canada) 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.
SALE OF SUBSIDIARIES
On February 5, 1999, the Company sold Massachusetts Casualty Insurance
Company ("MCIC"), a disability insurance company, to Centre Solutions (U.S.)
Limited, a wholly-owned subsidiary of Centre Reinsurance Holdings Limited. The
net proceeds of this sale were $34.0 million and the Company realized a post-tax
loss of $25.5 million.
On October 29, 1999, the Company sold New London Trust F.S.B. ("NLT") to a
subsidiary of Phoenix Home Life Mutual Insurance Company for approximately $30.3
million and realized a post-tax gain of $13.2 million.
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.
(Investment real estate holdings represented approximately 2.1% of the Company's
total general account portfolio at December 31, 1999, and 2.3% of the Company's
total general account portfolio at March 31, 2000.) 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
51
<PAGE>
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.
Liabilities categorized as financial instruments and held in the Company's
general account had a fair value of $3,634.4 million at December 31, 1999 and a
fair value of $2,913.1 million at March 31, 2000. Fixed income investments
supporting those liabilities had a fair value of $4,308.6 million and $4,065.8
at December 31, 1999 and March 31, 2000, respectively. The Company performed a
sensitivity analysis on these interest-sensitive liabilities and assets on
December 31, 1999 and on March 31, 2000. The December 31, 1999 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 $118.0 million
and the corresponding assets would show a net decrease of $73.6 million. The
March 31, 2000 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 $66.7 million and the corresponding assets would show a net
decrease of $117.2 million.
By comparison, liabilities categorized as financial instruments and held
in the Company's general account at had a fair value of $4,385.0 million
December 31, 1998, and a fair value of $3,105.2 million at December 31, 1999.
Fixed income investments supporting those liabilities had a fair value of
$5,104.9 million and $4,308.6 million at December 31, 1998 and December 31,
1999, respectively. The Company performed a sensitivity analysis on these
interest-sensitive liabilities and assets at December 31, 1998 and at December
31, 1999. The December 31, 1998 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 $185.4 million and the corresponding
assets would show a net decrease of $168.7 million. The December 31, 1999
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.
52
<PAGE>
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 the Company's exposure to interest rate changes
will not materially affect its near-term financial position, results of
operations, or cash flows.
REINSURANCE
The Company has agreements with Sun Life (Canada) which provide that Sun
Life (Canada) will reinsure the mortality risks of the individual life insurance
contracts sold by the Company. Under these agreements, basic death benefits and
supplementary benefits are reinsured on a yearly renewable term basis and
coinsurance basis, respectively.
Effective January 1, 1991, the Company entered into an agreement with Sun
Life (Canada) under which certain individual life insurance contracts issued by
Sun Life (Canada) were reinsured by the Company on a 90% coinsurance basis. Also
effective January 1, 1991 the Company entered into an agreement with Sun Life
(Canada) which provides that Sun Life (Canada) will reinsure the mortality risks
in excess of $500,000 per policy for the individual life insurance contracts
assumed by the Company in the reinsurance agreement described above. Such death
benefits are reinsured on a yearly renewable term basis. The life reinsurance
assumed agreement requires the reinsurer to withhold funds in amounts equal to
the reserves assumed. The Company terminated these agreements effective
October 1, 1998.
The Company has also executed reinsurance agreements with unrelated
companies which provide reinsurance of certain individual life insurance
contracts on a modified coinsurance basis under which all deficiency reserves
are ceded.
During 1999, the Company entered into an agreement with an unrelated
company which provides reinsurance on certain fixed group annuity contracts.
Also during 1999, the Company entered into three agreements with two unrelated
companies for the purpose of obtaining stop-loss coverage of guaranteed minimum
death benefit exposure with respect to the Company's variable annuity business.
The Company has agreements with Sun Life (Canada) whereby Sun Life
(Canada) reinsures the mortality and mortality risks of the group life insurance
contracts and group long term disability contracts. Under these agreements,
certain death benefits and long-term disability benefits are reinsured on a
yearly renewable basis.
RESERVES
In accordance with the life insurance laws and regulations under which the
Company operates, it is obligated to carry on its books, as liabilities,
actuarially determined reserves to meet its obligations on its outstanding
contracts. Reserves are based on mortality tables in general use in the United
States and are computed to equal amounts that, with additions from premiums to
be received, and with interest on such reserves compounded annually at certain
assumed rates, will be sufficient to meet the Company's policy obligations at
their maturities or in the event of an insured's death. In the accompanying
Financial Statements, these reserves are determined in accordance with statutory
regulations.
INVESTMENTS
Of the Company's total assets of $21.5 billion at December 31, 1999, 75.1%
($16.1 billion) consisted of unitized and non-unitized separate account assets,
13.3% ($2.9 billion) was invested in
53
<PAGE>
bonds and similar securities, 4.3% ($931.4 million) was invested in mortgages,
0.4% ($95.1 million) was invested in real estate, and the remaining 6.9% ($1.5
billion) was invested in cash and other assets.
COMPETITION
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing insurance products. According to a 1999 statistical study published by
A.M. Best, the Company ranked 36th among North American life insurance companies
based upon admitted assets as of December 31, 1998.
EMPLOYEES
The Company and Sun Life (Canada) have entered into a service agreement
which provides that the latter will furnish the Company, as required, with
personnel as well as certain services and facilities on a cost reimbursement
basis. As of May 31, 2000, the Company had 385 direct employees who are employed
at its Principal Executive Office in Wellesley Hills, Massachusetts and at its
Retirement Products and Services Division in Boston, Massachusetts.
PROPERTIES
The Company occupies office space owned by it and leased to Sun Life
(Canada), and certain unrelated parties for lease terms not exceeding 5 years.
The Company also occupies office space which it leases from unaffiliated parties
for various lease terms.
STATE REGULATION
The Company is subject to the laws of the State of Delaware governing life
insurance companies and to regulation by the Commissioner of Insurance of
Delaware. An annual statement is filed with the Commissioner of Insurance on or
before March lst in each year relating to the operations of the Company for the
preceding year and its financial condition on December 31st of such year. Its
books and records are subject to review or examination by the Commissioner or
his agents at any time and a full examination of its operations is conducted at
periodic intervals.
The Company is also subject to the insurance laws and regulations of the
other states and jurisdictions in which it is licensed to operate. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to licensing to transact business, overseeing
trade practices, licensing agents, approving policy forms, establishing reserve
requirements, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. Each insurance company is required to file detailed
annual reports with supervisory agencies in each of the fire jurisdictions in
which it does business and its operations and accounts are subject to
examination by such agencies at regular intervals.
In addition, many states regulate affiliated groups of insurers, such as
the Company, Sun Life (Canada) and its affiliates, under insurance holding
company legislation. Under such laws, inter-company transfers of assets and
dividend payments from insurance subsidiaries may be subject to prior notice or
approval, depending on the size of such transfers and payments in relation to
the financial positions of the companies involved. Under insurance guaranty fund
laws in most states, insurers doing business therein can be assessed (up to
prescribed limits) for policyholder losses incurred by insolvent companies. The
amount of any future assessments of the Company under these laws cannot be
reasonably estimated. However, most of these laws do provide that an assessment
may be excused or deferred if it would threaten an insurer's own financial
strength and many permit the deduction of all or a portion of any such
assessment from any future premium or similar taxes payable.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes
54
<PAGE>
affecting the taxation of insurance companies, the tax treatment of insurance
products and its impact on the relative desirability of various personal
investment vehicles.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Variable Account. We
and our subsidiaries are engaged in various kinds of routine litigation which,
in management's judgment, is not of material importance to our respective total
assets or material with respect to the Variable Account.
ACCOUNTANTS
The financial statements of the Variable Account for the year ended
December 31, 1999 included in the Statement of Additional Information and the
consolidated financial statements of the Company for the years ended December
31, 1999, 1998 and 1997 included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this
Prospectus should be considered only as bearing on the ability of the Company to
meet its obligations with respect to amounts allocated to the Fixed Account and
with respect to the death benefit and the Company's assumption of the mortality
and expense risks. They should not be considered as bearing on the investment
performance of the Fund shares held in the Sub-Accounts of the Variable Account.
The financial statements of the Variable Account for the year ended
December 31, 1999 are included in the Statement of Additional Information.
------------------------
55
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONSOLIDATED STATEMENTS OF INCOME (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Premiums and annuity considerations....................... $ 45.1 $203.3 $257.4
Net investment income..................................... 365.0 455.9 539.9
Net realized investment gains............................. 2.3 8.4 12.5
Fee and other income...................................... 217.5 179.2 149.5
------ ------ ------
Total revenues............................................ 629.9 846.8 959.3
------ ------ ------
BENEFITS AND EXPENSES
Policyowner benefits...................................... 334.9 588.2 672.3
Other operating expenses.................................. 101.1 100.0 85.4
Amortization of deferred policy acquisition costs......... 67.8 88.8 62.3
------ ------ ------
Total benefits and expenses............................... 503.8 777.0 820.0
------ ------ ------
Income from operations.................................... 126.1 69.8 139.3
Interest expense.......................................... 43.3 44.9 42.5
------ ------ ------
Income before income tax expense and discontinued
operations.............................................. 82.8 24.9 96.8
INCOME TAX EXPENSE:
Federal................................................... 28.8 10.9 34.0
State..................................................... .3 (.1) 1.3
------ ------ ------
Income tax expense........................................ 29.1 10.8 35.3
------ ------ ------
Net income from continuing operations....................... 53.7 14.1 61.5
Net loss on disposal of subsidiaries, after tax............. (12.3) -- --
Discontinued operations..................................... 1.0 .1 69.0
------ ------ ------
NET INCOME.................................................. $ 42.4 $ 14.2 $130.5
====== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
56
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONSOLIDATED BALANCE SHEETS (IN MILLIONS)
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Investments
Fixed maturities available-for-sale at fair value
(amortized cost of $2,685.4 and $3,311.9 in 1999 and
1998, respectively)..................................... $ 2,677.3 $ 3,488.4
Trading fixed maturities at fair value (amortized cost of
$1.0 and $1.5 in 1999 and 1998, respectively)........... 1.0 1.5
Short-term investments.................................... 177.2 336.0
Mortgage loans............................................ 931.4 969.8
Real estate............................................... 95.1 99.0
Policy loans.............................................. 40.7 42.6
Other invested assets..................................... 67.9 64.2
--------- ---------
Total investments......................................... 3,990.6 5,001.5
Cash and cash equivalents................................. 550.3 264.7
Accrued investment income................................. 50.5 61.9
Deferred policy acquisition costs......................... 686.3 523.9
Outstanding premiums...................................... 2.7 .8
Other assets.............................................. 81.2 .1
Separate account assets................................... 16,123.3 12,302.9
Net assets from discontinued operations................... -- 92.4
--------- ---------
Total assets.............................................. $21,484.9 $18,248.2
========= =========
LIABILITIES
Future contract and policy benefits....................... $ 729.3 $ 736.1
Contractholder deposit funds and other policy
liabilities............................................. 3,144.8 3,658.2
Unearned revenue.......................................... 7.1 6.7
Accrued expenses and taxes................................ 98.8 32.8
Deferred federal income taxes............................. 77.7 113.1
Long-term debt payable to affiliates...................... 565.0 565.0
Other liabilities......................................... 67.7 55.8
Separate account liabilities.............................. 16,123.3 12,302.9
--------- ---------
Total liabilities......................................... 20,813.7 17,470.6
--------- ---------
COMMITMENTS AND CONTINGENCIES -- NOTE 15
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.................... 7.1 75.9
Retained earnings......................................... 458.8 496.4
--------- ---------
Total stockholder's equity................................ 671.2 777.6
--------- ---------
Total liabilities and stockholder's equity................ $21,484.9 $18,248.2
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
57
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $ 42.4 $14.2 $130.5
Other comprehensive income
Net unrealized holding gains (losses) on
available-for-sale securities, net of tax............... (68.6) (4.3) 26.7
Other..................................................... (.2) -- --
(68.8) (4.3) 26.7
Comprehensive income........................................ $ (26.4) $ 9.9 $157.2
======= ===== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
58
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<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, 1996............ $ 5.9 $199.4 $53.5 $470.6 $729.4
------ ------ ----- ------ ------
Net income............................ 130.5 130.5
Other comprehensive income............ 26.7 26.7
Dividends to stockholder.............. (68.9) (68.9)
------ ------ ----- ------ ------
Balance at December 31, 1997............ 5.9 199.4 80.2 532.2 817.7
------ ------ ----- ------ ------
Net income............................ 14.2 14.2
Other comprehensive income............ (4.3) (4.3)
Dividends to stockholder.............. (50.0) (50.0)
------ ------ ----- ------ ------
Balance at December 31, 1998............ 5.9 199.4 75.9 496.4 777.6
------ ------ ----- ------ ------
Net income............................ 42.4 42.4
Other comprehensive income............ (68.8) (68.8)
Dividends to stockholder.............. (80.0) (80.0)
------ ------ ----- ------ ------
Balance at December 31, 1999............ $ 5.9 $199.4 $ 7.1 $458.8 $671.2
====== ====== ===== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
59
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations....................... $ 53.7 $ 14.1 $ 61.5
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of discount and premiums..................... (0.5) 0.2 .6
Depreciation and amortization............................. 3.7 2.2 2.5
Net realized gains on investments......................... (2.3) (8.4) (12.5)
Interest credited to contractholder deposits.............. 216.4 238.7 282.9
Deferred federal income taxes............................. 14.5 (8.6) (1.6)
Cash dividends from subsidiaries.......................... 19.3 -- 40.6
Changes in assets and liabilities:
Deferred acquisition costs................................ (88.4) 208.7 (82.9)
Accrued investment income................................. 11.4 31.1 25.8
Other assets.............................................. (75.3) 78.5 (189.0)
Future contract and policy benefits....................... (7.5) (1,124.0) 182.5
Other, net................................................ 72.3 896.6 7.7
--------- --------- ---------
Net cash provided by operating activities................... 217.3 329.1 318.1
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, maturities and repayments of:
Available-for-sale fixed maturities....................... 1,240.9 1,665.6 1,535.8
Subsidiaries.............................................. 57.5 0.6 --
Other invested assets..................................... -- 0.9 .4
Mortgage loans............................................ 385.7 316.9 463.0
Real estate............................................... 2.8 6.0 15.1
Purchases of:
Available-for-sale fixed maturities....................... (615.2) (1,346.7) (1,334.1)
Equity securities......................................... -- (0.2) (.3)
Other invested assets..................................... (7.4) (11.4) (5.5)
Mortgage loans............................................ (344.9) (123.0) (159.0)
Real estate............................................... (1.6) (1.1) (10.1)
Capital contributions to subsidiaries....................... -- -- (2.0)
Changes in other investing activities, net.................. 3.1 (14.4) (.5)
Net change in policy loans.................................. 1.9 (1.6) (.2)
Net change in short-term investments........................ 155.9 (38.2) (152.9)
--------- --------- ---------
Net cash provided by investing activities................... 878.7 453.4 349.7
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits to contractholder deposit funds.................. 1,536.8 910.8 1,023.6
Withdrawals from contractholder deposit funds............. (2,267.2) (1,803.2) (1,550.8)
Issuance of long-term debt and borrowed funds............. -- -- 360.1
Repayment of long-term debt and borrowed funds............ -- (110.1) (58.0)
Dividends paid to stockholder............................. (80.0) (50.0) --
--------- --------- ---------
Net cash used in financing activities....................... (810.4) (1,052.5) (225.1)
--------- --------- ---------
Net change in cash and cash equivalents..................... 285.6 (270.0) 442.7
Cash and cash equivalents, beginning of year.............. 264.7 534.7 92.0
--------- --------- ---------
Cash and cash equivalents, end of year.................... $ 550.3 $ 264.7 $ 534.7
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................. $ 43.3 $ 40.5 $ 42.0
Income taxes paid......................................... 5.5 50.6 32.9
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
60
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Sun Life Assurance Company of Canada (U.S.) (the "Company") is
incorporated as a life insurance company 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, 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. ("SLC"), became the
ultimate parent of SLOC and the Company.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") in the United States of
America for stockholder-owned life insurance companies and include the accounts
of the Company and its subsidiaries.
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
the statutory 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. See Note 13 for a
reconciliation of statutory surplus to GAAP equity and statutory net income to
GAAP net income.
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. (formerly Sun Investment Services Company) ("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 Life of Canada (U.S.) SPE 97-1, Inc. ("SPE 97-1"),
Clarendon Insurance Agency, Inc. ("Clarendon"), and Sun Life Information
Services Ireland Limited ("SLIRL"). 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. SLIRL provides information systems development
services to the Company and it's affiliates. Sunfinco and Sunbesco are currently
inactive.
During 1999, the Company sold two of its subsidiaries, Massachusetts
Casualty Insurance Company ("MCIC") and New London Trust F.S.B. ("NLT") to
separate, unaffiliated parties. 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 Company owned a majority of Massachusetts Financial Services Company
("MFS"), an investment adviser and
61
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
broker-dealer, until December 24, 1997. The results of operations of these
subsidiaries are reported as discontinued operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Financial instruments
are more fully described in Note 5.
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, trading, or 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. Securities that do not
meet this criterion are classified as available-for-sale. Available-for-sale
securities are carried at aggregate fair value with changes in unrealized gains
or losses reported net of policyholder related amounts and of deferred income
taxes in a separate component of other comprehensive income. Trading securities
are carried at aggregate fair value with changes in unrealized gains or losses
reported as a component of net investment income. Fair values are obtained from
external market quotations. For privately placed fixed maturities, fair values
are estimated by taking into account prices for publicly traded securities of
similar credit risk, maturities repayment and liquidity characteristics. All
security transactions are recorded on a trade date basis. The Company's
accounting policy for impairment requires recognition of an other than temporary
impairment charge on a security if it is determined that the Company is unable
to recover all amounts due under the contractual obligations of the security. In
addition, for securities expected to be sold, an other than temporary impairment
charge is recognized if the Company does not expect the fair value of a security
to recover to cost or amortized cost prior to the
62
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
expected date of sale. Once an impairment charge has been recorded, the Company
then continues to review the other than temporarily impaired securities for
additional impairment, if necessary.
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 and 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 are 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 income are
carried at the lower of cost adjusted for accumulated depreciation or fair
value. Depreciation of buildings and improvements is calculated using the
straight-line method over the estimated useful life of the property, generally
40 to 50 years. 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 less estimated costs to
dispose at the time of foreclosure.
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. Hedge accounting is used to account for
certain derivatives. 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 on the statement of operations as a component of net investment
income.
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
63
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 principle 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.
DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting and other costs
which vary with and are primarily related to the production of new business.
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 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 cost
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 included in other assets.
64
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
POLICY LIABILITIES AND ACCRUALS
Future 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 6.0% to 11.3% 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 and its
affiliates' experience and industry standards. Estimated liabilities are
established for group life and health policies that contain experience rating
provisions.
Contractholder deposit funds 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 of 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.
INCOME TAXES
The Company and its subsidiaries participate in a consolidated federal
income tax return with US 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,
65
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
"Accounting for Income Taxes". These differences result primarily from policy
reserves, policy acquisition expenses and unrealized gains or losses on
investments, and are generally not chargeable with liabilities that arise from
any other business of the Company. Separate account assets are subject to
general account claims only to the extent the value of such assets exceeds the
separate account liabilities.
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 statement of financial position, 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 Statement 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. The Company is evaluating SFAS No.
133 and has not determined its effect on the consolidated financial statements.
On January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants (AICPA) Statement of Position (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.
On January 1, 1999, the Company adopted AICPA SOP 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." This SOP
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. The adoption of
SOP 98-1, resulted in an increase in pre-tax income of $6,232,000 for the year
ended December 31, 1999.
66
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES
Effective October 1, 1998, the Company terminated a reinsurance agreement
with Sun Life Assurance Company of Canada resulting in a decrease in income from
operations to the Company of approximately $64,000,000.
On February 11, 1999, two notes previously issued to the Company by
Massachusetts Financial Services Company ("MFS"), an affiliate, were combined
into a new note with a February 11, 2000 maturity date. The original notes were
each issued for $110,000,000. One note was issued on February 11, 1998 at an
interest rate of 6.0% and a due date of February 11, 1999. The other note was
issued on December 22, 1998 at an interest rate of 5.55% and a due date of
February 11, 1999. These two notes and an additional $10,000,000 were combined
into a new note of $230,000,000 with a floating interest rate based on the six
month LIBOR rate plus 25 basis points. The $230,000,000 note was repaid to the
Company on December 21,1999.
On December 31, 1998, the Company had an additional $20,000,000 investment
in notes issued by MFS, scheduled to mature in 2000. These notes were repaid to
the Company on December 21, 1999.
On January 14, 2000, the Company purchased $200,000,000 of notes from MFS.
On February 5, 1999, the Company sold MCIC to an unaffiliated company. The
net proceeds of this sale were $33,965,000. The Company realized a loss of
$25,465,000 net of a $14,482,000 tax benefit.
On October 29, 1999, the Company sold NLT to an unaffiliated company for
$30,254,000. The Company realized a gain of $13,170,000 after taxes of
$10,186,000.
On December 22, 1999, the Company acquired twenty-eight mortgages from
SLOC for a total cost of $118,092,000.
Dividends in the amounts of $80,000,000 and $50,000,000, were declared and
paid by the Company to its parent, Life Holdco during 1999 and 1998,
respectively. On December 24, 1997 the Company transferred as a dividend to Life
Holdco all of its ownership in MFS valued at $68,951,000. These dividends were
approved by the Company's Board of Directors.
The Company has management services agreements 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 these agreements
amounted to approximately $30,745,000 in 1999, $17,381,000 in 1998, and
$17,152,000 in 1997.
As more fully described in Note 7, the Company has been involved in
several reinsurance transactions with its ultimate parent, SLOC.
On December 22, 1997, the Company issued a $250,000,000 surplus note to
Life Holdco. This note has an interest rate of 8.625% and is due on or after
November 6, 2027.
On May 9, 1997, the Company issued a short-term note of $600,000,000 to
Life Holdco at an interest rate of 5.10%, which was extended at various interest
rates. This note was repaid on December 22, 1997.
On December 23, 1997, the Company issued a $110,000,000 note to US Holdco
at an interest rate of 5.80%, which was repaid on March 1, 1998. A $110,000,000
note was also issued to the Company by MFS on December 23, 1997 at an interest
rate of 5.85% and was repaid on February 11, 1998.
67
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)
On December 31, 1996, the Company issued a $58,000,000 note to SLOC at an
interest rate of 5.70% which was repaid on February 10, 1997. Also on December
31, 1996, the Company was issued a $58,000,000 note by MFS at an interest rate
of 5.76%. This note was repaid to the Company on February 10, 1997.
The Company accrued $4,259,000 and $4,259,000 for interest on surplus
notes for the years ended December 31, 1999 and 1998, respectively.
The Company expensed $43,266,000, $44,903,000, and $42,481,000 for
interest on surplus notes and notes payable for the years ended December 31,
1999, 1998 and 1997, respectively.
The Company had $565,000,000 of surplus notes issued to affiliates and
outstanding as of December 31, 1999 and 1998. The following table lists the
details of the surplus notes outstanding (in 000's):
<TABLE>
<CAPTION>
MATURITY PRINCIPAL RATE
-------- --------- --------
<S> <C> <C> <C>
Sun Canada Financial Co..................................... 12/15/07 $150,000 6.625%
Sun Canada Financial Co..................................... 12/15/15 150,000 7.250%
Sun Canada Financial Co..................................... 12/15/07 7,500 6.125%
Sun Canada Financial Co..................................... 12/15/15 7,500 5.750%
Life Holdco................................................. 11/06/27 250,000 8.625%
--------
Total............................................... $565,000
========
</TABLE>
3. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair value of fixed maturities were as follows (in
000's):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fixed maturities available-for-sale:
United States treasury securities, U.S.
Government and agency securities............. $ 107,272 $ 2,104 $ (3,191) $ 106,186
States, provinces and political subdivisions... 32,593 15 (161) 32,447
Mortgage-backed securities..................... 98,903 1,225 (541) 99,588
Public utilities............................... 360,672 7,954 (9,780) 358,846
Transportation................................. 327,544 8,585 (4,258) 331,871
Finance........................................ 281,303 4,632 (6,935) 279,000
Corporate...................................... 1,477,105 22,851 (30,556) 1,469,400
---------- ------- --------- ----------
Total fixed maturities available-for-sale........ $2,685,392 $47,366 $ (55,422) $2,677,338
========== ======= ========= ==========
Trading fixed maturities:
United States treasury securities, U.S.
Government and agency securities............. $ 1,000 $ 2 $ -- $ 1,002
---------- ------- --------- ----------
Total trading fixed securities................... $ 1,000 $ 2 $ -- $ 1,002
========== ======= ========= ==========
</TABLE>
68
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fixed maturities available-for-sale:
United States treasury securities, U.S.
Government and agency securities............. $ 221,724 $ 8,356 $ (360) $ 229,720
States, provinces and political subdivisions... 25,888 2,825 0 28,713
Mortgage-backed securities..................... 238,539 6,864 (1,501) 243,902
Public utilities............................... 473,243 31,526 (235) 504,534
Transportation................................. 378,393 31,168 (53) 409,508
Finance........................................ 369,809 15,927 (1,911) 383,825
Corporate...................................... 1,604,323 94,123 (10,224) 1,688,222
---------- -------- --------- ----------
Total fixed maturities available-for-sale........ $3,311,919 $190,789 $ (14,284) $3,488,424
========== ======== ========= ==========
Trading fixed maturities:
United States treasury securities, U.S.
Government and agency securities........... $ 1,506 $ 35 $ -- $ 1,541
---------- -------- --------- ----------
Total trading fixed securities................... $ 1,506 $ 35 $ -- $ 1,541
========== ======== ========= ==========
</TABLE>
There were no contractual fixed maturity investment commitments at
December 31, 1999 and 1998, respectively.
The amortized cost and estimated fair value by maturity periods for fixed
maturity investments are shown below (in 000's). Actual maturities may differ
from contractual maturities on mortgage-backed securities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties, or the Company may have the right to put or sell the obligations back
to the issuers.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
<S> <C> <C>
Maturities of available for sale securities:
Due in one year or less................................... $ 216,235 $ 216,417
Due after one year through five years..................... 933,481 924,198
Due after five years through ten years.................... 600,735 605,804
Due after ten years....................................... 934,941 930,919
---------- ----------
$2,685,392 $2,677,338
========== ==========
Maturities of trading securities:
Due in one year or less................................... $ 500 500
Due after one year through five years..................... $ 500 502
---------- ----------
$ 1,000 $ 1,002
========== ==========
</TABLE>
Gross gains of $12,496,128, $25,752,149 and $18,292,309 and gross losses
of $7,646,028, $1,439,129, and $5,284,286 were realized on the voluntary sale of
fixed maturities for the years ended December 31, 1999, 1998, and 1997,
respectively.
69
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. INVESTMENTS (CONTINUED)
Fixed maturites with an amortized cost of approximately $3,009,000 and
$2,976,000 at December 31, 1999 and 1998 respectively, were on deposit with
Federal and State governmental authorities as required by law.
No fixed maturities have been pledged to collateralize various liabilities
at December 31, 1999 and 1998, respectively.
As of December 31, 1999 and 1998, 94% of the Company's fixed maturities
were investment grade and there were no significant concentrations by issuer or
by industry, other than U.S. Treasury securities. Investment grade securities
are those that are rated "BBB" or better by nationally recognized rating
agencies. The Company believes that unrealized losses are temporary in nature,
and accordingly, no provisions for permanent impairment of value have been
recorded. All of the Company's securities were income producing for the periods
ending December 31, 1999, 1998 and 1997.
MORTGAGE LOANS AND REAL ESTATE
The Company invests in commercial first mortgage loans and real estate
throughout the United States. Investments are diversified by property type and
geographic area. 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. Real estate investments classified as held for sale have
been obtained primarily through foreclosure. The carrying value of mortgage
loans and real estate investments net of applicable reserves were as follows (in
000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Total mortgage loans........................................ $931,351 $969,799
======== ========
Real estate:
Held for sale............................................. 7,804 4,323
Held for production of income............................. 87,290 94,625
-------- --------
Total real estate........................................... $ 95,094 $ 98,948
======== ========
</TABLE>
Accumulated depreciation on real estate was $18,529,000 and $16,829,000 at
December 31, 1999 and 1998, respectively.
The Company monitors the condition of the mortgage loans in its portfolio.
In those cases where mortgages have been restructured, appropriate allowances
for losses have been made. The Company has restructured mortgage loans totaling
$28,019,000 and $39,804,000 at December 31, 1999 and 1998, respectively, against
which there are allowances for losses of $3,705,000 and $5,700,000,
respectively. In those cases where, in management's judgment, the mortgage
loans' values are impaired, appropriate losses are recorded. The carrying value
of impaired loans was $19,356,000 and $27,500,000 with related reserves of
$2,123,000 and $3,730,000 as of December 31, 1999 and 1998, respectively. All
impaired loans were reserved as of December 31, 1999 and 1998. The average
carrying value of impaired loans was $19,491,000 and $27,313,000 with related
interest income while such loans were impaired of $1,782,000 and $2,181,000 as
of December 31, 1999 and 1998, respectively. During 1999 and 1998, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $20,433,000 and $22,372,000,
respectively.
70
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. INVESTMENTS (CONTINUED)
The investment valuation allowances, which have been deducted in arriving
at investment carrying values as presented in the consolidated balance sheets,
were as follows (in 000's):
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
JANUARY 1, ADDITIONS SUBTRACTIONS DECEMBER 31,
---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
1999
Mortgage loans.................................... $6,600 $4,045 $(2,895) $7,750
Real estate....................................... 1,250 1,379 (906) 1,723
1998
Mortgage loans.................................... $6,671 $1,098 $(1,169) $6,600
Real estate....................................... 806 569 (125) 1,250
</TABLE>
Mortgage loans and real estate investments comprise the following property
types and geographic regions (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Property Type:
Office building........................................... $ 357,466 $ 370,679
Residential............................................... 58,546 55,952
Retail.................................................... 433,970 401,549
Industrial/warehouse...................................... 156,204 248,417
Other..................................................... 29,732 --
Valuation allowances...................................... (9,473) (7,850)
---------- ----------
Total....................................................... $1,026,445 $1,068,747
========== ==========
Geographic region:
California................................................ $ 117,355 $ 134,789
Massachusetts............................................. 99,661 115,807
Michigan.................................................. 69,545 71,678
New York.................................................. 65,107 67,407
Ohio...................................................... 43,946 56,682
Pennsylvania.............................................. 159,328 155,216
Washington................................................ 68,657 73,555
All other................................................. 412,319 401,463
Valuation allowances...................................... (9,473) (7,850)
---------- ----------
Total....................................................... $1,026,445 $1,068,747
========== ==========
</TABLE>
At December 31, 1999, scheduled mortgage loan maturities were as follows
(000's):
<TABLE>
<S> <C>
2000........................................................ $113,731
2001........................................................ 71,648
2002........................................................ 72,535
2003........................................................ 41,430
Thereafter.................................................. 632,007
--------
Total....................................................... $931,351
========
</TABLE>
71
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. INVESTMENTS (CONTINUED)
Actual maturities could differ from contractual maturities because
borrowers may have the right to prepay obligations with or without prepayment
penalties and loans may be refinanced.
The Company has made commitments of mortgage loans on real estate and
other loans into the future. The outstanding commitments for these mortgages
amount to $15,911,000 and $31,563,000 at December 31, 1999 and 1998,
respectively.
SECURITIES LENDING
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chase Manhattan of New York. The custodian has
indemnified the Company against losses arising from this program. The total par
value of securities out on loan was $0 and $0 at December 31, 1999 and 1998,
respectively. The Company requires collateral at 102% of the value of securities
loaned. As of December 31, 1999 and 1998, the Company received collateral with a
fair value of $0 and $0 for securities on loan. The income resulting from this
program was $37,000, $135,000 and $230,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
LEVERAGED LEASES
The Company is a lessor in a leverage lease agreement entered into on
October 21, 1994, under which equipment having an estimated economic life of
25-40 years was leased for a term of 9.78 years. The Company's equity investment
represented 22.9% of the purchase price of the equipment. The balance of the
purchase price was furnished by third-party long-term debt financing,
collateralized by the equipment and non-recourse to the Company. At the end of
the lease term, the master Lessee may exercise a fixed price purchase option to
purchase the equipment. The Company's net investment in leveraged leases is
composed of the following elements (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Lease contracts receivable.................................. $ 69,766 $ 78,937
Less: non-recourse debt..................................... (69,749) (78,920)
-------- --------
Net Receivable.............................................. 17 17
Estimated residual value of leased assets................... 41,150 41,150
Less: unearned and deferred income.......................... (7,808) (8,932)
-------- --------
Investment in leverage lease................................ 33,359 32,235
Less: fees.................................................. (113) (138)
-------- --------
Net investment in leverage leases........................... $ 33,246 $ 32,097
======== ========
</TABLE>
DERIVATIVES
The Company uses derivative financial instruments for risk management
purposes to hedge against specific interest rate risk, to alter investment rate
exposures arising from mismatches between assets and liabilities, and to
minimize the Company's exposure to fluctuations in interest rates, foreign
currency exchange rates and general market conditions. The derivative financial
instruments used by the Company include futures, interest rate swap agreements,
options, and interest rate and currency swap agreements structured as forward
spread lock contracts. The Company does not hold or issue any derivative
instruments for trading purposes.
72
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. INVESTMENTS (CONTINUED)
FUTURES
A futures contract is a contractual agreement to make or take delivery of
a notional principal amount at a specified future date in accordance with terms
specified by a regulated futures exchange. Although futures contracts generally
specify delivery terms for the underlying commodity or financial instrument,
most futures contracts are settled in cash prior to delivery by executing a
futures position opposite to the original position. That is, a contract to take
delivery (a "long" position) is offset by executing a contract to make delivery
(a "short" position), and vice versa.
The Company purchases futures contracts to hedge against interest rate
fluctuations. Gains or losses on contracts that qualify as hedges are deferred
until the earliest of the completion of the hedging transaction, determination
that the transaction will no longer take place, or determination that the hedge
is no longer effective. Upon completion of the hedge, where it is impractical to
allocate gains (losses) to specific hedged assets or liabilities, gains (losses)
are deferred and amortized over the remaining life of the hedged assets. If
instruments being hedged by futures are disposed, any unamortized gains (losses)
are included in the determination of gain or loss from the disposition. Gains
(losses) on hedge contracts that are deemed ineffective are realized
immediately. There were no deferred gains (losses), disposed hedges, or hedges
deemed ineffective in 1999 and 1998. The Company had no futures contracts
outstanding at December 31, 1999 and 1998, respectively.
INTEREST RATE SWAPS
Interest rate swap agreements are contracts with other parties to exchange
at specified intervals, the difference between fixed and floating rate interest
amounts based upon a notional principal amount. No cash is exchanged at the
outset of the contract and no principal payments are made by either party. A
single net payment is usually made by one counterparty at each interest payment
date.
The Company enters into interest rate swap agreements to hedge against
exposure to interest rate fluctuations. Because the underlying principal is not
exchanged, the Company's maximum exposure to counterparty credit risk is the
difference in payments exchanged. The net payable/receivable is recognized over
the life of the swap contract as an adjustment to net investment income. The net
increase (decrease) in net investment income related to interest rate swaps was
($2,512,745), ($1,685,909) and ($2,579,536) for the years ended December 31,
1999, 1998 and 1997 respectively. The company's derivatives did not qualify for
hedge accounting treatment in 1999 and 1998. As a result, the realized gains and
losses were realized immediately in those years and the deferred balances as of
year ended December 31, 1997 were realized during 1998.
PUT OPTIONS
Options are legal contracts that give the contractholder the right to buy
or sell a specific amount of the underlying interest at a strike price upon
exercise of the option. Cash is exchanged to purchase the option and on exercise
date, the holder of the option can elect to exercise or allow it to expire. The
Company utilizes options to hedge against stock market exposure inherent in the
mortality and expense risk charges and guaranteed minimum death benefit features
of the Company's variable annuities.
FORWARD SPREAD LOCK CONTRACTS
Interest rate and currency swap agreements structured as forward spread
lock contracts are swap agreements which are executed in a current period but
effective on a future date. The contracts outline the interest or currency
rates, which each party agrees to at contract date as well as the outset of the
73
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. INVESTMENTS (CONTINUED)
contract. No principal payments are made by either party. A single net payment
is made to close out the contract prior to the effective date in the event that
either party to the contract wishes to terminate the agreement. If the contract
is not terminated prior to the effective future date, the contract becomes a
swap agreement as described above.
The Company's underlying notional or principal amounts associated with
open derivatives positions were as follows (in 000's):
<TABLE>
<CAPTION>
OUTSTANDING AT
DECEMBER 31, 1999
---------------------
NOTIONAL MARKET
PRINCIPAL VALUE OF
AMOUNTS POSITIONS
--------- ---------
<S> <C> <C>
Interest rate swaps......................................... $368,000 $ 9,522
Foreign currency swaps...................................... 1,700 295
-------- --------
Total..................................................... $369,700 $ 9,817
======== ========
<CAPTION>
OUTSTANDING AT
DECEMBER 31, 1998
---------------------
NOTIONAL MARKET
PRINCIPAL VALUE OF
AMOUNTS POSITIONS
--------- ---------
Interest rate swaps $ 297,000 ) (10,656
<S> <C> <C>
Foreign currency swaps...................................... 3,100 689
-------- --------
Total..................................................... $300,100 $ (9,967)
======== ========
</TABLE>
During 1998, the Company discontinued hedge accounting treatment for
certain derivative instruments for which correlation could not be established.
The Company recognized gross realized gains of $4,734,971 and $6,567,922 in 1999
and 1998, respectively, as well as gross realized losses of $1,789,357 and
$20,538,120 during 1999 and 1998, respectively.
The Company's primary risks associated with these transactions are
exposure to potential credit loss in the event of non-performance by
counterparties and market risk. The Company regularly assesses the strength of
the counterparties and generally enters into transactions with counterparties
rated "A" or better by nationally recognized ratings agencies. Management
believes that the risk of incurring losses related to credit risk is remote. As
of December 31, 1999 and 1998, the Company's derivatives had no significant
concentration of credit risk. The Company does not require collateral or other
security to support derivative financial instruments with credit risk.
4. NET REALIZED INVESTMENT GAINS AND LOSSES
Net realized investment gains (losses) consisted of the following (in
000's):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Fixed maturities............................................ $ (1,839) $ 21,811 $ 671
Mortgage and other loans.................................... 1,981 36 9,465
Real estate................................................. (742) 499 2,393
Derivative instruments...................................... 2,945 (13,970) (63)
-------- -------- -------
Total..................................................... $ 2,345 $ 8,376 $12,466
======== ======== =======
</TABLE>
74
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
5. NET INVESTMENT INCOME
Net investment income consisted of the following (in 000's):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Fixed maturities............................................ $254,390 $295,167 $324,150
Equity securities........................................... (33) 37 --
Mortgage and other loans.................................... 90,638 103,804 128,214
Real estate................................................. 6,829 7,844 7,070
Policy loans................................................ 3,172 2,934 3,639
Derivatives................................................. 17,671 (11,880) (3,060)
Income on funds withheld under reinsurance.................. -- 67,045 85,840
Other....................................................... (1,416) (817) 943
-------- -------- --------
Gross investment income................................... 371,251 464,134 546,796
Less: Investment expenses................................... 6,273 8,277 6,882
-------- -------- --------
Net investment income..................................... $364,978 $455,857 $539,914
======== ======== ========
</TABLE>
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107 excludes certain insurance liabilities and other non-financial
instruments from its disclosure requirements. The fair value amounts presented
herein do not include the expected interest margin (interest earnings over
interest credited) to be earned in the future on investment-type products or
other intangible items. Accordingly, the aggregate fair value amounts presented
herein do not necessarily represent the underlying value of the Company;
likewise, care should be exercised in deriving conclusions about the Company's
business or financial condition based on the fair value information presented
herein.
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1999 and 1998 (in
000's):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents..................... $ 550,265 $ 550,265 $ 264,744 $ 264,744
Fixed maturities.............................. 2,678,340 2,678,340 3,489,965 3,489,965
Short-term investments........................ 177,213 177,213 336,026 336,026
Mortgages..................................... 931,351 933,725 969,800 1,014,189
Derivatives................................... 9,817 9,817 (9,967) (9,967)
Policy loans.................................. 40,660 40,660 42,595 42,595
Other invested assets......................... 67,938 67,938 64,177 64,177
Financial liabilities:
Guaranteed investment contracts............... $ 677,265 $ 665,830 $1,064,357 $1,089,070
Contractholder deposit funds.................. 2,279,413 2,213,896 2,449,585 2,460,530
Fixed annuity contracts....................... 112,794 105,845 113,913 114,661
Interest sensitive life insurance............. 116,999 119,659 118,076 120,077
Long-term debt................................ 565,000 529,212 565,000 600,625
</TABLE>
75
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
6. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair values of cash and cash equivalents are estimated to be cost plus
accrued interest which approximates fair value. The fair values of short-term
bonds are estimated to be the amortized cost. The fair values of publicly traded
fixed maturities are based upon market prices or dealer quotes. For privately
placed fixed maturities, fair values are estimated by taking into account prices
for publicly traded securities of similar credit risk, maturity, repayment and
liquidity characteristics. The fair values of mortgage and other loans are
estimated by discounting future cash flows using current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Policy loans are state at unpaid principal balances which approximate fair
value.
The fair values of the Company's general account insurance reserves and
contractholder deposits under investment-type contracts (insurance, annuity and
pension contracts that do not involve mortality or morbidity risks) are
estimated using discounted cash flow analyses or surrender values based on
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for all contracts being valued. Those contracts
that are deemed to have short-term guarantees have a carrying amount equal to
the estimated market value.
The fair values of other deposits with future maturity dates are estimated
using discounted cash flows.
The fair value of notes payable and other borrowings are estimated using
discounted cash flow analyses based upon the Company's current incremental
borrowing rates for similar types of borrowings. The carrying amount of all
other assets is assumed to approximate fair value. The company's commitments to
extend credit approximate fair value.
7. REINSURANCE
INDIVIDUAL INSURANCE
The Company has agreements with SLOC which provide that SLOC will reinsure
the mortality risks of the individual life insurance contracts sold by the
Company. Under these agreements basic death benefits and supplementary benefits
are reinsured on a yearly renewable term basis and coinsurance basis,
respectively.
Effective January 1, 1991, the Company entered into an agreement with SLOC
under which certain individual life insurance contracts issued by SLOC were
reinsured by the Company on a 90% coinsurance basis. Also effective January 1,
1991, the Company entered into an agreement with SLOC which provides that SLOC
will reinsure the mortality risks in excess of $500,000 per policy for the
individual life insurance contracts assumed by the Company in the reinsurance
agreement described above. Such death benefits are reinsured on a yearly
renewable term basis. These two agreements were terminated effective October 1,
1998.
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured.
GROUP INSURANCE
The Company has agreements with SLOC whereby SLOC reinsures the mortality
and morbidity risks of the group life insurance contracts and group long-term
disability contracts. Under these agreements, certain death benefits and
long-term disability benefits are reinsured on a yearly renewable term
76
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
7. REINSURANCE (CONTINUED)
basis. The agreements provide that SLOC will reinsure the mortality risks in
excess of $50,000 per policy for group life contracts and $3,000 per policy per
month for long-term disability contracts ceded by the Company.
The effects of reinsurance were as follows (in 000's):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Insurance premiums
Direct.................................................... $ 33,033 $ 39,168 $ 43,312
Assumed................................................... -- 159,787 211,657
Ceded..................................................... 5,814 11,867 13,180
-------- -------- --------
Net Premiums................................................ $ 27,219 $187,088 $241,789
======== ======== ========
Insurance and other individual policy benefits and claims
Direct.................................................... $318,519 $330,592 $411,834
Assumed................................................... -- 248,664 241,947
Ceded..................................................... 3,821 11,170 5,361
-------- -------- --------
Net policy benefits and claims.............................. $314,698 $568,086 $648,420
======== ======== ========
</TABLE>
The Company is contingently liable for the portion of the policies
reinsured under each of its existing reinsurance agreements in the event the
reinsurance companies are unable to pay their portion of any reinsured claim.
Management believes that any liability from this contingency is unlikely.
However, to limit the possibility of such losses, the Company evaluates the
financial condition of its reinsurers and monitors concentration of credit risk.
8. RETIREMENT PLANS
PENSION PLAN
The Company and its subsidiaries participate with SLOC in a
non-contributory defined benefit pension plan covering essentially all
employees. Benefits under all plans are based on years of service and employees'
average compensation.
The Company's funding policies for the pension plans are to contribute
amounts which at least satisfy the minimum amount required by the Employee
Retirement Income Security Act of 1974 ("ERISA"); currently the plans are fully
funded. Most pension plan assets consist of separate accounts of SLOC or other
insurance company contracts. The following table sets forth the change in the
77
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. RETIREMENT PLANS (CONTINUED)
pension plan's projected benefit obligations and assets, as well as the plans
funded status at December 31, 1999 and 1998 (in 000's):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Change in projected benefit obligation:
Projected benefit obligation at beginning of year........... $110,792 $ 79,684
Service cost................................................ 5,632 4,506
Interest cost............................................... 6,952 6,452
Actuarial loss (gain)....................................... (21,480) 21,975
Benefits paid............................................... (2,376) (1,825)
-------- --------
Projected benefit obligation at end of year................. $ 99,520 $110,792
======== ========
Change in fair value of plan assets:
Fair value of plan assets at beginning of year.............. $151,575 $136,610
Actual return on plan assets................................ 9,072 16,790
Benefits paid............................................... (2,376) (1,825)
Fair value of plan assets at end of year.................... $158,271 $151,575
Funded status............................................... $ 58,752 $ 40,783
Unrecognized net actuarial loss............................. (20,071) (2,113)
Unrecognized transition obligation.......................... (22,617) (24,674)
Unrecognized prior service cost............................. 7,081 7,661
-------- --------
Prepaid benefit cost........................................ $ 23,145 $ 21,657
======== ========
</TABLE>
The following table sets forth the components of the net periodic pension
cost for the years ended December 31, 1999 and 1998 (in 000's).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Components of net periodic benefit cost:
Service cost................................................ $ 5,632 $ 4,506
Interest cost............................................... 6,952 6,452
Expected return on plan assets.............................. (12,041) (10,172)
Amortization of transition obligation asset................. (2,056) (2,056)
Amortization of prior service cost.......................... 580 580
Recognized net actuarial gain............................... (554) (677)
-------- --------
Net periodic benefit cost................................... $ (1,487) $ (1,367)
======== ========
The Company's share of net periodic benefit cost............ $ 736 $ 586
======== ========
</TABLE>
The projected benefit obligations were based on calculations that utilize
certain assumptions. The assumed weighted average discount rate was 7.5% and
6.75% for the years ended December 31, 1999 and 1998, respectively. The expected
return on plan assets for 1999 and 1998 was 8.75% and 8.00%, respectively, and
the assumed rate of compensation increase for both 1999 and 1998 was 4.50%.
78
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. RETIREMENT PLANS (CONTINUED)
The Company and certain subsidiaries also participate with SLOC and
certain affiliates in a 401(k) savings plan for which substantially all
employees are eligible. Under the various plans the Company matches, up to
specified amounts, employees' contributions to the plan. The Company's
contributions were $284,000 and $231,000 for the years ended December 31, 1999
and 1998, respectively.
OTHER POST-RETIREMENT BENEFIT PLANS
In addition to pension benefits, the Company and certain subsidiaries
provide certain health, dental, and life insurance benefits ("postretirement
benefits") for retired employees and dependents. Substantially all employees of
the participating companies may become eligible for these benefits if they reach
normal retirement age while working for the Company, or retire early upon
satisfying an alternate age plus service condition. Life insurance benefits are
generally set at a fixed amount.
The following table sets forth the change in other postretirement benefit
plans' obligations and assets, as well as the plans' funded status at December
31, 1999 and 1998 (in 000's).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year..................... $ 10,419 $ 9,845
Service cost................................................ 413 240
Interest cost............................................... 845 673
Actuarial loss.............................................. 1,048 308
Benefits paid............................................... (508) (647)
--------- ---------
Benefit obligation at end of year........................... $ 12,217 $ 10,419
========= =========
Change in fair value of plan assets:
Fair value of plan assets at beginning of year.............. $ -- $ --
Employer contributions...................................... 508 647
Benefits paid............................................... (508) (647)
--------- ---------
Fair value of plan assets at end of year.................... $ -- $ --
========= =========
Funded Status............................................... $ (12,217) $ (10,419)
Unrecognized net actuarial loss............................. 1,469 586
Unrecognized transition obligation.......................... 140 185
--------- ---------
Prepaid (accrued) benefit cost.............................. $ (10,608) $ (9,648)
========= =========
</TABLE>
79
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. RETIREMENT PLANS (CONTINUED)
The following table sets forth the components of the net periodic
postretirement benefit costs for the years ended December 31, 1999 and 1998 (in
000's).
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Components of net periodic benefit cost
Service cost................................................ $ 413 $240
Interest cost............................................... 845 673
Amortization of transition obligation (asset)............... 45 45
Recognized net actuarial loss (gain)........................ 164 (20)
------ ----
Net periodic benefit cost................................... $1,467 $938
====== ====
The Company's share of net periodic benefit cost............ $ 185 $ 95
====== ====
</TABLE>
In order to measure the postretirement benefit obligation at December 31,
1999, the Company assumed a 10.9% annual rate of increase in the per capita cost
of covered health care benefits. These rates were assumed to decrease gradually
to 5.0% for 2005 and remain at that level thereafter. Assumed health care cost
trend rates have a significant effect on the amounts reported for the health
care plans. For example, increasing the health care cost trend rate assumptions
by one percentage point in each year would increase the accumulated
postretirement benefit obligation at December 31, 1999 by $2.8 million, and the
aggregate of the service and interest cost components of net periodic
postretirement benefit expense for 1999 by $0.3 million. Conversely, decreasing
assumed rates by one percentage point in each year would decrease the
accumulated postretirement benefit obligation at December 31, 1999 by $2.3
million, and the aggregate of the service and interest cost components of net
periodic postretirement benefit expense for 1999 by $0.5 million. The assumed
weighted average discount rate used in determining the postretirement benefit
obligation was 7.5% and 6.75% for the year ended December 31, 1999 and 1998,
respectively.
9. FEDERAL INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return with US Holdco as previously described in Note 1. Federal income taxes
are calculated as if the Company was filing a separate federal income tax
return. A summary of the components of federal income tax expense in the
consolidated statements of income for the years ended December 31, 1999, 1998
and 1997 were as follows (in 000's):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal income tax expense
Current................................................... $18,570 $19,476 $35,689
Deferred.................................................. 10,210 (8,551) (1,674)
------- ------- -------
Total....................................................... $28,780 $10,925 $34,015
======= ======= =======
</TABLE>
80
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
9. FEDERAL INCOME TAXES (CONTINUED)
Federal income taxes attributable to the consolidated operations are
different from the amounts determined by multiplying income before federal
income taxes by the expected federal income tax rate of 35%. The Company's
effective rate differs from the federal income tax rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Expected federal income tax expense......................... $28,969 $ 9,405 $36,925
Low income housing credit................................... (6,348) (4,446) (3,270)
Additional tax provision.................................... 6,851 5,423 1,004
Other....................................................... (692) 543 (644)
------- ------- -------
Federal income tax expense.................................. $28,780 $10,925 $34,015
======= ======= =======
</TABLE>
The deferred income tax (asset) liability represents the tax effects of
temporary differences between the carrying amounts of assets and liabilities
used for financial reporting purposes and the amounts used for income tax
purposes. The components of the Company's deferred tax (assets) and liabilities
as of December 31, 1999 and 1998 were as follows (in 000's):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax asset
Actuarial liabilities..................................... $ 136,560 $ 118,074
Investments, net.......................................... $ 943 --
---------- ----------
Total deferred tax asset.................................... $ 137,503 $ 118,074
Deferred tax liabilities
Investments, net.......................................... $ -- $ (65,704)
Deferred policy acquisition costs......................... (193,238) (144,366)
Other..................................................... (21,940) (21,105)
---------- ----------
Total deferred tax liability................................ $ (215,178) $ (231,175)
---------- ----------
Net deferred tax liability.................................. $ (77,675) $ (113,101)
========== ==========
</TABLE>
The Company makes payments under the tax sharing agreements as if it were
filing as a separate company.
The Company's federal income tax returns are routinely audited by the
Internal Revenue Service ("IRS"), and provisions are made in the consolidated
financial statements in anticipation of the results of these audits. The Company
is currently under audit by the IRS for the years 1994 and 1995. In the
Company's opinion, adequate tax liabilities have been established for all years
and any adjustments that might be required for the years under audit will not
have a material effect on the Company's financial statements. However, the
amounts of these tax liabilities could be revised in the future if estimates of
the Company's ultimate liability are revised.
81
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSES
Activity in the liability for unpaid claims and claims adjustment expenses
related to the group life and group disability products is summarized below (in
000's):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Balance at January 1........................................ $15,002 $13,016
Less reinsurance recoverables............................... (3,232) (2,777)
------- -------
Net balance at January 1.................................... 11,770 10,239
------- -------
Incurred related to:
Current year.............................................. 12,187 10,212
Prior years............................................... (1,487) (1,721)
------- -------
Total incurred.............................................. 10,700 8,491
------- -------
Paid losses related to:
Current year.............................................. (6,755) (5,146)
Prior years............................................... (1,996) (1,814)
------- -------
Total paid.................................................. (8,751) (6,960)
------- -------
Net balance at December 31.................................. 17,755 15,002
Plus reinsurance recoverables............................... (4,036) (3,232)
------- -------
Balance at December 31...................................... $13,719 $11,770
======= =======
</TABLE>
The Company regularly updates its estimates of liabilities for unpaid
claims and claims adjustments expenses as new information becomes available and
further events occur which may impact the resolution of unsettled claims for its
individual and group disability lines of business. Changes in prior estimates
are recorded in results of operations in the year such changes are determined to
be needed.
11. DEFERRED POLICY ACQUISITION COSTS
The following illustrates the changes to the deferred policy acquisition
cost asset (in 000's):
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
Balance at January 1........................................ $523,872 $ 719,819
Acquisition costs deferred................................ 156,228 144,324
Amortized to expense during year.......................... (67,815) (88,794)
Adjustment for unrealized investment gains (losses) during
year.................................................... 73,993 (11,139)
Adjustment for termination of reinsurance agreement....... -- (240,338)
-------- ---------
Balance at December 31...................................... $686,278 $ 523,872
======== =========
</TABLE>
12. SEGMENT INFORMATION
The Company conducts business principally in five operating segments and
maintains a corporate segment to provide for the capital needs of the various
operating segments and to engage in other financing related activities. Each
segment was defined consistent with the way results are evaluated by the chief
operating decision-maker.
82
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
12. SEGMENT INFORMATION (CONTINUED)
INDIVIDUAL PROTECTION
The Individual Protection segment markets and administers life insurance
products sold to individuals and corporate owners of individual life insurance.
The products include a variety of whole life, universal life and variable life
products.
GROUP PROTECTION
The Group Protection segment markets and administers group life insurance,
long term disability and short-term disability products. These products are sold
to employers which provide group benefits for their employees.
WEALTH MANAGEMENT
The Wealth Management segment markets and administers both individual and
group fixed and variable annuity products and provides asset management services
to certain of the Company's separate accounts.
CORPORATE SEGMENT
The Corporate segment includes the unallocated capital of the Company, its
debt financing, and items not otherwise attributable to the other segments.
Management evaluates the results of the operating segments on a pre-tax
basis. The Company does not materially depend on one or a few customers, brokers
or agents. The following amounts pertain to the various business segments (in
000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
---------------------------------------
TOTAL TOTAL PRETAX NET OPERATING TOTAL
REVENUES EXPENDITURES INCOME INCOME ASSETS
-------- ------------ -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Individual Protection............... $ 17,139 $ 18,001 $ (861) $ (118) $ 291,508
Group Protection.................... 16,095 15,541 554 360 20,038
Wealth Management................... 543,424 460,788 82,636 59,734 20,534,218
Corporate........................... 53,241 52,758 483 (6,244) 639,149
-------- -------- ------- ------- -----------
Total............................. $629,899 $547,088 $82,812 $53,732 $21,484,913
======== ======== ======= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------
TOTAL TOTAL PRETAX NET OPERATING TOTAL
REVENUES EXPENDITURES INCOME INCOME ASSETS
-------- ------------ --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Individual Protection......... $230,219 $300,478 $ (70,259) $ (46,469) $ 357,042
Group Protection.............. 14,993 13,023 1,970 1,260 18,163
Wealth Management............. 538,053 457,483 80,570 59,978 17,211,359
Corporate..................... 63,438 50,787 12,651 (705) 661,698
-------- -------- --------- --------- -----------
Total....................... $846,703 $821,771 $ 24,932 $ 14,064 $18,248,262
======== ======== ========= ========= ===========
</TABLE>
83
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
12. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------
TOTAL TOTAL PRETAX NET OPERATING TOTAL
REVENUES EXPENDITURES INCOME INCOME ASSETS
-------- ------------ -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Individual Protection.......... $295,933 $301,216 $ (5,283) $ (3,260) $ 1,554,818
Group Protection............... 12,425 13,603 (1,178) (764) 13,793
Wealth Management.............. 586,925 499,225 87,700 60,709 15,026,991
Corporate...................... 63,980 48,411 15,569 4,785 739,913
-------- -------- -------- -------- -----------
Total........................ $959,263 $862,455 $ 96,808 $ 61,470 $17,335,515
======== ======== ======== ======== ===========
</TABLE>
13. REGULATORY FINANCIAL INFORMATION
The insurance subsidiaries are required to file annual statements with state
regulatory authorities prepared on an accounting basis prescribed or permitted
by such authorities (statutory basis). Statutory surplus differs from
shareholder's equity reported in accordance with generally accepted accounting
principles for stock life insurance companies primarily because policy
acquisition costs are expensed when incurred, investment reserves are based on
different assumptions, post-retirement benefit costs are based on different
assumptions and reflect a different method of adoption, life insurance reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable.
For the year ended December 31, 1999, the Company filed its Annual Report
on Form 10-K ("10-K") using audited statutory financial statements. The
following information reconciles statutory net income and statutory surplus with
net income and equity on a GAAP basis (in 000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Statutory net income........................................ $ 90,358 $ 125,401 $129,242
Adjustments to GAAP for life insurance companies:
Statutory interest maintenance reserve.................... 3,956 2,925 1,867
Investment income and realized gains (losses)............. 13,803 (4,532) 14,186
Policyowner benefits...................................... (154,293) (187,990) (84,895)
Deferred policy acquisition costs......................... 88,413 60,527 88,921
Deferred income taxes..................................... (13,615) 8,886 (26,067)
Other, net................................................ 13,850 9,017 7,247
--------- --------- --------
GAAP net income............................................. $ 42,472 $ 14,234 $130,501
========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Statutory capital stock and surplus......................... $ 886,342 $ 909,924
Adjustments to GAAP for life insurance companies:
Valuation of investments.................................. 3,697 139,826
Deferred policy acquisition costs......................... 686,278 550,900
Future policy benefits and Contractholder deposit funds... (350,181) (240,035)
Deferred income taxes..................................... (86,112) (106,343)
Statutory interest maintenance reserve.................... 42,325 44,668
Statutory asset valuation reserve......................... 45,281 46,698
Surplus notes............................................. (565,000) (565,000)
</TABLE>
84
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
13. REGULATORY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Other, net................................................ 8,615 (3,038)
--------- ---------
GAAP equity................................................. $ 671,245 $ 777,600
========= =========
</TABLE>
The NAIC 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.
14. DIVIDEND RESTRICTIONS
The Company and its insurance subsidiary's ability to pay dividends are
subject to certain restrictions. Delaware and New York have enacted laws
governing the payment of dividends to stockholders by insurers. These laws
affect the dividend paying ability of the Company and Sun Life (N.Y.).
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without prior
approval of the Delaware Commissioner of Insurance, is limited to the greater of
(i) 10% of its statutory surplus as of the preceding December 31st, or (ii) the
individual company's statutory net gain from operations for the preceding
calendar year (if such insurer is a life company), or its net income (not
including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory surplus, would also require the prior approval of the Delaware
Commissioner of Insurance. During 1997, the Company received approval from the
Delaware Commissioner of Insurance and transferred all of its ownership in MFS
valued at $68,951,000 as a dividend to Life Holdco. See Note 2 for additional
information. In 1998, a dividend in the amount of $50,000,000 was declared and
paid by the Company to its parent, Life Holdco. During 1999, a dividend in the
amount of $80,000,000 was declared and paid by the Company to Life Holdco. These
dividends were approved by the Board of Directors, but did not require prior
approval of the Insurance Commissioner. The maximum dividend payable by the
Company without prior approval of the Delaware Commissioner of Insurance at
December 31, 1999 was $8,000,000.
Under New York statute, cash dividends may be paid out of that part of the
Company's available and accumulated surplus funds, which was derived from
realized net operating profits of its business and realized capital gains. A
cash dividend otherwise lawful may be paid out of such earned surplus even
though total surplus is at the time less than previously contributed or paid-in
surplus. No cash dividend shall be paid to stockholder unless a notice of the
intention of the Board of Directors to declare such dividend and the amount
thereof shall have been filed with the Superintendent of Insurance of the State
of New York not less than thirty days in advance of such proposed declaration,
nor if the Superintendent within thirty days after such filing gives written
notice to the Company of his disapproval of such payment. During 1999 and 1998,
Sun (N.Y.) declared and paid dividends in the amounts of $6,500,000 and
$3,000,000, respectively, to the Company.
85
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
15. COMMITMENTS AND CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the
number of insurance companies that are under regulatory supervision. This may
result in an increase in mandatory assessments by state guaranty funds, or
voluntary payments by solvent insurance companies to cover losses to
policyholders of insolvent or rehabilitated companies. Mandatory assessments,
which are subject to statutory limits, can be partially recovered through a
reduction in future premium taxes in some states. The Company is not able to
reasonably estimate the potential effect on it of any such future assessments.
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 if 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. The Company incurred
guaranty fund assessments of approximately $3,500,000, $3,500,000, and
$3,083,000 in 1999, 1998 and 1997, respectively.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. Although the Company does not
believe that there is a material contingency associated with the Year 2000
project, there can be no assurance that exposure for material contingencies may
not arise.
LITIGATION
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 assurance, management, at the present
time, does not anticipate that the ultimate liability arising from such pending
and threatened litigation will have a material effect on the financial condition
or operating results of the Company.
86
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASE COMMITMENTS
The Company leases various facilities and equipment under operating leases
with terms up to twenty-five years. As of December 31, 1999, minimum future
lease payments under such leases are as follows (in 000's):
<TABLE>
<S> <C>
2000........................................................ $ 4,354
2001........................................................ 4,354
2002........................................................ 4,407
2003........................................................ 3,378
Thereafter.................................................. 2,776
=======
Total....................................................... $19,269
=======
</TABLE>
Total rental expense for the years ended December 31, 1999, 1998 and 1997
was $4,656,000, $4,139,000, and $3,875,000 respectively.
16. DISCONTINUED OPERATIONS
During 1999, the Company discontinued its individual disability segment and
its banking and trust segment. These segments were composed of MCIC and NLT
which were both sold during 1999 to separate, unaffiliated parties. Net proceeds
on the sale of MCIC were approximately $33,965,000 and the Company realized a
net loss after taxes of $25,465,000. Net proceeds on the sale of NLT were
approximately $30,000,000; the Company realized a net gain after taxes of
$13,170,000. Immediately before the sale date of NLT, the Company received a $19
million dividend distribution from NLT.
During 1997, the Company discontinued its investment management segment
which was comprised of Massachusetts Financial Services Company, ("MFS"). As
part of a corporate restructuring at the end of 1997, MFS was transferred to
Life Holdco in the form of a dividend valued at $68,951,000. MFS was then
transferred to US Holdco and then to a newly formed holding company, Sun Life of
Canada (U.S.) Financial Services Holdings, Inc.
Income from discontinued operations (in 000's):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue..................................................... $22,667 $104,225 $691,348
Expenses.................................................... 21,430 104,593 570,521
Provision for income taxes.................................. 203 (445) 51,795
------- -------- --------
Income from discontinued operations......................... $ 1,034 $ 77 $ 69,032
======= ======== ========
</TABLE>
87
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF SUN LIFE ASSURANCE
COMPANY OF CANADA (U.S.):
We have audited the accompanying consolidated balance sheets of Sun Life
Assurance Company of Canada (U.S.) and its subsidiaries (the "Company") as of
December 31, 1999 and 1998, and the related consolidated statements of income,
stockholder's equity, comprehensive income and of cash flows for each of the
three years in the period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Sun Life Assurance Company of
Canada (U.S.) and its subsidiaries as of December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 22, 2000
------------------------
88
<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 MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
2000 1999
--------- ---------
<S> <C> <C>
Revenues
Premiums and annuity considerations......................... $ 14.6 $ 11.0
Net investment income....................................... 79.9 98.4
Net realized investment gains............................... 0.2 4.5
Fee and other income........................................ 66.6 49.9
------ ------
Total revenues.............................................. 161.3 163.8
------ ------
Benefits and expenses
Policyowner benefits........................................ 80.3 84.7
Underwriting, acquisition and other operating expenses...... 27.0 20.0
Amortization of deferred policy acquisition costs........... 0.6 24.4
------ ------
Total benefits and expenses................................. 107.9 129.1
------ ------
Income from operations...................................... 53.4 34.7
Interest expense............................................ 10.8 10.8
------ ------
Income before income tax expense and discontinued
operations................................................ 42.6 23.9
Income tax expense.......................................... 14.9 3.3
------ ------
Net income from continuing operations....................... 27.7 20.6
Net loss on disposal of subsidiary, after tax............... -- (25.6)
Net income from discontinued operations..................... -- 0.8
------ ------
Net income (loss)........................................... $ 27.7 $ (4.2)
====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.
89
<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)
<TABLE>
<CAPTION>
UNAUDITED
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities available-for-sale at fair value (amortized
cost of $2,843.5 and $2,685.4 in 2000 and 1999,
respectively)............................................. $ 2,833.7 $ 2,677.3
Trading fixed maturities at fair value (amortized cost of
$1.0 and $1.0 in 2000 and 1999, respectively)............. 1.0 1.0
Short-term investments...................................... 85.5 177.2
Mortgage loans.............................................. 898.1 931.4
Real estate................................................. 94.3 95.1
Policy loans................................................ 40.4 40.7
Other invested assets....................................... 68.3 67.9
--------- ---------
Total investments........................................... 4,021.3 3,990.6
--------- ---------
Cash and cash equivalents................................... 321.0 550.3
Accrued investment income................................... 52.4 50.5
Deferred policy acquisition costs........................... 728.1 686.3
Outstanding premiums........................................ 2.0 2.7
Other assets................................................ 62.2 81.2
Separate account assets..................................... 17,298.8 16,123.3
--------- ---------
TOTAL ASSETS................................................ $22,485.8 $21,484.9
========= =========
LIABILITIES
Future contract and policy benefits......................... $ 727.4 $ 729.3
Contractholder deposit funds and other policy liabilities... 2,945.3 3,144.8
Unearned revenue............................................ 7.5 7.1
Accrued expenses and taxes.................................. 93.4 98.8
Deferred federal income taxes............................... 90.2 77.7
Long-term debt payable to affiliates........................ 565.0 565.0
Other liabilities........................................... 58.7 67.7
Separate account liabilities................................ 17,298.8 16,123.3
--------- ---------
Total liabilities........................................... 21,786.3 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...................... 7.7 7.1
Retained earnings........................................... 486.5 458.8
--------- ---------
Total stockholder's equity.................................. 699.5 671.2
--------- ---------
Total liabilities and stockholder's equity.................. $22,485.8 $21,484.9
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.
90
<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 THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
2000 1999
--------- ---------
<S> <C> <C>
Net income (loss)........................................... $27.7 $ (4.2)
Other comprehensive income:
Net change in unrealized holding gains and losses on
available-for-sale securities, net of tax................. 0.7 10.7
Currency translation........................................ (0.1) --
----- ------
Other comprehensive income:................................. 0.6 10.7
----- ------
Comprehensive income........................................ $28.3 $ 6.5
===== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.
91
<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 THREE MONTHS ENDED MARCH 31, 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, 1999............ $5.9 $199.4 $ 7.1 $458.8 $671.2
Comprehensive income:
Net income............................ -- -- -- 27.7 27.7
Other comprehensive income............ -- -- 0.6 -- 0.6
---- ------ ----- ------ ------
Balance at March 31, 2000............... $5.9 $199.4 $ 7.7 $486.5 $699.5
==== ====== ===== ====== ======
Balance at December 31, 1998............ $5.9 $199.4 $75.9 $496.4 $777.6
Comprehensive income:
Net income............................ -- -- -- (4.2) (4.2)
Other comprehensive income............ -- -- 10.7 -- 10.7
Dividends to stockholder.............. -- -- -- (75.0) (75.0)
---- ------ ----- ------ ------
Balance at March 31, 1999............... $5.9 $199.4 $86.6 $417.2 $709.1
==== ====== ===== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.
92
<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 THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income from continuing operations....................... $ 27.7 $ 20.6
Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:
Amortization of discount and premiums..................... (0.3) 0.0
Depreciation and amortization............................. 0.3 0.5
Net realized gains on investments......................... (0.2) (4.5)
Tax benefit on disposal of subsidiary..................... -- 14.8
Interest credited to contractholder deposits.............. 48.7 56.0
Deferred federal income taxes............................. 12.1 (5.9)
Changes in assets and liabilities:
Deferred acquisition costs................................ (39.0) (16.6)
Accrued investment income................................. (1.9) 1.0
Other assets.............................................. 13.1 (17.9)
Future contract and policy benefits....................... (1.4) (4.1)
Other, net................................................ (10.1) 12.7
------- -------
Net cash provided by operating activities................... 49.0 56.6
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, maturities and repayments of:
Available-for-sale fixed maturities..................... 208.9 413.3
Subsidiary.............................................. -- 33.6
Mortgage loans.......................................... 50.1 24.0
Real estate............................................. 3.0 --
Purchases of:
Available-for-sale fixed maturities..................... (366.9) (143.8)
Other invested assets................................... -- (1.0)
Mortgage loans.......................................... (17.6) (97.7)
Real estate............................................. (1.9) (0.1)
Changes in other investing activities, net................ 0.3 --
Net change in policy loans................................ 0.3 (0.7)
Net change in short term investments...................... 94.6 (91.3)
------- -------
Net cash provided by (used in) investing activities......... (29.2) 136.4
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits and interest credited to contractholder deposit
funds................................................... 317.0 341.3
Withdrawals from contractholder deposit funds............. (566.1) (471.8)
------- -------
Net cash used in financing activities....................... (249.1) (130.4)
------- -------
Net change in cash and cash equivalents..................... (229.3) 62.6
Cash and cash equivalents, beginning of period............ 550.3 264.7
Cash and cash equivalents, end of period.................. $ 321.0 $ 327.3
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid, net of refunds......................... $ (19.5) $ 13.3
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.
93
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
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, 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 has changed its basis of accounting for the three months ended March 31,
2000 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 March 31, 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 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 Life of Canada
(U.S.) SPE 97-1, Inc. ("SPE 97-1"), Clarendon Insurance Agency, Inc.
("Clarendon"), and Sun Life Information Services Ireland Limited ("SLIRL"). 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. SLIRL provides information systems development
services to the Company and its affiliates. Sunbesco and Sunfinco are currently
inactive.
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 these subsidiaries are reported as
discontinued operations.
94
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
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
95
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 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. Hedge accounting is used to account for
certain derivatives. 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.
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.
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,
96
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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
97
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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., 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. The Company is evaluating SFAS No. 133 and
has not determined its effect on the consolidated financial statements.
On January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants (AICPA) Statement of Position (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
98
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
such liability. The adoption of SOP 97-3 had no material impact on the financial
position or results of operations of the Company.
On January 1, 1999, the Company adopted AICPA SOP 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." This SOP
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. The adoption of
SOP 98-1, had no material impact on pre-tax income in either three month period.
(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 $7,374,000 and $6,798,000 for the three month period in 2000 and
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 month period amounted to approximately $1,994,000 in 2000 and
$1,762,000 in 1999.
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, 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 three operating
segments and maintains a corporate segment to provide for the capital needs of
the three 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.
99
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SEGMENT INFORMATION (CONTINUED)
Summarized unaudited financial information by segment is provided in the
tables below:
<TABLE>
<CAPTION>
PERIOD ENDED MARCH 31, 2000 MARCH 31,
--------------------------------------------- 2000
TOTAL TOTAL PRETAX NET ------------
REVENUES EXPENDITURES INCOME INCOME TOTAL ASSETS
-------- ------------ -------- -------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Individual Protection....................... $ 3.1 $ 3.2 $ (.1) $ (.1) $ 325.0
Group Protection............................ 4.2 3.3 .9 .6 27.8
Wealth Management........................... 146.9 99.3 47.6 32.6 21,903.1
Corporate................................... 7.1 12.9 (5.8) (5.4) 229.8
====== ====== ===== ===== =========
Total..................................... $161.3 $118.7 $42.6 $27.7 $22,485.7
====== ====== ===== ===== =========
Group Protection............................ 4.2 3.6 .6 .4 20.0
Wealth Management........................... 146.3 120.5 25.8 18.1 20,534.2
Corporate................................... 8.9 11.4 (2.5) 2.1 639.2
====== ====== ===== ===== =========
Total..................................... $163.8 $139.9 $23.9 $20.6 $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. 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>
MARCH 31, 1999
(IN MILLIONS)
--------------
<S> <C>
Revenue..................................................... $7.5
Expenses.................................................... 6.2
Provision for income taxes.................................. .5
====
Income from discontinued operations......................... $ .8
====
</TABLE>
(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 generally accepted accounting principles. The
Company has changed its basis of accounting for the three months ended March 31,
2000 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 March 31, 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 10-K is shown below:
100
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) STATUTORY FINANCIAL INFORMATION (CONTINUED)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND CAPITAL STOCK AND
SURPLUS
<TABLE>
<CAPTION>
DECEMBER 31, 1999
(IN MILLIONS)
-----------------
<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>
101
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) STATUTORY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
(IN MILLIONS)
-----------------
<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>
THREE MONTHS
ENDED MARCH 31,
-------------------
2000 1999
-------- --------
(IN MILLIONS)
<S> <C> <C>
Statutory net income........................................ $ 21.4 $ 37.7
Adjustments to GAAP for life insurance companies:
Statutory interest maintenance reserve.................... (.8) (.9)
Investment income and realized gains (losses)............... 1.9 (14.5)
Policyowner benefits........................................ (24.4) (35.4)
Deferred policy acquisition costs........................... 39.0 16.6
Deferred income taxes....................................... (11.1) (9.0)
Other, net.................................................. 1.7 1.3
------ ------
GAAP net income (loss)...................................... $ 27.7 $ (4.2)
====== ======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(IN MILLIONS)
<S> <C> <C>
Statutory surplus........................................... $ 915.5 $ 886.3
Adjustments to GAAP for life insurance companies:
Valuation of investments.................................. 3.2 3.7
Deferred policy acquisition costs......................... 728.1 686.3
Future policy benefits and Contractholder deposit funds... (386.4) (350.2)
Deferred income taxes..................................... (89.4) (86.1)
Statutory interest maintenance reserve.................... 41.3 42.3
Statutory asset valuation reserve......................... 42.4 45.3
Surplus notes............................................. (565.0) (565.0)
Other, net................................................ 9.8 8.6
------- -------
GAAP equity................................................. $ 699.5 $ 671.2
======= =======
</TABLE>
The NAIC 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.
102
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
------------------------
103
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Calculation of Performance Data
Advertising and Sales Literature
Calculations
Example of Variable Accumulation Unit Value Calculation
Example of Variable Annuity Unit Calculation
Example of Variable Annuity Payment Calculation
Distribution of the Contracts
Designation and Change of Beneficiary
Custodian
Financial Statements
</TABLE>
104
<PAGE>
This Prospectus sets forth information about the Contract and the Variable
Account that a prospective purchaser should know before investing. Additional
information about the Contract and the Variable Account has been filed with the
Securities and Exchange Commission in a Statement of Additional Information
dated June 26, 2000 which is incorporated herein by reference. The Statement of
Additional Information is available upon request and without charge from Sun
Life Assurance Company of Canada (U.S.). To receive a copy, return this request
form to the address shown below or telephone (888) 786-2435.
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
To: Sun Life Assurance Company of Canada (U.S.)
c/o Retirement Products and Services
P.O. Box 9133
Boston, Massachusetts 02117
Please send me a Statement of Additional Information for
Futurity Focus II Variable and Fixed Annuity
Sun Life of Canada (U.S.) Variable Account F.
</TABLE>
<TABLE>
<S> <C>
Name ------------------------------------------------------------
Address ------------------------------------------------------------
------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
City -------------------------------- State -------------- Zip -------
</TABLE>
<TABLE>
<S> <C>
Telephone ------------------------------------------------------------
</TABLE>
105
<PAGE>
APPENDIX A
GLOSSARY
The following terms as used in this Prospectus have the indicated
meanings:
ACCOUNT or PARTICIPANT ACCOUNT: An account established for each
Participant to which Net Purchase Payments are credited.
ACCOUNT VALUE: The Variable Accumulation Value, if any, plus the Fixed
Accumulation Value, if any, of your Account for any Valuation Period.
ACCOUNT YEAR and ACCOUNT ANNIVERSARY: Your first Account Year is the
period 365 days from the date on which we issued your Contract. Your Account
Anniversary is the last day of an Account Year. Each Account Year after the
first is the 365-day period that begins on your Account Anniversary. For
example, if the Contract Date is on March 12, the first Account Year is
determined from the Contract Date and ends on March 12 of the following year.
Your Account Anniversary is March 12 and all Account Years after the first are
measured from March 12. (If the Anniversary Date falls on a non-Business Day,
the previous Business Day will be used.)
ACCUMULATION PHASE: The period before the Annuity Commencement Date and
during the lifetime of the Annuitant during which you make Purchase Payments
under the Contract. This is called the "Accumulation Period" in the Contract.
*ANNUITANT: The person or persons to whom the first annuity payment is
made. If the Annuitant dies prior to the Annuity Commencement Date, the
Co-Annuitant will become the sole Annuitant. If the Co-Annuitant dies or if no
Co-Annuitant is named, the Participant becomes the Annuitant upon the
Annuitant's death prior to the Annuity Commencement Date. If you have not named
a sole Annuitant on the 30th day before the Annuity Commencement Date and both
the Annuitant and Co-Annuitant are living, the Co-Annuitant will be the sole
Annuitant/Payee during the Income Phase.
ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment
under each Contract is to be made.
ANNUITY OPTION: The method you choose for receiving annuity payments.
ANNUITY UNIT: A unit of measure used in the calculation of the amount of
the second and each subsequent Variable Annuity payment from the Variable
Account.
APPLICATION: The document signed by you or other evidence acceptable to us
that serves as your application for participation under a Group Contract or
purchase of an Individual Contract.
*BENEFICIARY: Prior to the Annuity Commencement Date, the person or entity
having the right to receive the death benefit and, for Non-Qualified Contracts,
who, in the event of the Participant's death, is the "designated beneficiary"
for purposes of Section 72(s) of the Internal Revenue Code. After the Annuity
Commencement Date, the person or entity having the right to receive any payments
due under the Annuity Option elected, if applicable, upon the death of the
Payee.
BUSINESS DAY: Any day the New York Stock Exchange is open for trading.
Also, any day on which we make a determination of the value of a Variable
Accumulation Unit.
CERTIFICATE: The document for each Participant which evidences the
coverage of the Participant under a Group Contract.
COMPANY: Sun Life Assurance Company of Canada (U.S.).
CONTRACT: Any Individual Contract, Group Contract, or Certificate issued
under a Group Contract.
CONTRACT DATE: The date on which we issue your Contract. This is called
the "Date of Coverage" in the Contract.
* You specify these items on the Application, and may change them, as we
describe in this Prospectus.
106
<PAGE>
COVERED PERSON: The person(s) identified as such in the Contract whose
death will trigger the death benefit provisions of the Contract and whose
medically necessary stay in a hospital or nursing facility may allow the
Participant to be eligible for a waiver of the withdrawal charge. Unless
otherwise noted, the the Participant/Owner is the Covered Person.
DEATH BENEFIT DATE: If you have elected a death benefit payment option
before the Annuitant's death that remains in effect, the date on which we
receive Due Proof of Death. If your Beneficiary elects the death benefit payment
option, the later of (a) the date on which we receive the Beneficiary's election
and (b) the date on which we receive Due Proof of Death. If we do not receive
the Beneficiary's election within 60 days after we receive Due Proof of Death,
the Death Benefit Date will be the last day of the 60 day period and we will pay
the death benefit in one lump sum.
DUE PROOF OF DEATH: An original certified copy of an official death
certificate, an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death, or any other proof satisfactory to the
Company.
FIXED ACCOUNT: The general account of the Company, consisting of all
assets of the Company other than those allocated to a separate account of the
Company.
FIXED ACCOUNT VALUE: The value of that portion of your Account allocated
to the Fixed Account.
FIXED ANNUITY: An annuity with payments which do not vary as to dollar
amount.
FUND: A registered management investment company, or series thereof, in
which assets of a Sub-Account may be invested.
GROUP CONTRACT: A Contract issued by the Company on a group basis.
GUARANTEE AMOUNT: Each separate allocation of Account Value to a
particular Guarantee Period (including interest earned thereon).
GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is
credited.
GUARANTEED INTEREST RATE: The rate of interest we credit on a compound
annual basis during any Guarantee Period.
INCOME PHASE: The period on and after the Annuity Commencement Date and
during the lifetime of the Annuitant during which we make annuity payments under
the Contract.
INDIVIDUAL CONTRACT: A Contract issued by the Company on an individual
basis.
NET INVESTMENT FACTOR: An index applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater or less than or equal to one.
NET PURCHASE PAYMENT (NET PAYMENTS): The portion of a Purchase Payment
which remains after the deduction of any applicable premium tax or similar tax.
This is also the term used to describe the total contribution made to the
Contract minus the total withdrawals.
NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement
plan that does not receive favorable federal income tax treatment under
Sections 401, 403, 408, or 408A of the Internal Revenue Code. The Participant's
interest in the Contract must be owned by a natural person or agent for a
natural person for the Contract to receive income tax treatment as an annuity.
*OWNER: The person, persons or entity entitled to the ownership rights
stated in a Group Contract and in whose name or names the Group Contract is
issued. The Owner may designate a trustee or custodian of a retirement plan
which meets the requirements of Section 401, Section 408(c), Section 408(k),
Section 408(p) or Section 408A of the Internal Revenue Code to serve as legal
owner of assets of a retirement plan, but the term "Owner," as used herein,
shall refer to the organization entering into the Group Contract.
* You specify these items on the Application, and may change them, as we
describe in this Prospectus.
107
<PAGE>
*PARTICIPANT: In the case of an Individual Contract, the owner of the
Contract. In the case of a Group Contract, the person named in the Contract who
is entitled to exercise all rights and privileges of ownership under the
Contract, except as reserved by the Owner. If there are 2 Participants, the
death benefit is paid upon the death of either Participant.
PAYEE: A recipient of payments under a Contract. The term includes an
Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Participant, or on the Annuity Commencement Date.
PURCHASE PAYMENT (PAYMENT): An amount paid to the Company as consideration
for the benefits provided by a Contract.
QUALIFIED CONTRACT: A Contract used in connection with a retirement plan
which may receive favorable federal income tax treatment under Sections 401,
403, 408 or 408A of the Internal Revenue Code of 1986, as amended.
RENEWAL DATE: The last day of a Guarantee Period.
SUB-ACCOUNT: That portion of the Variable Account which invests in shares
of a specific Fund or series of a Fund.
VALUATION PERIOD: The period of time from one determination of Variable
Accumulation Unit or Annuity Unit values to the next subsequent determination of
these values. Value determinations are made as of the close of the New York
Stock Exchange on each day that the Exchange is open for trading.
VARIABLE ACCOUNT: Variable Account F of the Company, which is a separate
account of the Company consisting of assets set aside by the Company, the
investment performance of which is kept separate from that of the general assets
of the Company.
VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of
Variable Account Value.
VARIABLE ACCOUNT VALUE: The value of that portion of your Account
allocated to the Variable Account.
VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount
in relation to the investment performance of the Variable Account.
108
<PAGE>
APPENDIX B
MARKET VALUE ADJUSTMENT
FIXED ACCOUNT -- EXAMPLES OF THE MARKET VALUE ADJUSTMENT ("MVA")
The MVA Factor is:
<TABLE>
<C><C> <S><C> <C>
TO THE POWER OF N/12
1 + I
( -------- ) -1
1 + J + b
</TABLE>
These examples assume the following:
(1) The Guarantee Amount was allocated to a 5-year Guarantee Period with
a Guaranteed Interest Rate of 6% or .06.
(2) The date of surrender is 2 years from the Expiration Date (N = 24).
(3) The value of the Guarantee Amount on the date of surrender is
$11,910.16.
(4) The interest earned in the current Account Year is $674.16.
(5) No transfers or partial withdrawals affecting this Guarantee Amount
have been made.
(6) Withdrawal charges, if any, are calculated in the same manner as
shown in the examples in Part 1.
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender, the current rate (J) is 8% or .08
and the b factor is zero.
<TABLE>
<C> <C> <S><C> <C><C> <C>
TO THE POWER OF N/12
1 + I
The MVA factor = ( -------- ) -1
1 + J + b
</TABLE>
<TABLE>
<C> <C> <S><C> <C><C> <C>
TO THE POWER OF 24/12
1 + .06
= ( ------ ) -1
1 + .08
= (.981)2 -1
= .963 -1
= - .037
</TABLE>
The value of the Guarantee Amount less interest credited to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA:
($11,910.16 - $674.16) X (-.037) = -$415.73
-$415.73 represents the MVA that will be deducted from the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $674.16) X (-.037) = -$49.06. -$49.06 represents the MVA
that will be deducted from the partial withdrawal amount before the deduction of
any withdrawal charge.
109
<PAGE>
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of surrender, the current rate (J) is 5% or .05
and the b factor is zero.
<TABLE>
<C> <C> <S><C> <C><C> <C>
TO THE POWER OF N/12
1 + I
The MVA factor = ( -------- ) -1
1 + J + b
</TABLE>
<TABLE>
<C> <C> <S><C> <C><C> <C>
TO THE POWER OF 24/12
1 + .06
= ( ------ ) -1
1 + .05
= (1.010)2 -1
= 1.019 -1
= - .019
</TABLE>
The value of the Guarantee Amount less interested credit to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA:
($11,910.16 - $674.16) X .019 = $213.48
$213.48 represents the MVA that would be added to the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $674.16) X .019 = $25.19.
$25.19 represents the MVA that would be added to the value of the partial
withdrawal amount before the deduction of any withdrawal charge.
110
<PAGE>
APPENDIX C
CALCULATION OF BASIC DEATH BENEFIT
EXAMPLE 1:
Assume a Purchase Payment of $60,000.00 is made on the Contract Date and
an additional Purchase Payment of $40,000.00 is made one year later. Assume that
all of the money is invested in the Sub-Accounts, that no Withdrawals are made
and that the Account Value on the Death Benefit Date is $80,000.00. The
calculation of the Death Benefit to be paid is as follows:
<TABLE>
<S> <C> <C> <C>
The Basic Death Benefit is the greatest of:
Account Value = $ 80,000.00
Cash Surrender Value = $ 74,400.00
Purchase Payments = $100,000.00
The Basic Death Benefit would therefore be: $100,000.00
</TABLE>
EXAMPLE 2:
Assume a Purchase Payment of $60,000.00 is made on the Contract Date and
an additional Purchase Payment of $40,000.00 is made one year later. Assume that
all of the money is invested in the Sub-Accounts and that the Account Value is
$80,000.00 just prior to a $20,000.00 withdrawal. The Account Value on the Death
Benefit Date is $60,000.00.
<TABLE>
<S> <C> <C> <C>
The Basic Death Benefit is the greatest of:
Account Value = $ 60,000.00
Cash Surrender Value = $ 55,200.00
Adjusted Purchase Payments* = $ 75,000.00
The Basic Death Benefit would therefore be: $ 75,000.00
*Adjusted Purchase Payments can be calculated as follows:
Payments X (Account Value after withdrawal DIVIDED BY Account Value before
withdrawal)
$100,000.00 X ($60,000.00 DIVIDED BY $80,000.00)
</TABLE>
111
<PAGE>
APPENDIX D
CALCULATION OF EARNINGS ENHANCEMENT OPTIONAL DEATH BENEFIT
EXAMPLE 1:
Assume a Purchase Payment of $60,000.00 is made on the Contract Date and
an additional Purchase Payment of $40,000.00 is made one year later. Assume that
all of the money is invested into the Sub-Accounts, no withdrawals are made and
the Account Value on the Death Benefit Date is $150,000.00. In addition, this
Contract was issued prior to the Participant's 70th birthday. The calculation of
the Basic Death Benefit to be paid is as follows:
<TABLE>
<S> <C> <C> <C>
The Basic Death Benefit is the greatest of:
Account Value = $150,000.00
Cash Surrender Value = $ 72,800.00
Adjusted Purchase Payments = $100,000.00
The Basic Death Benefit would therefore = $150,000.00
The benefit under the optional death benefit rider
can be calculated as follows:
The lesser of:
Adjusted Purchase Payments = $100,000.00
Account Value -- adjusted Purchase Payments = $ 50,000.00
Amount to use to determine rider benefit = $ 50,000.00
The amount to be paid on the rider benefit = $ 50,000.00 X 40% = $20,000.00
</TABLE>
The total Death Benefit would be the amount paid on the Basic Death
Benefit plus the amount paid on the Earnings Enhancement Optional Death Benefit
Rider: $150,000.00 + $20,000.00 = $170,000.00
EXAMPLE 2:
Assume a Purchase Payment of $60,000.00 is made on the Contract Date and
an additional Purchase Payment of $40,000.00 is made one year later. Assume that
all of the money is invested in the Sub-Accounts and that the Account Value is
$150,000.00 just prior to a $20,000.00 withdrawal. The Account Value on the
Death Benefit Date is $130,000.00.
<TABLE>
<S> <C> <C> <C>
The Basic Death Benefit is the greatest of:
Account Value = $130,000.00
Cash Surrender Value = $123,600.00
Adjusted Purchase Payments* = $ 86,666.67
The Basic Death Benefit would therefore = $130,000.00
*Adjusted Purchase Payments can be calculated as follows:
Payments X (Account Value after withdrawal DIVIDED BY Account Value before withdrawal)
$100,000.00 X ($130,000.00 DIVIDED BY $150,000.00)
The benefit under the optional death benefit rider
can be calculated as follows:
The lesser of:
Adjusted Purchase Payments = $ 86,666.67
Account Value -- adjusted Purchase Payments = $ 43,333.33
Amount to use to determine rider benefit: = $ 43,333.33
The amount to be paid on the rider benefit = $ 43,333.33 X 40% = $17,333.33
</TABLE>
The total Death Benefit would be the amount paid on the Basic Death
Benefit plus the amount paid on the Earnings Enhancement Optional Death Benefit
Rider: $130,000.00 + $17,333.33 = $147,333.33.
112
<PAGE>
APPENDIX E
CALCULATION OF DEATH BENEFIT WHEN ALL THREE OPTIONAL DEATH BENEFITS RIDERS ARE
SELECTED
Assume a Purchase Payment of $100,000.00 is made on the Contract Date, no
additional Purchase Payments or withdrawals are made and all of the money is
invested in the Sub-Accounts. In addition, on the Death Benefit Date the Account
Value is $150,000.00, the value of the Purchase Payment accumulated at 5% until
the Death Benefit Date is $160,000.00, and the Maximum Account Anniversary Value
is $170,000.00. The calculation of the death benefit to be paid is as follows:
<TABLE>
<S> <C> <C> <C>
The Death Benefit Amount will be the greatest
of:
Account Value = $150,000.00
Cash Surrender Value = $142,800.00
Total of adjusted Purchase Payments = $100,000.00
5% Premium Roll-Up Rider = $160,000.00
Maximum Account Anniversary Value Rider = $170,000.00
The Death Benefit Amount would therefore = $170,000.00
~ PLUS ~
The Earnings Enhancement Rider benefit is calculated as
follows:
The lesser of:
Adjusted Purchase Payments = $100,000.00
Account Value -- adjusted Purchase
Payments = $ 50,000.00
Amount to use to determine this rider
benefit: = $ 50,000.00
The amount to be paid on the rider benefit = $ 50,000.00 X 40% = $20,000.00
</TABLE>
The total Death Benefit would be the amount paid on the Maximum Account
Anniversary Rider plus the amount paid on the Earnings Enhancement Rider:
$170,000.00 + $20,000.00 = $190,000.00
113
<PAGE>
<TABLE>
<S> <C>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 9133
BOSTON, MASSACHUSETTS 02117
TELEPHONE:
Toll Free (888) 786-2435
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
AUDITORS
Deloitte & Touche LLP
200 Berkeley Street
Boston, Massachusetts 02116
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS.
Item 14. Other Expenses of Issuance and Distribution
The expenses incurred by the registrant in connection with the issuance
and distribution of the securities registered hereby, other than underwriting
discounts and commissions, are as follows*:
<TABLE>
<S> <C>
SEC Registration Fee.................. $ 27,800
Printing and Engraving................ 75,000
Accounting Fees and Expenses.......... 10,000
Legal Fees and Expenses............... 25,000
--------
$137,800
</TABLE>
----------------
*Except for the SEC Registration Fee, all expenses are estimates
Item 15. Indemnification of Directors and Officers
Article 8 of the By-Laws of Sun Life Assurance Company of Canada (U.S.),
as amended, provides for indemnification of directors and officers as follows:
"Section 8.01 (a). Every person who is or was a director, officer or
employee of this corporation or of any other corporation which he served at
the request of this corporation and in which this corporation owns or owned
shares of capital stock or of which it is or was a creditor shall have a
right to be indemnified by this corporation against all liability and
reasonable expenses incurred by him in connection with or resulting from any
claim, action, suit or proceeding in which he may become involved as a party
or otherwise by reason of his being or having been a director, officer or
employee of this corporation or such other corporation, provided (1) said
claim, action, suit or proceeding shall be prosecuted to a final
determination and he shall be vindicated on the merits, or (2) in the absence
of such a final determination vindicating him on the merits, the board of
directors shall determine that he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; said determination to
be made by the board of directors acting through a quorum of disinterested
directors, or in its absence on the opinion of counsel.
(b) For purposes of the preceding subsection: (1) "liability and
reasonable expenses" shall include but not be limited to reasonable counsel
fees and disbursements, amounts of any judgment, fine or penalty, and
reasonable amounts paid in settlement; (2) "claim, action, suit or
proceeding" shall include every such claim, action, suit or proceeding,
whether civil or criminal, derivative or otherwise, administrative, judicial
or legislative, any appeal relating thereto, and shall include any reasonable
apprehension or threat of such a claim, action, suit or proceeding; (3) a
settlement, plea of nolo contendere, consent judgment, adverse civil
judgment, or conviction shall not of itself create a presumption that the
conduct of the person seeking indemnification did not meet the standard of
conduct set forth in subsection (a)(2) hereof.
II-1
<PAGE>
(c) Notwithstanding the foregoing, the following limitations shall
apply with respect to any action by or in the right of the Corporation: (1)
no indemnification shall be made in respect of any claim, issue or matter as
to which the person seeking indemnification shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
corporation unless and only to the extent that the Court of Chancery of the
State of Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper; and (2) indemnification shall
extend only to reasonable expenses, including reasonable counsel's fees and
disbursements.
(d) The right of indemnification shall extend to any person otherwise
entitled to it under this by-law whether or not that person continues to be a
director, officer or employee of this corporation or such other corporation
at the time such liability or expense shall be incurred. The right of
indemnification shall extend to the legal representative and heirs of any
person otherwise entitled to indemnification. If a person meets the
requirements of this by-law with respect to some matters in a claim, action,
suit or proceeding, but not with respect to others, he shall be entitled to
indemnification as the former. Advances against liability and expenses may
be made by the corporation on terms fixed by the board of directors subject
to an obligation to repay if indemnification proves unwarranted.
(e) This by-law shall not exclude any other rights of indemnification or
other rights to which any director, officer or employee may be entitled to by
contract, vote of the stockholders or as a matter of law. If any clause,
provision or application of this section shall be determined to be invalid,
the other clauses, provisions or applications of this section shall not be
affected but shall remain in full force and effect. The provisions of this
by-law shall be applicable to claims, actions, suits or proceedings made or
commenced after the adoption hereof, whether arising from acts or omissions
to act occurring before or after the adoption hereof.
(f) Nothing contained in this by-law shall be construed to protect any
director or officer of the corporation against any liability to the
corporation or its security holders to which he would otherwise be subject by
reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office."
II-2
<PAGE>
Item 16. Exhibits
Exhibits:
Exhibit
Number Description
1 Form of Underwriting Agreement (Incorporated herein by reference
from Pre-Effective Amendment No. 1 to the Registration Statement
on Form N-4, File No. 333-37907, filed on January 16, 1998)
4(a) Form of Flexible Payment Combination Fixed/Variable Group Annuity
Contract (Incorporated herein by reference from Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-4, File
No. 333-31248, filed on June 14, 2000)
4(b) Form of Certificate to be used in connection with Contract filed as
Exhibit 4(a) (Incorporated herein by reference from Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-4, File
No. 333-31248, filed on June 14, 2000)
4(c) Form of Flexible Payment Combination Fixed/Variable Individual
Annuity Contract (Incorporated herein by reference from
Pre-Effective Amendment No. 1 to the Registration Statement on
Form N-4, File No. 333-31248, filed on June 14, 2000)
5 Opinion re Legality*
(10)(a) Form of Participation Agreement by and between The Alger
American Fund, the Depositor, and Fred Alger and Company,
Incorporated (Incorporated by reference to Post-Effective
Amendment No. 13 to the Registration Statement on Form N-4, File
No. 33-41628, filed April 23, 1999)
(b)(i) Form of Participation Agreement dated February 17, 1998 by
and between Goldman Sachs Variable, Insurance Trust, Goldman
Sachs & Co. and the Depositor (Incorporated by reference to
Post-Effective Amendment No. 13 to the Registration
Statement on Form N-4, File No. 33-41628, filed April 23, 1999)
(ii) Form of Amendment No. 1 dated December 14, 1998 to
Participation Agreement filed as Exhibit 8(b)(i)
(Incorporated by reference to Post-Effective Amendment No.
13 to the Registration Statement on Form N-4, File No. 33-41628,
filed April 23, 1999)
(iii) Form of Amendment No. 2 dated as of March 15, 1999 to
Participation Agreement filed as Exhibit 8(b)(i)
(Incorporated by reference to Post-Effective Amendment No.
13 to the Registration Statement on Form N-4, File No. 33-41628,
filed April 23, 1999)
(c) Form of Fund Participation Agreement between Depositor and
J.P. Morgan Services Trust II (Incorporated by reference to
Post-Effective Amendment No. 13 to the Registration
Statement on Form N-4, File No. 33-41628, filed April 23, 1999)
(d) Form of Participation Agreement dated February 17, 1998 by
and among MFS/Sun Life Services Trust, the Depositor and
Massachusetts Financial Services Company (Incorporated by
reference to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-4, File No. 33-41628, filed
April 23, 1999)
(e) Form of Participation Agreement dated February 17, 1998 by
and among OCC Accumulation Trust, the Depositor and OCC
Distributors (Incorporated by reference to Post-Effective
Amendment No. 13 to the Registration Statement on Form N-4, File
No. 33-41628, filed April 23, 1999)
(f) Form of Participation Agreement dated February, 1998 by and
among the Depositor, Warburg Pincus Trust, Warburg Pincus
Asset Management, Inc. and Counsellors Securities, Inc
(Incorporated by reference to Post-Effective Amendment No. 13
to the Registration Statement on Form N-4, File No. 33-41628,
filed April 23, 1999)
23 Independent Auditors' Consent*
24(a) Powers of Attorney (Incorporated by reference to the Registration
Statement on Form S-6, File No. 333-94359, filed on January 10,
2000)
(b) Power of Attorney of David D. Horn (Incorporated by reference to
Post-Effective Amendment No. 1 to the Registration Statement on
Form N-4, File No. 333-82957, filed on February 3, 2000)
(c) Power of Attorney of Richard B. Bailey (Incorporated by
reference to Post-Effective Amendment No. 6 to the Registration
Statement on Form N-4, File No. 333-05227, filed on April 5, 2000)
(d) Power of Attorney of William W. Stinson (Incorporated by reference
to Post-Effective Amendment No. 23 to Form N-4, File No. 2-78738,
filed on April 20, 2000)
* Filed herewith
II-3
<PAGE>
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(1)(i) and a(1)(ii) do
not apply if the registration statement is on Form S-3 or Form S-8,
and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in
the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, Sun Life Assurance Company of Canada (U.S.), certifies that it
has reasonable grounds to believe that it meets all of the requirements for
filing on Form S-2 and has duly caused this Registration Statement on Form
S-2 to be signed on its behalf by the undersigned, thereunto duly authorized,
in the Town of Wellesley Hills, Commonwealth of Massachusetts, on the 14th
day of June, 2000.
Sun Life Assurance Company of
Canada (U.S.)
(Registrant)
By: /s/ JAMES A. MCNULTY, III
-----------------------------
James A. McNulty, III
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ JAMES A. MCNULTY, III President and Director June 14, 2000
--------------------------- (Principal Executive Officer)
James A. McNulty, III
/s/ DAVEY S. SCOON Vice President, Finance and
--------------------------- Treasurer (Principal Financial
Davey S. Scoon & Accounting Officer) June 14, 2000
* /s/ DONALD A. STEWART Chairman and Director June 14, 2000
---------------------------
Donald A. Stewart
* /s/ C. JAMES PRIEUR Vice Chairman and Director June 14, 2000
---------------------------
C. James Prieur
** /s/ RICHARD B. BAILEY Director June 14, 2000
---------------------------
Richard B. Bailey
--------------------
* By Edward M. Shea pursuant to Power of Attorney filed as an Exhibit to the
Registration Statement on Form S-6, File No. 333-94359, filed on
January 10, 2000.
** By Edward M. Shea pursuant to Power of Attorney filed as Exhibit 15(c) to
the Post-Effective Amendment No. 6 to the Registration Statement on Form N-4,
File No. 333-05227, filed on April 5, 2000.
II-5
<PAGE>
SIGNATURE TITLE DATE
* /s/ GREGORY W. GEE
------------------------------- Director June 14, 2000
Gregory W. Gee
*** /s/ DAVID D. HORN
-------------------------------- Director June 14, 2000
David D. Horn
* /s/ ANGUS A. MacNAUGHTON Director June 14, 2000
---------------------------------
Angus A. MacNaughton
* /s/ S. CAESAR RABOY Director June 14, 2000
--------------------------------
S. Caesar Raboy
**** /s/ WILLIAM W. STINSON Director June 14, 2000
--------------------------------
William W. Stinson
-----------------------
* By Edward M. Shea pursuant to Power of Attorney filed as an Exhibit to
the Registration Statement on Form S-6, File No. 333-94359, filed on
January 10, 2000.
*** By Edward M. Shea pursuant to Power of Attorney filed as an Exhibit to
Post-Effective Amendment No. 1 to the Registration Statement on Form N-4,
File No. 333-82957, filed on February 3, 2000.
**** By Edward M. Shea pursuant to Power of Attorney filed as an Exhibit to
Post-Effective Amendment No. 23 to the Registration Statement on Form N-4,
File No. 2-78738, filed on April 20, 2000.
II-6
<PAGE>
EXHIBIT INDEX
Exhibit
Number
5 Opinion re Legality
23 Independent Auditors' Consent
II-7
