<PAGE>
As filed with the Securities and Exchange Commission on April 10, 2000
Registration No. 333-62837
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM S-2
AMENDMENT NO. 3 TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Sun Life Assurance Company of Canada (U.S.)
(Exact Name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
38-1082080
------------
(I.R.S. Employer 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)
Copies to:
<TABLE>
<S> <C>
Edward M. Shea, Assistant Vice President and Senior Counsel Joan Boros, Esquire
Sun Life Assurance Company of Canada (U.S.) Jorden Burt Boros Cicchetti
Retirement Products and Services Berenson & Johnson LLP
One Copley Place 1025 Thomas Jefferson Street, N.W.
Boston, Massachusetts, 02116 Suite 400E
(781) 237-6030 Washington, DC 20007
(202) 965-8100
</TABLE>
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. / /
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
Attached hereto and made a part hereof is the Prospectus dated May 1, 2000.
<PAGE>
PROSPECTUS
MAY 1, 2000
FUTURITY FIXED ANNUITY
This Prospectus describes the Futurity Fixed Annuity, a single payment
deferred annuity contract ("Contract" or "Contracts"). The Contract is designed
for use in connection with retirement and deferred compensation plans, some of
which may qualify as retirement programs under Sections 401, 403, 408 or 408A of
the Internal Revenue Code of 1986, as amended (the "Code"). The Contract
provides for the accumulation of values on a fixed basis, and for annuity
payments which do not vary as to dollar amount and which will begin on a future
date you select.
The Contracts are offered by Sun Life Assurance Company of Canada (U.S.)
(the "Company;" also "we," "us," "our"). Our Principal Executive Offices are
located at One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481,
telephone (781) 237-6030. You may write to us at the following address (which we
sometimes refer to as our "Annuity Mailing Address"): Sun Life Assurance Company
of Canada (U.S.), Retirement Products and Services, P.O. Box 9133, Boston,
Massachusetts 02117, telephone (888) 388-8748. We are an indirect wholly-owned
subsidiary of Sun Life Assurance Company of Canada, one of the largest life
insurance companies in Canada.
The Company issues Contracts on either an individual or a group basis,
depending on the state or jurisdiction where the Contract is issued. A Contract
issued to an individual ("Individual Contract") is evidenced by an Individual
Contract. Participation in a Contract issued to a group ("Group Contract") is
evidenced by a certificate ("Certificate") which describes the Participant's
interest under the Group Contract. Unless otherwise expressly indicated,
references in this Prospectus to "Contracts" include Individual Contracts, Group
Contracts and Certificates issued under Group Contracts, and references to
"Participants" include Individual Contract Owners and individuals participating
under Group Contracts ("Participants;" also "you," "your").
The minimum Purchase Payment for a Contract is $10,000, unless the Company
waives this requirement. If you desire to make a Purchase Payment in excess of
$1,000,000, you must obtain our prior approval.
An Accumulation Account is established for each Participant in order to
determine benefits under the Contract. You may allocate your Net Purchase
Payment to only one of the available Guarantee Periods. The Guarantee Periods
have durations of one to ten years, although not all may be available. Your
Purchase Payment, together with any interest credited, is held in the Fixed
Account, which is part of our general account (See "The Fixed Account,"
page 10).
Values under a Contract accumulate on a fixed basis. Your Accumulation
Account is credited at an interest rate ("Guaranteed Interest Rate") for the
duration of the Guarantee Period you choose, subject to any applicable
withdrawal charge or Market Value Adjustment. The Minimum Average Interest Rate
for any Guarantee Period will be at least three percent (3%) per year,
compounded annually. We may not change a Guaranteed Interest Rate during the
Guarantee Period. However, Guaranteed Interest Rates for subsequent Guarantee
Periods cannot be predicted and will be determined at our sole discretion
(subject to the Minimum Average Interest Rate guarantee).
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 CONTRACTS ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE
PRINCIPAL AMOUNT INVESTED. FOR A MORE DETAILED DESCRIPTION OF THE RISKS
ASSOCIATED WITH PURCHASING A CONTRACT, PLEASE REFER TO PAGES 11 THROUGH 13 OF
THIS PROSPECTUS.
1
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS CONTAINS INFORMATION ABOUT THE CONTRACTS THAT A PROSPECTIVE
PURCHASER SHOULD KNOW BEFORE INVESTING. YOU SHOULD RETAIN THIS PROSPECTUS FOR
FUTURE REFERENCE.
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
We will not assess a sales charge against your Purchase Payment or a
withdrawal charge upon annuitization (except for period certain annuities of
less than ten years) or if you make a transfer. Except as discussed below, you
may withdraw a portion (as specified in your Contract) of your Accumulation
Account in each Account Year without being subject to a withdrawal charge, and
you may withdraw your Purchase Payment without charge after the Company has held
it for seven years (although your withdrawal may be subject to a Market Value
Adjustment). In addition, we will not assess a withdrawal charge on amounts
withdrawn on or after the later of (a) the end of the Initial Guarantee Period
or (b) the end of the third Account Year. However, if you otherwise withdraw any
part of your Accumulation Account, we may deduct a withdrawal charge, which
ranges from 7% to 0%. In no event will the withdrawal charges assessed against
your Accumulation Account exceed 7% of your Accumulation Account Value (See
"Withdrawal Charges," page 14).
Generally, any cash withdrawal (other than a withdrawal upon annuitization
or as the result of a transfer) is subject to a Market Value Adjustment. The
Market Value Adjustment will reflect the relationship between the current rate
(which is the Guaranteed Interest Rate currently declared by the Company for
Guarantee Periods equal to the balance of the Contract's Guarantee Period) and
the Guaranteed Interest Rate applicable to the Contract. Generally, if the
Guaranteed Interest Rate is lower than our currently declared rate, the
application of the Market Value Adjustment results in a lower payment upon
withdrawal. Similarly, except as described below under the section titled "Cash
Withdrawals, Withdrawal Charges and Market Value Adjustment--Market Value
Adjustment," if the Guaranteed Interest Rate is higher than the currently
declared rate, the application of the Market Value Adjustment results in a
higher payment upon withdrawal. The Market Value Adjustment also does not apply
to a withdrawal effective within 30 days prior to the Expiration Date of the
applicable Guarantee Period or the withdrawal of the free withdrawal amount (See
"Market Value Adjustment," page 16).
The Contracts provide that the Company may modify the withdrawal charges,
transfer charges, the tables used to determine the amount of the first monthly
fixed annuity payments and the formula used to calculate the Market Value
Adjustment. However, the modification will apply only to Accumulation Accounts
established after the effective date of such modification (See "Modification,"
page 22).
We reserve the right to defer the payment of any withdrawals for not more
than six months from the date we receive a written withdrawal request.
Contracts sold in certain states are subject to a deduction for premium
taxes. These premium taxes are deducted from the Accumulation Account (See
"Premium Taxes," page 23).
Subject to certain conditions, and during the Accumulation Period, you may
transfer the entire Accumulation Account Value to another Guarantee Period
available under the Contracts. No partial transfers are permitted. Currently
there is no charge for transfers. However, transfers are subject to the Market
Value Adjustment unless the transfer is effective within 30 days prior to an
Expiration Date and other restrictions may apply (See "Transfer Privilege;
Telephone Transfers," page 13).
2
<PAGE>
If the Participant dies prior to the Annuity Commencement Date, we will
pay a death benefit to the Beneficiary. If the Annuitant dies on or after the
Annuity Commencement Date, no death benefit is payable, except as may be
provided under the Annuity Option elected (See "Death Benefit," page 17).
Annuity Payments begin on the Annuity Commencement Date. You select the
Annuity Commencement Date, frequency of payments and the Annuity Option (See
"Annuity Provisions," page 19).
We periodically furnish Owners and Participants with certain reports and
statements (See "Periodic Statements," page 22). Such reports, other than
prospectuses, do not include the Company's financial statements.
If you are not satisfied with your Contract, you may return it to us at
our Annuity Mailing Address within ten days after you receive the Contract. When
we receive your Contract, it will be canceled and the Accumulation Account Value
on the date on which the Contract was received by us will be refunded to you.
However, if applicable state or federal law so requires, we will refund the full
amount of any Purchase Payment received by us, the "free look" period may be
greater than ten days and alternative methods of returning the Contract may be
acceptable.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended, (the "1934 Act") and, in accordance therewith,
files reports and other information with the Securities and Exchange Commission
(the "SEC"). Such reports and other information can be inspected and copied at
the SEC's public reference facilities at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. and at the SEC's Regional Offices located at 75 Park Place, New
York, New York and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois. Copies of such materials also can be obtained,
for a fee, from the SEC's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The SEC maintains a Website that contains the text of
reports, proxy and information statements and other information as filed
electronically by the Company with the Commission; these filings are found at
the following address: http://www.sec.gov.
The Company has filed a registration statement and related exhibits
(collectively, the "Registration Statement") with respect to the Contracts with
the Commission under the Securities Act of 1933. This Prospectus has been filed
as a part of the Registration Statement and does not contain all of the
information set forth in the Registration Statement. Reference is hereby made to
the Registration Statement for further information relating to the Company and
the Contracts. The Registration Statement may be inspected and copied, and
copies can be obtained for a fee as described above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Annual Report on Form 10-K for the year ended December 31, 1999, which
the Company has filed with the Commission under the 1934 Act, is incorporated by
reference in this Prospectus.
Any statement contained in a document incorporated by reference in this
Prospectus shall be deemed modified or superseded by this Prospectus to the
extent that a statement contained in a later-filed document or in this
Prospectus shall modify or supersede such statement. Any statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will furnish you, without charge, upon your written or oral
request, copies of the reports referred to above which have been incorporated by
reference in this Prospectus. Any documents so provided will not include the
exhibits to such reports, unless the exhibits are specifically incorporated by
reference in this Prospectus. Requests for such documents 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.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Special Terms 6
This Prospectus is a Catalog of Facts 8
Uses of the Contracts 8
The Company 8
The Fixed Account 9
The Purchase Payment and Contract Values During the
Accumulation Period 10
The Purchase Payment 10
Accumulation Account 10
Guarantee Period 11
Guaranteed Interest Rates 11
Transfer Privilege; Telephone Transfers 12
Waivers; Reduced Charges; Credits; Bonus Guaranteed
Interest Rates 12
Cash Withdrawals, Withdrawal Charges and Market Value
Adjustment 13
Cash Withdrawals 13
Withdrawal Charges 13
Section 403(b) Annuities 15
Market Value Adjustment 15
Death Benefit 16
Death Benefit Provided by the Contract 16
Election and Effective Date of Election 17
Death of Participant 17
Payment of Death Benefit 18
Amount of Death Benefit 18
Annuity Provisions 18
Annuity Commencement Date 18
Election/Change of Annuity Option 19
Annuity Options 19
Determination of Annuity Payments 20
Annuity Payment Rates 20
Other Contract Provisions 20
Designation and Change of Beneficiary 20
Exercise of Contract Rights 21
Change of Ownership 21
Periodic Statements 21
Modification 22
Discontinuance of New Participants 22
Right to Return 22
Premium Taxes 23
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Tax Considerations 23
Tax Treatment of the Company 23
Taxation of Annuities in General 23
Qualified Retirement Plans 25
Pension and Profit-Sharing Plans 25
Tax-Sheltered Annuities 26
Individual Retirement Accounts 26
Roth IRAs 26
Distribution of the Contracts 26
Additional Information About the Company 27
General 27
Selected Financial Data 27
Management's Discussion and Analysis of Financial 28
Sale of Subsidiary 36
Quantitative and Qualitative Disclosure About Market
Risk 35
Other Matters 35
Reinsurance 38
Reserves 38
Investments 38
Competition 39
Employees 39
Properties 39
The Company's Directors and Executive Officers
State Regulation 39
Accountants 40
Registration Statements 40
Financial Statements 40
Appendix--Examples of the Market Value Adjustment 65
</TABLE>
5
<PAGE>
SPECIAL TERMS
The following terms as used in this Prospectus have the indicated
meanings:
ACCOUNT YEARS and ACCOUNT ANNIVERSARIES: The first Account Year is the
period of 12 months plus a part of a month as measured from the Date of Coverage
for each Participant through the last day of the calendar month in which the
Purchase Payment is received. All Account Years and Account Anniversaries
thereafter are 12 month periods based upon the first day of the calendar month
which follows the calendar month of coverage. For example, if the Date of
Coverage is in March, the first Account Year is determined from the Date of
Coverage and ends on March 31 in the following year; all subsequent Account
Years and all Account Anniversaries will be measured from April 1.
ACCUMULATION ACCOUNT: An account established for each Participant to which
the Net Purchase Payment and any interest are credited.
ACCUMULATION ACCOUNT VALUE: The value of the Accumulation Account on any
date.
ACCUMULATION PERIOD: The period before the Annuity Commencement Date and
during the lifetime of the Participant.
*ANNUITANT: The person (or persons) on whose life (or lives) the first
annuity payment is to be made. If the Annuitant dies prior to the Annuity
Commencement Date, the Co-Annuitant, if any, will become the Annuitant. If,
prior to the Annuity Commencement Date, the Co-Annuitant dies or if no
Co-Annuitant is named, the Participant becomes the Annuitant upon the
Annuitant's death.
*ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment
under a Contract is to be made.
*ANNUITY OPTION: The method for making annuity payments.
APPLICATION: The document, if any, signed by each Participant that serves
as his or her application for participation under a Group Contract or for
purchase of an Individual Contract.
*BENEFICIARY: Prior to the Annuity Commencement Date, the person or entity
having the right to receive the death benefit set forth in each Contact 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 Code. After the
Annuity Commencement Date, the Beneficiary is the person or entity having the
right, upon the death of the Payee, to receive any remaining payments due under
the Annuity Option elected.
CERTIFICATE: The document which evidences the coverage of a Participant
under a Group Contract. Unless otherwise expressly indicated, references in this
Prospectus to "Contracts" include Certificates.
CODE: The Internal Revenue Code of 1986, as amended.
DATE OF COVERAGE: The date on which a Participant's Accumulation Account
becomes effective.
DEATH BENEFIT DATE: The date on which the Company receives Due Proof of
Death.
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, and/or any other proof satisfactory to
the Company.
EXPIRATION DATE: The last day of a Guarantee Period.
*FLOATING RATE: The indexed rate published in The Wall Street Journal two
business days prior to the Floating Rate Reset Date. In the event the Floating
Rate is no longer published in The
- ---------
* As specified on the Contract Specifications Page or the Certificate
Specifications Page (as appropriate), unless changed.
6
<PAGE>
Wall Street Journal, the Company will use an actuarially based method of
determining the indexed rate, which method will be determined in a manner the
Company believes is equitable.
FLOATING RATE GUARANTEE PERIOD: A Guarantee Period for which the
Guaranteed Interest Rate changes on each Floating Rate Reset Date.
FLOATING RATE RESET DATE: The first Floating Rate Reset Date shall be the
first business day of the first calendar quarter that begins after a Floating
Rate Guarantee Period is elected. Thereafter, a new Floating Rate Reset Date
will occur on the first business day of each subsequent calendar quarter until
the Expiration Date of the particular Floating Rate Guarantee Period.
FLOATING RATE SPREAD: The amount deducted from the Floating Rate to
determine the Guaranteed Interest Rate in effect initially and on each Floating
Rate Reset Date during a Floating Rate Guarantee Period. The Floating Rate
Spread remains constant throughout a Floating Rate Guarantee Period. However,
the Floating Rate Spread may change for a new Floating Rate Guarantee Period.
GUARANTEE AMOUNT: The amount of the Accumulation Account Value in a
particular Guarantee Period with a particular Expiration Date (including
interest earned thereon).
GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is
credited.
GUARANTEED INTEREST RATE: The rate of interest credited by the Company on
a compound annual basis during a particular Guarantee Period.
*MINIMUM AVERAGE INTEREST RATE: The minimum average rate of interest that
may be credited by the Company on a compound annual basis, as determined at the
end of a particular Guarantee Period or upon surrender of the Contract, as
applicable.
NET PURCHASE PAYMENT: The portion of the Purchase Payment remaining after
the deduction of any applicable premium tax or similar tax.
NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement
plan which does not receive favorable federal income tax treatment under
Sections 401, 403, 408, or 408A or any other applicable section of the Code. The
Participant's interest in the Contract must be owned by a natural person or
agent for a natural person in order for the Contract to receive favorable income
tax treatment as an annuity.
*OWNER: The person or entity named on the Group Contract Specifications
Page who is entitled to exercise all rights and privileges of ownership under
the Group Contract.
PARTICIPANT (ALSO "YOU," "YOUR"): In the case of an Individual Contract,
the owner of the Contract. In the case of a Group Contract, the person named on
the Certificate Specifications Page who is entitled to exercise all rights and
privileges of ownership under the Certificate, except as reserved by the Owner.
If the Contract is a Non-Qualified Contract, the Participant must be a natural
person or agent for a natural person in order for the Contract to receive
favorable income tax treatment as an annuity. If the Contract is a Qualified
Contract (other than a Section 403 contract), the Participant must be a trustee
or custodian of a retirement plan which meets the requirements of Section 401,
Section 408(c), Section 408(k), Section 408A, or any other applicable section of
the Code, and the Qualified Plan Endorsement must be attached to and made a part
of the Contract.
PAYEE: A recipient of payments under the Contract.
PURCHASE PAYMENT: The amount paid to the Company by or on behalf of the
Participant as consideration for the benefits provided by the 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 or any other applicable section of the Code.
- ---------
* As specified on the Contract Specifications Page or the Certificate
Specifications Page (as appropriate), unless changed.
7
<PAGE>
THIS PROSPECTUS IS A CATALOG OF FACTS
This Prospectus contains information about the Contracts, which provide
fixed benefits. It describes the Contracts' uses and objectives, its benefits
and costs, and the rights and privileges of Owners and Participants. It also
contains information about the Company and the Fixed Account. This Prospectus
has been carefully prepared in non-technical language to help you decide whether
the purchase of a Contract fits the needs of your retirement plan. We urge you
to read it carefully and retain it for future reference.
A Fixed Annuity provides that Purchase Payments, less certain deductions,
will accumulate at a Guaranteed Interest Rate prior to the Annuity Commencement
Date. After the Annuity Commencement Date, annuity payments will be made to the
Annuitant. Under a Fixed Annuity, the investment risk is assumed by the Company
(except in the case of early withdrawals (See "Cash Withdrawals" and "Market
Value Adjustment")), and the amounts of the annuity payments do not vary.
However, each Participant bears the risk that the Guaranteed Interest Rate
credited to the Contract may not exceed the Minimum Average Interest Rate
specified in the Contract.
USES OF THE CONTRACTS
The Contracts are designed to be used in connection with retirement plans,
some of which meet the requirements of Section 401 (including Section 401(k)),
Section 403, Section 408(b), Section 408(c), Section 408(k), Section 408(p) or
Section 408A of the Code; however, the Company may discontinue offering new
Contracts in connection with certain types of qualified plans.
Certain federal tax advantages are currently available to retirement plans
which qualify under the Code as (a) self-employed individuals' retirement plans
under Section 401; (b) corporate or association retirement plans under
Section 401; (c) annuity purchase plans sponsored by certain tax exempt
organizations or public school systems under Section 403(b); or (d) individual
retirement accounts, including employer or association of employees individual
retirement accounts under Section 408(c), SEP-IRAs under Section 408(k), Simple
Retirement Accounts under Section 408(p), and Roth IRAs under Section 408A (See
"Tax Considerations").
The Contracts are also designed to be used in connection with certain
non-tax-qualified retirement plans, such as payroll savings plans, and by such
other groups (trusteed or nontrusteed) as may be eligible under applicable law.
THE COMPANY
Sun Life Assurance Company of Canada (U.S.) (the "Company;" also "we,"
"us," and "our") is a stock life insurance company which was incorporated under
the laws of Delaware on January 12, 1970. Our Executive Offices are located at
One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481, telephone
(781) 237-6030. We currently are authorized to do business in 48 states, the
District of Columbia and Puerto Rico, and it is anticipated that the Company
will be authorized to do business in all states except New York. The Company
issues life insurance policies and individual and group annuities. The Company
has formed a wholly-owned subsidiary, Sun Life Insurance and Annuity Company of
New York, which issues individual fixed and combination fixed/variable annuity
contracts and group life and long-term disability insurance in New York. The
Company's other active subsidiaries are: Sun Capital Advisers, Inc., a
registered investment adviser; Clarendon Insurance Agency, Inc., a registered
broker-dealer that acts as the general distributor of the Contracts and other
annuity and life insurance contracts issued by the Company and its affiliates;
Sun Life of Canada (U.S.) Distributors, Inc., a registered broker-dealer and
investment adviser; Sun Life Financial Services Limited, which provides
off-shore administrative services to the Company and its parent company, Sun
Life Assurance Company of Canada (sometimes referred to in this Prospectus as
"Sun Life (Canada)"); and Sun Life Information Services Ireland Limited, an
offshore technology center.
The Company is 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.
8
<PAGE>
("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 FIXED ACCOUNT
The Fixed Account is made up of all of the general assets of the Company,
other than those allocated to any unitized separate account. The Purchase
Payment is allocated to the Guarantee Period you elect at the time your
Accumulation Account is established. Your Accumulation Account Value may be
transferred to another Guarantee Period available under the Contract, subject to
certain restrictions (See "Transfer Privilege"). Assets supporting amounts
allocated to Guarantee Periods become part of the Company's general account
assets and are available to fund the claims of all classes of customers of the
Company, including claims for benefits under the Contracts.
The Company invests the assets of the Fixed Account in those assets chosen
by the Company and allowed by applicable state laws regarding the nature and
quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
investment. 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.
The Company's general investment strategy is to invest the assets of the
Fixed Account in investment grade debt securities and mortgages. The Company
intends to invest the assets of the Fixed Account primarily in such debt
instruments as follows:
- Securities issued by the United States Government or its agencies or
instrumentalities, which securities may or may not be guaranteed by the
United States Government;
- Investment grade debt securities, I.E., those which have a rating, at
the time of purchase, within the four highest grades assigned by
Moody's Investors Services, Inc. ("Moody's") or Standard & Poor's
Corporation ("Standard & Poor's") (Aaa, Aa, A or Baa and AAA, AA, A or
BBB, respectively) or any other nationally recognized rating service;
- Other debt instruments, including, but not limited to, issues of or
guaranteed by banks or bank holding companies and other corporations,
which obligations, although not rated by Moody's or Standard & Poor's,
are deemed by the Company's management to have an investment quality
comparable to securities which may be purchased as stated above; and
- Other evidences of indebtedness secured by mortgages or deeds of trust
representing liens upon real estate.
The Company may also invest a portion of the Fixed Account in below
investment grade debt instruments. Instruments rated Baa and/or BBB or lower
normally involve a higher risk of default and are less liquid than higher rated
instruments. If the rating of an investment grade debt security held by the
Company is subsequently downgraded to below investment grade, the Company's
decision to retain or dispose of the security will be made based upon our
individual evaluation of the circumstances surrounding the downgrade and the
prospects for continued deterioration, stabilization and/or improvement.
In pursuing its general investment strategy with respect to amounts
allocated to the Fixed Account, the Company uses immunization strategies
appropriate to the various Guarantee Periods. This includes, with respect to
investments and average terms of investments, using dedication (cash flow
matching) and/or duration matching to minimize the Company's risk of not
achieving the rates it is crediting under Guarantee Periods in volatile interest
rate environments.
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. Investment income from such Fixed Account assets will be
allocated between the Company and all contracts participating in the Fixed
Account, including the Contracts, in accordance with the terms of such
contracts.
9
<PAGE>
Fixed annuity payments made to Annuitants under the Contracts will not be
affected by the mortality experience (death rate) of the persons receiving such
payments or of the general population. The Company assumes this "mortality risk"
by virtue of annuity rates incorporated in the Contracts which cannot be changed
(except as described under "Modification" with respect to Accumulation Accounts
established after the effective date of such modification). In addition, the
Company guarantees that it will not impose a charge for maintenance of the
Contracts, regardless of its actual expenses (except as described under
"Modification" with respect to Accumulation Accounts established after the
effective date of such modification).
The amount of investment income allocated to the Contracts will vary from
Guarantee Period to Guarantee Period in our sole discretion. However, the
Company guarantees that it will credit interest at the Minimum Average Interest
Rate, compounded annually, to amounts allocated to the Fixed Account under the
Contracts. The Company may (but is not obligated to) declare Guaranteed Interest
Rates in excess of the Minimum Average Interest Rate.
We are aware of no statutory limitations on the maximum amount of interest
we may credit, and the Company's Board of Directors has set no limitations.
However, inherent in our exercise of discretion in this regard is the equitable
allocation of distributable earnings and surplus among our various policyholders
and contract owners and our sole stockholder.
THE PURCHASE PAYMENT AND CONTRACT VALUES DURING THE ACCUMULATION PERIOD
THE PURCHASE PAYMENT
- PLACE AND AMOUNT. Your Purchase Payment is paid to the Company at its
Annuity Mailing Address. The Company generally will not accept a
Purchase Payment which is less than $10,000; exceptions will be
determined by the Company on an individual basis. In addition, the
Company's prior approval is required before it will accept a Purchase
Payment which exceeds $1,000,000.
A completed Application, if required, and the Purchase Payment are
forwarded to the Company for acceptance. Upon acceptance, in the case of
an Individual Contract, the Contract is issued to the Participant, and
in the case of a Group Contract, the Contract and Certificate(s), as
applicable, are issued to the Owner and the Participant(s),
respectively. The Purchase Payment, minus any applicable premium tax or
similar tax (the "Net Purchase Payment"), is credited to the
Accumulation Account. The Company generally confirms receipt of the
Purchase Payment in writing within five business days of receipt. Your
Accumulation Account starts earning interest on the day the Purchase
Payment is applied.
If an Application or a purchase order is not properly completed, we will
attempt to contact the prospective Participant in writing or by
telephone. If the Application or purchase order has not been properly
completed within five business days after we receive it, we will return
the Purchase Payment.
- ALLOCATION OF NET PURCHASE PAYMENT. The Net Purchase Payment is
allocated to the Guarantee Period selected by the Participant in the
Application, from among such Guarantee Periods as may be made available
from time to time by the Company.
ACCUMULATION ACCOUNT
We will establish an Accumulation Account for each Participant and will
maintain the Accumulation Account during the Accumulation Period. The
Accumulation Account is automatically continued in full force during the
lifetime of the Participant and until the Annuity Commencement Date or until the
Accumulation Account is surrendered.
10
<PAGE>
GUARANTEE PERIOD
You may elect one Guarantee Period of one to ten years from among those
made available from time to time by the Company. The Guarantee Period that you
elect determines the Guaranteed Interest Rate. Amounts allocated to a particular
Guarantee Period, less any applicable premium taxes or similar taxes and less
any amounts subsequently withdrawn, earn interest at the Guaranteed Interest
Rate in effect during the Guarantee Period.
The Initial Guarantee Period begins on the date the Net Purchase Payment
is applied. Except for Floating Rate Guarantee Periods, the Initial Guarantee
Period ends when the number of calendar years in the Guarantee Period elected
(measured from the end of the calendar month in which the Net Purchase Payment
was applied) has elapsed. For Floating Rate Guarantee Periods, the Initial
Guarantee Period ends when the number of calendar years in the Floating Rate
Guarantee Period elected (measured from the end of the calendar quarter in which
the Net Purchase Payment was applied) has elapsed. The last day of a Guarantee
Period is the Expiration Date. Subsequent Guarantee Periods begin on the first
day following the Expiration Date. For Floating Rate Guarantee Periods, the
Expiration Date always occurs at the end of a calendar quarter. For other
Guarantee Periods, the Expiration Date always occurs at the end of a calendar
month.
We will mail written notification to the Participant at least 45 and no
more than 75 days prior to the Expiration Date of a Guarantee Period. A new
Guarantee Period of the same duration and type as the previous Guarantee Period
will commence automatically at the end of the previous Guarantee Period, unless
the Company receives, in writing or other manner acceptable to us, prior to the
end of such Guarantee Period, an election by the Participant of a different
Guarantee Period from among those being offered by the Company at such time.
We reserve the right to add or remove Guarantee Periods available for
election by the Participant.
GUARANTEED INTEREST RATES
The Company periodically establishes a Guaranteed Interest Rate for each
Guarantee Period. There is no specific formula for the determination of
Guaranteed Interest Rates. Some of the factors that the Company may consider in
establishing Guaranteed Interest Rates, are:
- general economic trends
- rates of return currently available and anticipated on the Company's
investments
- regulatory and tax requirements
- competitive factors
- sales commissions and administrative and distribution expenses borne by
the Company
Guaranteed Interest Rates will be reflective of expected investment yields
and interest rates available on the types of debt instruments in which the
Company intends to invest. These rates are guaranteed for the duration of the
respective Guarantee Periods. Interest is credited to your Accumulation Account
daily at an annual effective rate of interest. However, any Accumulation Account
Value withdrawn is subject to any applicable withdrawal charge and may be
subject to a Market Value Adjustment (See "Market Value Adjustment").
For a Floating Rate Guarantee Period, the Guaranteed Interest Rate may
change on each Floating Rate Reset Date; however, the Floating Rate Spread used
by the Company to compute the Guaranteed Interest Rate will remain constant
throughout such Floating Rate Guarantee Period. The Company will determine a new
Floating Rate Spread at the beginning of each Floating Rate Guarantee Period.
The Minimum Average Interest Rate will not be less than three percent (3%)
per year, compounded annually. The Participant bears the risk that the
Guaranteed Interest Rate to be credited may not exceed the Minimum Average
Interest Rate for any Guarantee Period.
11
<PAGE>
On any Expiration Date, and on the date on which a Contract is surrendered
in full, the Accumulation Account Value (before the application of any
applicable withdrawal charge and/or Market Value Adjustment) will not be less
than the Net Purchase Payment, less any previous withdrawals, accumulated at an
effective annual rate of interest equal to the Minimum Average Interest Rate.
Subject to the above guarantees, the Guaranteed Interest Rate credited during a
particular calendar quarter to a Floating Rate Guarantee Period may be less than
the Minimum Average Interest Rate.
TRANSFER PRIVILEGE; TELEPHONE TRANSFERS
At any time during the Accumulation Period, you may transfer your entire
Accumulation Account Value to a new Guarantee Period, subject to the conditions
set forth below. No partial transfers are permitted. One transfer per Account
Year is permitted and a minimum of 30 calendar days must elapse between
transfers. No transfer is allowed within 30 days after the Date of Coverage. A
transfer will be subject to the Market Value Adjustment (See "Market Value
Adjustment"), unless the transfer is effective within 30 days prior to an
Expiration Date. The Company reserves the right, in its sole discretion, to
delay the effective date of any transfer for a period not to exceed six months
from the date written request for such transfer is received by the Company.
Under current law, there is no tax liability to you if you make a transfer.
Except as described below, a transfer generally is effective on the date
the request for transfer is received by the Company, if such request is received
in good order by 4:00 p.m. Eastern Time on any date on which the Company is open
for business. The Company generally is open for business on any day that the New
York Stock Exchange is open for business.
If you make a transfer, we will establish a new Guarantee Period for the
amount being transferred. Any such new Guarantee Period will begin on the
effective date of the transfer and end on the new Expiration Date. The amount
transferred will earn interest at the Guaranteed Interest Rate declared by the
Company for the new Guarantee Period as of the effective date of the transfer.
You or your agent of record may request a transfer either in writing or by
telephone. The telephone transfer privilege is made available to Participants
automatically without the Participants' election. The Company employs reasonable
procedures to confirm that instructions communicated by telephone by
Participants and their agents of record are genuine. Such procedures may include
one or more of the following: requesting identifying information, such as name,
Contract number, Social Security Number, and/or personal identification number;
tape recording all telephone transactions; providing written confirmation
thereof to both the Participant and any agent of record, at the last address of
record; or such other procedures as the Company may deem reasonable. Although
the Company's failure to follow reasonable procedures may result in the
Company's liability for any losses due to unauthorized or fraudulent telephone
transfers, the Company will not be liable for following instructions
communicated by telephone which it reasonably believes to be genuine. The
Participant bears the risk of incurring a loss on actions taken by the Company
in reliance on telephone instructions which the Company reasonably believed to
be genuine.
WAIVERS; REDUCED CHARGES; CREDITS; BONUS GUARANTEED INTEREST RATES
The Company may reduce or waive the withdrawal charge, credit additional
amounts, or grant bonus Guaranteed Interest Rates in situations 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. In addition, the Company may waive the withdrawal charge,
credit additional amounts, or grant bonus Guaranteed Interest Rates in
connection with Contracts sold 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 their
affiliates, employees of affiliated asset management firms, and persons who have
retired from such positions ("Eligible Employees") and immediate family members
of Eligible Employees. The Company may reduce or waive such charges, credit
additional amounts, or grant bonus Guaranteed Interest Rates on any Contract
where, for example, expenses associated with the sale of the Contract and/or
costs or services associated with administering and maintaining the Contract are
reduced. Eligible Employees
12
<PAGE>
and their immediate family members may also purchase a Contract without regard
to minimum Purchase Payment requirements. For other situations in which
withdrawal charges may be waived, see "Withdrawal Charges."
CASH WITHDRAWALS, WITHDRAWAL CHARGES AND MARKET VALUE ADJUSTMENT
CASH WITHDRAWALS
At any time before the Annuity Commencement Date, you may elect to receive
a cash withdrawal payment by filing with us at our Annuity Mailing Address, a
written election in such form as the Company may require. Any such election
shall specify the amount of the withdrawal and will be effective on the date
that it is received by the Company. The Company reserves the right to defer the
payment of amounts withdrawn for a period not to exceed six months from the date
the Company receives a written request for such withdrawal. The Company is not
required to pay interest on amounts so deferred.
You may request a full surrender or a partial withdrawal. A full surrender
will result in a cash withdrawal payment equal to:
(1) the Accumulation Account Value as of the date the Company receives
the request, plus or minus
(2) any applicable Market Value Adjustment, minus
(3) any applicable withdrawal charge (determined as a percentage of
(1) before any application of a Market Value Adjustment).
Upon a full surrender, the Contract will be canceled and no further benefits
will be payable thereunder. A request for a partial withdrawal (I.E., a payment
of an amount less than that paid under a full surrender) will reduce the
Accumulation Account Value by:
(1) the dollar amount of the cash withdrawal amount, plus or minus
(2) any applicable Market Value Adjustment, plus
(3) any applicable withdrawal charge (determined as a percentage of
(1) before any application of a Market Value Adjustment).
If you request a partial withdrawal which would cause your Accumulation Account
Value to be less than $1,000, the partial withdrawal will be treated as a full
surrender.
All cash withdrawals, except those effective within 30 days prior to the
Expiration Date of a Guarantee Period or the withdrawal of the "free withdrawal
amount," will be subject to the Market Value Adjustment described in this
Prospectus (See "Market Value Adjustment"). Any applicable Market Value
Adjustment will be deducted from or added to (as applicable) your Accumulation
Account (or, in the case of a partial withdrawal, the dollar amount of the cash
withdrawal amount) before the application of any withdrawal charge.
Upon request, the Company will advise the Participant of the amounts that
would be payable in the event of a full surrender or partial withdrawal.
Since the Qualified Contracts will be issued in connection with retirement
plans which meet the requirements of Sections 401, 403, 408, and 408A of the
Code, you should refer to the terms of your particular retirement plan for any
limitations or restrictions on cash withdrawals. For special restrictions
applicable to withdrawals from Contracts used with Tax-Sheltered Annuities
established pursuant to Section 403(b) of the Code, see "Section
403(b) Annuities," below.
WITHDRAWAL CHARGES
We deduct no sales charges from your Purchase Payment. However, we will
assess a withdrawal charge, when applicable, as reimbursement to us for certain
expenses relating to the distribution of the Contracts, including commissions,
costs of preparing sales literature and other promotional costs and
13
<PAGE>
acquisition expenses. A cash withdrawal under either a Qualified Contract or a
Non-Qualified Contract may result in a tax penalty of ten percent (10%) (See
"Federal Tax Status").
You may withdraw a portion of your Accumulation Account Value each year
without incurring any withdrawal charge, and after seven years your entire
Accumulation Account Value may be withdrawn free of any withdrawal charge. In
addition, no withdrawal charge is imposed on amounts withdrawn on or after the
later of:
(a) the end of the Initial Guarantee Period, or
(b) the end of the third Account Year.
No withdrawal charge is assessed upon annuitization (except for period certain
annuities of less than ten years), upon payment of the death benefit (unless the
Participant was age 86 or older on the Date of Coverage), or upon the transfer
of your Accumulation Account Value to a new Guarantee Period.
The withdrawal charge is not assessed on an Accumulation Account
established for the personal account of an employee of the Company or of any of
its affiliates, or of a licensed insurance agent engaged in distributing the
Contracts, and the Company may waive the withdrawal charge with respect to a
Purchase Payment derived from the surrender of other annuity contracts and/or
certificates issued by the Company.
All other full or partial withdrawals are subject to a withdrawal charge
which will be determined on the following basis:
(a) FREE WITHDRAWAL AMOUNT: The free withdrawal amount in any Account
Year is the greater of:
(1) 10% of that Account Year's beginning Accumulation Account Value,
or
(2) any amounts required to be withdrawn to comply with any
mandatory distribution requirements applicable to Qualified
Contracts under federal law.
(b) AMOUNT SUBJECT TO WITHDRAWAL CHARGE: For a partial withdrawal or full
surrender, the amount subject to a withdrawal charge equals the amount
of the partial withdrawal or full surrender, minus any of the current
Account Year's remaining free withdrawal amount.
(c) WITHDRAWAL CHARGE PERCENTAGE: The withdrawal charge percentage varies
according to the number of complete Account Years occurring between
the Account Year in which the Net Purchase Payment was credited to the
Accumulation Account and the Account Year in which it is withdrawn.
(d) AMOUNT OF WITHDRAWAL CHARGE: The amount of the withdrawal charge is
determined by multiplying the amount subject to the withdrawal charge
by the applicable withdrawal charge percentage, in accordance with the
following table:
<TABLE>
<CAPTION>
NUMBER OF COMPLETE WITHDRAWAL CHARGE
ACCOUNT YEARS PERCENTAGE
------------- ----------
<S> <C>
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 or more 0%
</TABLE>
In no event shall the aggregate withdrawal charges assessed against an
Accumulation Account exceed 7% of the Contract's Accumulation Account Value (See
the Appendix for examples of withdrawals, withdrawal charges and the Market
Value Adjustment). The Company may, upon notice to the Owner, modify the
withdrawal charges under a Group Contract, provided that such modification shall
apply only to Accumulation Accounts established after the effective date of such
modification (See "Modification").
14
<PAGE>
SECTION 403(b) ANNUITIES
The Code imposes restrictions on cash withdrawals from Contracts used with
Section 403(b) Annuities. In order for such Contracts to receive tax deferred
treatment, the Contracts must provide that cash withdrawals of amounts
attributable to salary reduction contributions (other than withdrawals of
Accumulation Account Value as of December 31, 1988 ("Pre-1989 Account Value"))
may be made only when the Participant:
(a) attains age 59 1/2,
(b) separates from service with the employer,
(c) dies, or
(d) becomes disabled (within the meaning of Section 72(m)(7) of the
Code).
These restrictions apply to any growth or interest on or after January 1, 1989
on Pre-1989 Account Value, salary reduction contributions made on or after
January 1, 1989, and any growth or interest on such contributions ("Restricted
Account Value").
In cases of financial hardship, withdrawals of Restricted Account Value
are permitted to the extent of contributions. Earnings on contributions cannot
be withdrawn for hardship reasons. While specific rules defining hardship have
not been issued by the Internal Revenue Service, it is expected 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 Contract (See "Federal Tax Status"). Under certain
circumstances, the 10% tax penalty may not apply if the withdrawal is made to
pay medical expenses. You should consult your tax adviser.
Under the terms of a particular Section 403(b) plan, the Participant may
be entitled to transfer all or a portion of the Accumulation 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.
For information on the federal income tax withholding rules that apply to
distributions from Qualified Contracts (including Section 403(b) Annuities), see
"Federal Tax Status."
MARKET VALUE ADJUSTMENT
Any cash withdrawal, other than a withdrawal effective within 30 days
prior to an Expiration Date or the withdrawal of the "free withdrawal amount,"
is subject to a Market Value Adjustment ("MVA"). (For this purpose, transfers,
death benefit distributions and amounts applied to purchase an annuity are
treated as cash withdrawals.)
The MVA reflects the relationship between the Current Rate (as defined
below) for the amount being withdrawn and the Guaranteed Interest Rate
applicable to the amount being withdrawn. It also reflects the time remaining in
the applicable Guarantee Period. Generally, if the Guaranteed Interest Rate is
lower than the applicable Current Rate, then the application of the MVA will
result in a lower payment upon withdrawal. Similarly, if the Guaranteed Interest
Rate is higher than the applicable Current Rate plus the "b factor" referenced
below, the application of the MVA generally will result in a higher payment upon
withdrawal.
The MVA is determined by multiplying the amount being withdrawn, before
deduction of any applicable withdrawal charge, by the market value adjustment
factor.
The market value adjustment factor for all Guarantee Periods, except
Floating Rate Guarantee Periods, is:
<TABLE>
<C> <S> <C> <C> <C>
N/12
1 + I
( --------- ) -1
1 + J + b
</TABLE>
where,
15
<PAGE>
I is the Guaranteed Interest Rate currently being credited to the
Accumulation Account,
J is the Guaranteed Interest Rate declared by the Company, as of the date
of the application of the MVA, for current allocations to Guarantee Periods
equal to the balance of the current Guarantee Period, rounded to the next higher
number of complete years (the "Current Rate"),
b is a factor which the Company will determine for a Contract and which
will not exceed 0.25%, and
N is the number of complete months remaining in the current Guarantee
Period.
In determining J, if the Company currently does not offer the applicable
Guarantee Period, then the rate will be determined by linear interpolation of
the current rates for Guarantee Periods that are available. If no Guarantee
Periods are available to perform a linear interpolation, the Company will use an
equitable method and will inform the appropriate state regulatory authority of
such method.
The market value adjustment factor for each Floating Rate Guarantee Period
is:
<TABLE>
<C> <C> <S> <C> <C>
N/12
1 + F - X
( --------------- ) -1
1 + F - Y + b
</TABLE>
where,
F is the Floating Rate currently being used to determine the Guaranteed
Interest Rate for the Floating Rate Guarantee Period;
X is the Floating Rate Spread in effect during the current Floating Rate
Guarantee Period,
Y is the Floating Rate Spread, as of the date of the application of the
MVA, for current allocations to new Floating Rate Guarantee Periods equal to the
balance of the current Floating Rate Guarantee Period, rounded up to the next
higher number of complete years,
b is a factor which the Company will determine for a Contract and which is
set forth on the Contract Specifications Page or the Certificate Specifications
Page (as appropriate) and which will not exceed 0.25%, and
N is the number of complete months remaining in the current Floating Rate
Guarantee Period.
In the determination of Y, if the Company currently does not offer the
applicable Floating Rate Guarantee Period, then the rate will be determined by
using the next longer Floating Rate Guarantee Period that is available. If the
Company currently does not offer a longer Floating Rate Guarantee Period, the
Company will determine, in an equitable manner and in its sole discretion, the
value of Y.
The b factor currently is zero (0).
See the Appendix for examples of the application of the MVA.
DEATH BENEFIT
DEATH BENEFIT PROVIDED BY THE CONTRACT
- If the Participant dies while the Contract is in effect and prior to
the Annuity Commencement Date, the Company will, upon receipt of Due
Proof of Death of the Participant, pay a death benefit to the
Beneficiary.
- If the designated Beneficiary does not survive the Participant, the
Company will, upon receipt of Due Proof of Death of the Participant
and/or the Beneficiary, if applicable, pay the death benefit in one sum
to the estate of the deceased Participant.
- If the Annuitant dies on or after the Annuity Commencement Date, no
death benefit will be payable under the Contract, except as may be
provided under the elected Annuity Option.
- If the Participant is not a natural person, the Annuitant is considered
the "Participant" for purposes of the death benefit provided by the
Contract.
16
<PAGE>
ELECTION AND EFFECTIVE DATE OF ELECTION
During your lifetime and prior to the Annuity Commencement Date, you may
elect to have the death benefit applied under one or more of the Annuity Options
available under the Contract to effect a Fixed Annuity for the Beneficiary as
Payee after your death. The Annuity Option chosen must comply with
Section 72(s) of the Code.
If no method of settlement of the death benefit is in effect on the date
of your death, the Beneficiary may elect either: (a) to receive the death
benefit in the form of a single cash payment, or (b) to have the death benefit
applied under one or more of the Annuity Options (on the Annuity Commencement
Date described under "Payment of Death Benefit") to effect a Fixed Annuity for
the Beneficiary as Payee. Either election may be made, or subsequently revoked,
by filing with us at our Annuity Mailing Address, a written election or
revocation of an election in such form as we may require. Any election or
revocation of an election of a method of settlement of the death benefit by the
Participant will become effective on the date the Company receives it. For the
purposes of the "Payment of Death Benefit" and "Amount of Death Benefit"
sections of this Prospectus, any election by the Participant of a method of
settlement of the death benefit which is in effect on the date of the
Participant's death will be deemed effective on the date the Company receives
Due Proof of Death of the Participant.
Any election of a method of settlement of the death benefit by the
Beneficiary will become effective on the later of: (a) the date the election is
received by the Company, or (b) the date Due Proof of Death of the Participant
is received by the Company. If an election by the Beneficiary is not received by
the Company within 60 days following the date Due Proof of Death of the
Participant is received by the Company, the Beneficiary will be deemed to have
elected a cash payment as of the last day of the 60 day period.
In all cases, no Participant or Beneficiary shall be entitled to exercise
any rights that would adversely affect the treatment of the Contract as an
annuity contract under the Code (See "Death of Participant").
DEATH OF PARTICIPANT
If a Participant under a Non-Qualified Contract dies prior to the Annuity
Commencement Date, the death benefit must be distributed to the "designated
beneficiary" (as defined below) either: (a) within five years after the date of
death of the Participant, or (b) as an annuity over some period not greater than
the life or expected life of the designated beneficiary, with annuity payments
beginning within one year after the date of death of the Participant. For this
purpose (and for purposes of Section 72(s) of the Code), the person named as
Beneficiary shall be considered the designated beneficiary, and if no person
then living has been so named, then the Annuitant shall automatically be the
designated beneficiary. If the designated beneficiary is the surviving spouse of
the deceased Participant, the spouse can elect to continue the Contract in the
spouse's own name as Participant, in which case these mandatory distribution
requirements will apply on the spouse's death.
If the Payee dies on or after the Annuity Commencement Date and before the
entire Accumulation Account has been distributed, the remaining portion of such
Accumulation Account, if any, must be distributed at least as rapidly as the
method of distribution then in effect.
In any case where a non-natural person is the holder of the Contract for
the purposes of Section 72(s) of the Code, (a) the distribution requirements
described above shall apply upon the death of any Annuitant, and (b) a change in
any Annuitant shall be treated as the death of an Annuitant.
In no cases shall a Participant or Beneficiary be entitled to exercise any
rights that would adversely affect the treatment of the Contract as an annuity
contract under the Code.
Any distributions upon the death of a Participant under a Qualified
Contract will be subject to the laws and regulations governing the particular
retirement or deferred compensation plan in connection with which the Qualified
Contract was issued.
17
<PAGE>
PAYMENT OF DEATH BENEFIT
If the Participant has elected settlement under one or more of the Annuity
Options available under the Contract:
- the Annuity Commencement Date will be the first day of the calendar
month following the Death Benefit Date, and
- the Accumulation Account will be maintained in effect until the Annuity
Commencement Date.
If the death benefit is to be paid in cash to the Beneficiary, payment
will be made within seven calendar days of the Death Benefit Date.
AMOUNT OF DEATH BENEFIT
The death benefit is determined by the Company as of the Death Benefit
Date.
- If the Participant was age 85 or less on the Date of Coverage, the
death benefit equals the greater of:
(1) the Accumulation Account Value on the Death Benefit Date; or
(2) the amount which would have been payable in the event of a full
surrender of the Contract on the Death Benefit Date.
For the purposes of determining the amount payable under (2), the
Accumulation Account Value will be adjusted by the difference between
(2) and (1).
- If the Participant was age 86 or older on the Date of Coverage, the
death benefit is equal to the amount which would have been payable in
the event of a full surrender of the Contract on the Death Benefit
Date. The Accumulation Account Value will be adjusted to equal such
amount.
ANNUITY PROVISIONS
ANNUITY COMMENCEMENT DATE
Annuity payments begin on the Annuity Commencement Date which you select.
The Annuity Commencement Date may not be sooner than the first day of the second
calendar month following the Date of Coverage. If no such date has been
specified, the Annuity Commencement Date will be the first day of the first
month following the Annuitant's 90th birthday.
If more than one person is named as Annuitant, due to the designation of a
Co-Annuitant, the Annuity Commencement Date will be no later than the first day
of the first month following the 90th birthday of the youngest of the named
Annuitants. In most situations, current law requires that the Annuity
Commencement Date under a Qualified Contract be 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). The terms of your
particular retirement plan may impose additional limitations.
You may change your Annuity Commencement Date from time to time by written
notice to the Company in such form as the Company may require, provided that the
Company receives notice of each change at least 30 days prior to the then
current Annuity Commencement Date and the new Annuity Commencement Date is a
date which is:
(a) at least 30 days after the date notice of the change is received
by the Company;
(b) the first day of a month; and
(c) not later than the first day of the first month following the
Annuitant's 90th birthday, unless otherwise restricted, in the
case of a Qualified Contract, by the particular retirement plan
or by applicable law, or unless waived by the Company.
18
<PAGE>
The Annuity Commencement Date may also be changed by your election of an
Annuity Option (See "Death Benefit").
On the Annuity Commencement Date, your Accumulation Account will be
canceled and its adjusted value will be applied to provide an annuity under one
or more of the options described under the heading "Annuity Options," below. No
withdrawal charge will be imposed upon amounts applied to purchase an annuity,
except that period certain annuities of less than ten years may incur a
withdrawal charge. A Market Value Adjustment may apply (See "Determination of
Annuity Payments").
No payments may be requested under the Contract's cash withdrawal
provisions on or after the Annuity Commencement Date and no cash withdrawal will
be permitted except as may be available under the Annuity Option elected by you.
Since the Contracts may be issued in connection with retirement plans
which meet the requirements of Sections 401, 403, 408, or 408A of the Code, as
well as certain non-qualified plans, you should refer to the terms of your
particular retirement plan for any limitations or restrictions on the Annuity
Commencement Date.
ELECTION/CHANGE OF ANNUITY OPTION
During the lifetime of the Participant and prior to the Annuity
Commencement Date, the Participant may elect one or more of the Annuity Options
described below, or such other settlement option as may be agreed to by the
Company, for the Annuitant as Payee. The Participant may also change any
election, but written notice of any election or change of election must be
received by the Company at least 30 days prior to the Annuity Commencement Date.
If no election is in effect on the 30th day before the Annuity Commencement
Date, Annuity Option B, for a Life Annuity with 120 monthly payments certain,
will be determined to have been elected. If there is no election of a sole
Annuitant in effect on the 30th day before the Annuity Commencement Date, the
person designated as Co-Annuitant will be the Payee under the applicable Annuity
Option.
Annuity Options may also be elected by the Participant or the Beneficiary
(See "Death Benefit").
You should refer to the terms of your particular retirement plan and any
applicable legislation for any limitations or restrictions on the Annuity
Options which may be elected.
You should be aware that no change of Annuity Option is permitted after
the Annuity Commencement Date.
ANNUITY OPTIONS
No lump sum settlement option is available under the Contract. You may
surrender your Contract prior to the Annuity Commencement Date. Upon surrender,
any applicable surrender charge will be deducted from the cash withdrawal
payment and a Market Value Adjustment, if applicable, will be applied.
ANNUITY OPTION A. LIFE ANNUITY: Monthly payments during the lifetime of
the Payee. This option offers a higher level of monthly payments than Annuity
Options B or C because no further payments are payable after the death of the
Payee and there is no provision for a death benefit payable to a Beneficiary.
ANNUITY OPTION B. LIFE ANNUITY WITH 60, 120, 180 OR 240 MONTHLY PAYMENTS
CERTAIN: Monthly payments during the lifetime of the Payee and in any event for
60, 120, 180 or 240 months certain, as elected. The election of a longer period
certain results in smaller monthly payments than would be the case if a shorter
period certain were elected. In the event of the death of the Payee under this
option, the Contract provides that the Company will pay any remaining payments
to the Payee's designated beneficiary. If there is no designated beneficiary
entitled to the remaining payments then living, the discounted value of the
remaining payments, if any, will be calculated and paid in one sum to the
deceased Payee's estate. In addition, any Beneficiary who becomes entitled to
any remaining payments under this option may elect to receive the discounted
value of the amounts due under this option in
19
<PAGE>
one sum. In the event of the death of the Beneficiary who has become entitled to
receive any remaining payments under an Annuity Option, the Company will pay the
discounted value of such remaining payments, in one sum, to the deceased
Beneficiary's estate.
ANNUITY OPTION C. JOINT AND SURVIVOR ANNUITY: Monthly payments payable
during the joint lifetime of the Payee and a designated second person and during
the lifetime of the survivor. During the lifetime of the survivor, monthly
payments will be determined using the percentage chosen at the time of election
of this option.
ANNUITY OPTION D. MONTHLY PAYMENTS FOR A SPECIFIED PERIOD CERTAIN: Monthly
payments for a specified period of time (at least five years but not exceeding
30 years), as elected. In the event of the death of the Payee under this option,
the Contract provides that, as described under Annuity Option B above, in
certain circumstances the discounted value of the remaining payments, if any,
will be calculated and paid in one sum.
DETERMINATION OF ANNUITY PAYMENTS
On the Annuity Commencement Date the Accumulation Account will be canceled
and its adjusted value will be applied to provide a Fixed Annuity. The adjusted
value will equal:
(1) the Accumulation Account Value on the date immediately preceding
the Annuity Commencement Date, plus or minus
(2) any applicable Market Value Adjustment, and minus
(3) any applicable premium taxes or similar taxes.
Amounts applied to provide period certain annuities of less than ten years
under Annuity Options B and D will also be reduced by any applicable withdrawal
charges.
If the amount to be applied under any annuity option is less than $10,000,
or if the first annuity payment payable in accordance with such option is less
than $50, the Company will pay the amount to be applied in a single payment to
the Payee.
The dollar amount of each fixed annuity payment will be determined by the
Company in accordance with the Annuity Payment Rates found in the Contract. Such
Annuity Payments Rates are based on the Minimum Average Interest Rate, or, if
more favorable to the Payee(s), in accordance with the Annuity Payment Rates
published by the Company and in use on the Annuity Commencement Date.
ANNUITY PAYMENT RATES
The Contract contains Annuity Payment Rates for each Annuity Option. The
rates show, for each $1,000 applied, the dollar amount of the monthly fixed
annuity payment, when this payment is based on the Minimum Average Interest
Rate. The Company may change these rates for any Accumulation Accounts
established after the effective date of such change (See "Modification").
The Contract also describes the method of determining the adjusted age of
the Payee. The mortality table used in determining the annuity payment rates for
Annuity Options A, B and C is the 1983 Individual Annuitant Mortality Table.
Participants should be aware that annuity payment rates may vary according
to the Annuity Option elected and the adjusted age of the Payee.
OTHER CONTRACT PROVISIONS
DESIGNATION AND CHANGE OF BENEFICIARY
The Beneficiary designation made by you will remain in effect until you
change it.
Subject to the rights of an irrevocably designated Beneficiary, you may
change or revoke the designation of a Beneficiary. Any such change or revocation
must be filed with the Company and shall be in such form as the Company may
require. The change or revocation of a Beneficiary designation
20
<PAGE>
will not be binding upon the Company until the Company receives it. When the
Company receives a change or revocation of a Beneficiary, such change or
revocation will be effective as of the date on which you signed it; however, the
Company is not liable for any payment made or action taken by the Company before
the Company received the change or revocation.
You should refer to the terms of your particular retirement plan and any
applicable legislation for any restrictions on the Beneficiary designation.
EXERCISE OF CONTRACT RIGHTS
An Individual Contract shall belong to the individual Participant to whom
the Contract is issued. A Group Contract shall belong to the Owner. In the case
of a Group Contract, all Contract rights and privileges may be expressly
reserved by the Owner, failing which, each Participant shall 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 Participant's lifetime and prior to the Annuity
Commencement Date, except as otherwise provided in the Contract.
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 upon the death of the Annuitant after the
Annuity Commencement Date. Such Payees may thereafter exercise such rights and
privileges, if any, of ownership which continue under the Contract.
CHANGE OF OWNERSHIP
Ownership of a Qualified Contract may only be transferred to:
(a) the Annuitant;
(b) a trustee or successor trustee of a pension or profit sharing
trust which is qualified under Section 401 of the Code;
(c) 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 Code for
the benefit of the Annuitant;
(d) the trustee of an individual retirement account plan qualified
under Section 408 of the Code for the benefit of the Participants
under a Group Contract; or
(e) 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.
Ownership of a Non-Qualified Contract may be changed prior to the Annuity
Commencement Date by filing written notification with us at our Annuity Mailing
Address; and each Participant, in like manner, may change the ownership interest
in a Contract. When such notification is received by the Company, 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 the Company on account of any payment made or any action taken by
the Company prior to receiving the change.
A change of ownership will not be binding upon the Company until the
Company receives written notification of such change.
PERIODIC STATEMENTS
During the Accumulation Period, the Company will mail to you, at least
once during each Account Year, a statement showing the value of your
Accumulation Account. Such statement shall be accurate as of a date not more
than two months previous to the mailing date. The Company will also
21
<PAGE>
mail such other statements reflecting transactions in your Accumulation Account
as may be required by law.
These periodic statements contain important information concerning any
transactions in your Accumulation Account. It is your obligation to review each
statement carefully. If you find any error or discrepancy in the information
presented therein, you should report it to the Company, at the address or
telephone number provided on the statement, within 60 days of the date of such
statement. Unless the Company receives notice of any such error or discrepancy
from you within such 60 day period, the Company may not be responsible for
correcting the error.
MODIFICATION
Upon notice to you, the Company may modify a Contract if such
modification:
(i) is necessary to ensure compliance with applicable laws or
regulations to which the Company is subject; or
(ii) is necessary to assure continued qualification of the Contract
under the Code or other federal or state laws relating to
retirement annuities or annuity contracts; or
(iii) provides additional fixed accumulation options; or
(iv) is otherwise in the best interests of Owners or Participants, as
applicable.
The Company will not modify the Contract without first notifying 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
annuity period). In the event of any such modification, the Company may make
appropriate endorsement in the Contract to reflect the modification.
In addition, the Company may modify a Group Contract to impose a charge
for maintenance of the Contract or to change the withdrawal charges, the tables
used in determining the amount of the guaranteed annuity payments and the
formula used to calculate the Market Value Adjustment, provided that the
modification shall apply only to Accumulation Accounts established after the
effective date of such modification. In order to exercise its modification
rights in these particular instances, the Company will provide the Owner with
written notice of the modification. The notice shall specify the effective date
of the modification, which must be at least 60 days following the date on which
the Company mails the 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 Accumulation Accounts established prior to the effective date of such
modification.
DISCONTINUANCE OF NEW PARTICIPANTS
The Company may limit or discontinue the acceptance of new Applications
and the issuance of new Certificates under a Group Contract upon 30 days' prior
written notice to the Owner. Such limitation or discontinuance shall have no
effect on rights or benefits with respect to any Accumulation Accounts
established under such Group Contract prior to the effective date of the
limitation or discontinuance.
RIGHT TO RETURN
If you are not satisfied with your Contract, you may return the Contract
to us at our Annuity Mailing Address, within ten days after it was delivered to
you. Generally, upon receiving the returned Contract, we will cancel it and your
Accumulation Account Value at the end of the Valuation Period during which the
Contract was received by us will be refunded to you. However, if applicable
state law so requires, the "free look" period may be greater than ten days, the
Purchase Payment may be refunded, and alternative methods of returning the
Contract may be acceptable.
22
<PAGE>
With respect to Individual Retirement Accounts, the Code requires the
Company to furnish a Participant establishing an Individual Retirement Account
("IRA") with a disclosure statement containing certain information about the
Contract and applicable legal requirements. This statement must be furnished on
or before the date the IRA is established. If the Participant is furnished with
such disclosure statement before the seventh day preceding the date the IRA is
established, the Participant will not have any right of revocation. If the
disclosure statement is furnished after the seventh day preceding the
establishment of the IRA, then the Participant may give a notice of revocation
to the Company at any time within seven days after the date on which the
Contract becomes effective. Upon such revocation, the Company will refund the
Purchase Payment made by the Participant. This right of revocation is in
addition to the return privilege set forth in the preceding paragraph. The
Company will allow a Participant establishing an IRA a "ten day free-look,"
notwithstanding the provisions of the Code.
PREMIUM TAXES
A deduction, when applicable, is made for premium taxes or similar state
or local taxes. The amount of such applicable tax varies by jurisdiction and
may, from time to time, be changed by the legislature or other authority. In
many jurisdictions, there is no premium tax at all. The Company believes that
such premium taxes or similar taxes currently range from 0% to 3.5%. For more
complete information, you should consult a tax adviser. The Company's current
policy is to deduct any applicable tax from the amount applied to provide an
annuity at the time annuity payments commence. However, the Company reserves the
right to deduct such taxes on or after the date they are incurred.
TAX CONSIDERATIONS
The Contract is designed for use by personal retirement plans and
employer, association and other group retirement plans under the provisions of
Sections 401 (including Section 401(k)), 403, 408(b), 408(c), 408(k), 408(p) and
408A of the Internal Revenue Code (the "Code"), as well as non-qualified
retirement plans. The ultimate effect of federal income taxes may depend upon
the type of retirement plan for which the Contract is purchased, among other
factors. The following discussion is general in nature, is based upon the
Company's understanding of current federal income tax laws, and is not intended
as tax advice. Congress may enact legislation affecting the tax treatment of
annuity contracts, which could be applied retroactively to Contracts purchased
before the date of enactment. Also, because the Code is not in force in the
Commonwealth of Puerto Rico, some references in this discussion will not apply
to Contracts issued in Puerto Rico. Any person contemplating the purchase of a
Contract should consult a qualified tax adviser.
Participants should be aware that the Company does not make any guarantee
regarding the federal, state or local tax status of any Contract or any
transaction involving the Contracts.
TAX TREATMENT OF THE COMPANY
The Company is taxed as a life insurance company under Subchapter L of the
Code.
TAXATION OF ANNUITIES IN GENERAL
The Purchase Payment made under a Non-Qualified Contract is not deductible
from the Participant's income for federal income tax purposes. Participants
under Qualified Contracts should consult a tax adviser regarding the tax
treatment of Purchase Payments.
Generally, no taxes are imposed on the increase in the value of a Contract
until a distribution occurs, either as an annuity payment or as a cash
withdrawal or lump-sum payment prior to the Annuity Commencement Date. However,
corporate Owners and Participants and other Owners and Participants that are not
natural persons are subject to taxation on the annual increase in value of a
Non-Qualified Contract, unless the non-natural person holds the Contract as
agent for a natural person (for example, a bank holding a Contract as trustee
under a trust agreement). The taxation of annuities held by non-natural persons
does not apply to earnings accumulated under an "immediate annuity," which the
Code defines as a single premium contract with an annuity commencement date
within one
23
<PAGE>
year of the date of purchase. Also, the Internal Revenue Service might assert
that Owners or Participants under both Qualified Contracts and Non-Qualified
Contracts annually receive, and are subject to tax on, a deemed distribution
equal to the cost of any life insurance benefit provided by the Contracts.
The following discussion applies to both Individual Contracts and Group
Contracts. Because the Code is unclear in its application to a group annuity
contract where the owner is distinct from the individuals who receive the
contract benefits, the discussion as applied to the Group Contracts is the
Company's best understanding of the operation of the Code in the context of
group contracts. However, Owners and Participants should consult a qualified tax
adviser.
Under a Non-Qualified Contract, a partial cash withdrawal (I.E., a
withdrawal of less than the entire Accumulation Account Value) before the
Annuity Commencement Date is treated first as a withdrawal from the increase in
the Accumulation Account Value, rather than as a return of the Purchase Payment.
The amount of the withdrawal allocable to this increase is includible in the
Participant's income and is subject to tax at ordinary income rates. If part or
all of an Accumulation Account Value is assigned or pledged as collateral for a
loan, the amount assigned or pledged must be treated as if it were withdrawn
from the Contract.
In the case of annuity payments under a Non-Qualified Contract occuring
after the Annuity Commencement Date, a portion of each payment is treated as a
nontaxable return of the Purchase Payment. The nontaxable portion is determined
by applying an "exclusion ratio" to each annuity payment. An exclusion ratio, in
general, is the ratio that the total amount the Participant paid for the
Contract bears to the Payee's expected return under the Contract. The remainder
of the payment is taxable at ordinary income rates.
The total amount that a Payee may exclude from income through application
of the "exclusion ratio" is limited to the amount the Participant paid for the
Contract. If the Annuitant survives for his full life expectancy, so that the
Payee recovers the entire amount paid for the Contract, any subsequent annuity
payments will be fully taxable as income. Conversely, if the Annuitant dies
before the Payee recovers the entire amount paid, the Payee will be allowed a
deduction for the unrecovered amount of the Purchase Payment.
Taxable cash withdrawals and lump-sum payments from Non-Qualified
Contracts may be subject to a penalty tax equal to 10% of the amount treated as
taxable income. This 10% penalty also may apply to certain annuity payments.
This penalty will not apply in certain circumstances (such as where the
distribution is made upon the death of the Participant). The withdrawal penalty
also does not apply to distributions under an immediate annuity (as defined
above).
In the case of Qualified Contracts, distributions generally are taxable
and distributions made prior to age 59 1/2 are subject to a 10% penalty tax,
although this penalty tax will not apply in certain circumstances. Certain
distributions, known as "eligible rollover distributions," if rolled over to
certain other qualified retirement plans (either directly or after being
distributed to the Participant or Payee), are not taxable until distributed from
the plan to which they are rolled over. In general, an "eligible rollover
distribution" is any taxable distribution other than a hardship distribution or
a distribution that is part of a series of payments made for life or for a
specified period of ten years or more.
Owners, Participants, Annuitants, Payees and Beneficiaries should seek
qualified advice about the tax consequences of distributions, withdrawals,
rollovers and payments under the retirement plans in connection with which the
Contracts are purchased.
If the Participant under a Non-Qualified Contract dies, the value of the
Contract generally must be distributed within a specified period (See "Death
Benefit"). For Contracts owned by non-natural persons, a change in the Annuitant
is treated as the death of the Participant.
A Participant under Qualified Contract should refer to the terms of the
applicable retirement plan and consult a tax adviser regarding distribution
requirements upon the death of the Participant.
The transfer of a Non-Qualified Contract by gift (other than to the
Participant's spouse) is treated as the receipt by the Participant of income in
an amount equal to the Accumulation Account Value minus the total amount paid
for the Contract.
24
<PAGE>
The Company will withhold and remit to the U.S. Government a part of the
taxable portion of each distribution made under a Non-Qualified Contract or
under a Qualified Contract issued for use with an individual retirement account,
unless the Participant or Payee provides his or her taxpayer identification
number to the Company and notifies the Company (in the manner prescribed) before
the time of the distribution that he or she chooses not to have any amounts
withheld.
In the case of distributions from a Qualified Contract (other than
distributions from a Contract issued for use with an individual retirement
account), the Company or the plan administrator is required to withhold and
remit to the U.S. Government 20% of each distribution that is an eligible
rollover distribution (as defined above), 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. If a distribution from a
Qualified Contract is not an eligible rollover distribution, then the
Participant or Payee can choose not to have amounts withheld as described above
for Non-Qualified Contracts and Qualified Contracts issued for use with
individual retirement accounts.
Amounts withheld from any distribution may be credited against the
Participant's or Payee's federal income tax liability for the year of the
distribution.
THE FOLLOWING INFORMATION SHOULD BE CONSIDERED ONLY WHEN AN IMMEDIATE
ANNUITY CONTRACT AND A DEFERRED ANNUITY CONTRACT ARE PURCHASED TOGETHER: The
Company understands that the Treasury Department is in the process of
reconsidering the tax treatment of annuity payments under an immediate annuity
contract (as defined above) purchased together with a deferred annuity contract.
The Company believes that any adverse change in the existing tax treatment of
such immediate annuity contracts is likely to be prospective, that is, it would
not apply to contracts issued before such a change is announced. However, there
can be no assurance that any such change, if adopted, would not be applied
retroactively.
QUALIFIED RETIREMENT PLANS
The Qualified Contracts are designed for use with several types of
qualified retirement plans. The tax rules applicable to participants in such
qualified retirement plans vary according to the type of plan and its terms and
conditions. Therefore, this discussion does not attempt to provide more than
general information about the use of the Qualified Contracts with the various
types of qualified retirement plans. Participants under such plans as well as
Owners, Annuitants, Payees and Beneficiaries are cautioned 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 and conditions of
the Qualified Contracts issued in connection therewith. These terms and
conditions may include restrictions on, among other things, ownership,
transferability, assignability, contributions and distributions. Any person
contemplating the purchase of a Qualified Contract should consult a qualified
tax adviser. In addition, Owners, Participants, Payees, Beneficiaries and
administrators of qualified retirement plans should consider and consult their
tax advisers concerning whether the death benefit payable under the Contract
affects the qualified status of their retirement plan. Following are brief
descriptions of various types of qualified retirement plans and the use of the
Qualified Contracts in connection therewith.
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. The Contract may be purchased by those who would have
been covered under the rules governing old H.R. 10 (Keogh) Plans, as well as by
corporate plans. Such retirement plans may permit the purchase of Qualified
Contracts to provide benefits under the plans. Employers intending to use the
Qualified Contracts in connection with such plans should seek qualified advice
in connection therewith.
25
<PAGE>
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. Such annuity contracts are commonly referred to
as "Tax-Sheltered Annuities." Purchasers of the Qualified Contracts for such
purposes should seek qualified advice as to eligibility, limitations on
permissible amounts of Purchase Payments and tax consequences of distributions
(See "Section 403(b) Annuities").
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) known as an Individual
Retirement Account ("IRA"). These IRAs are subject to limitations on the amount
that may be contributed, the persons who may be eligible, and the time when
distributions may commence. In addition, certain distributions from some other
types of retirement plans may be placed on a tax-deferred basis in an IRA.
Sales of the Contract for use with IRAs may be subject to special
requirements imposed by the Internal Revenue Service. The Company will provide
purchasers of Contracts to be used in connection with IRAs with such
supplementary information as may be required by the Internal Revenue Service or
other appropriate agency. Additionally, purchasers of Contracts to be used in
connection with IRAs will have the right to revoke their Contracts under certain
circumstances (See "Right to Return Contract").
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
regular IRA under Section 408 of the Code, contributions to a Roth IRA are not
made on tax-deferred basis. However, distributions are tax-free, provided
certain requirements are satisfied. Like regular IRAs, Roth IRAs are subject to
limitations on the amount that may be contributed and the time when
distributions may commence. A regular IRA may be converted into a Roth IRA and
the resulting income may be spread over four years if the conversion occurs
before January 1, 1999. The Company will provide to purchasers of the Contracts
to be used in connection with Roth IRAs such supplementary information as may be
required by the Internal Revenue Service or other appropriate agency.
DISTRIBUTION OF THE CONTRACTS
The Contracts are offered by the Company on a continuous basis. The
Contracts are sold by licensed insurance agents in those states where the
Contracts may be lawfully sold. The agents are registered representatives of
broker-dealers registered under the Securities Exchange Act of 1934. The
broker-dealers are members of the National Association of Securities
Dealers, Inc. and 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 is a
wholly-owned subsidiary of the Company and is registered as a broker-dealer with
the Securities and Exchange Commission under the Securities Exchange Act of
1934. Clarendon is a member of the National Association of Securities
Dealers, Inc. and acts as the general distributor of certain other annuity
contracts issued by the Company and its wholly-owned subsidiary, Sun Life
Insurance and Annuity Company of New York, and variable life insurance contracts
issued by the Company.
Commissions and other distribution compensation with respect to the
Contracts will be paid by the Company and will not be more than 5.75% of the
Purchase Payment. Commissions will not be paid with respect to Accumulation
Accounts established for the personal account of employees of the Company or any
of its affiliates, or of persons engaged in the distribution of the Contracts,
or of immediate family members of such employees or persons. In addition,
commissions may be waived or reduced in
26
<PAGE>
connection with certain transactions (See "Waivers, Reduced Charges; Credits;
Bonus Guaranteed Interest Rates").
In addition to commissions, the Company may provide additional promotional
incentives, in the form of cash or other compensation. In some instances, these
incentives may be offered only to certain broker-dealers that sell or are
expected to sell during specified time periods certain minimum amounts of the
Contracts or other contracts offered by the Company.
ADDITIONAL INFORMATION ABOUT THE COMPANY
GENERAL
The Company is engaged in the sale of individual variable life 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.
The following table sets forth premiums and deposits by major product
categories for each of the last 3 years. See the Notes to the Statutory
Financial Statements of the Company included in this Prospectus for industry
segment information.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Protection $ 16,509 $ 155,907 $ 204,671
Wealth Management $2,651,247 $2,194,895 $2,204,693
---------- ---------- ----------
$2,667,756 $2,350,802 $2,409,364
========== ========== ==========
</TABLE>
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the Statutory Financial Statements and the Notes thereto
included in this Prospectus beginning on page .
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues
Premiums, annuity deposits
and other revenue $ 2,869,250 $ 2,581,463 $ 2,623,629 $ 2,215,322 $ 1,883,901
Net investment income and
realized gains 190,844 187,208 298,121 310,172 315,966
----------- ----------- ----------- ----------- -----------
3,060,094 2,768,671 2,921,750 2,525,494 2,199,867
----------- ----------- ----------- ----------- -----------
Benefits and expenses
Policyholder benefits 2,706,121 2,416,950 2,579,104 2,232,528 1,995,208
Other expenses 239,136 214,607 206,065 175,342 150,937
----------- ----------- ----------- ----------- -----------
2,945,257 2,631,557 2,785,169 2,407,870 2,146,145
----------- ----------- ----------- ----------- -----------
Operating gain 114,837 137,114 136,581 117,624 53,722
Federal income tax expense
(benefit) 24,479 11,713 7,339 (5,400) 17,807
----------- ----------- ----------- ----------- -----------
Net income $ 90,358 $ 125,401 $ 129,242 $ 123,024 $ 35,915
=========== =========== =========== =========== ===========
Assets $19,948,155 $16,902,621 $15,925,357 $13,621,952 $12,359,683
=========== =========== =========== =========== ===========
Surplus notes $ 565,000 $ 565,000 $ 565,000 $ 315,000 $ 650,000
=========== =========== =========== =========== ===========
</TABLE>
See "Reinsurance," below, for the effect of the reinsurance agreements on 1999
net income.
See Note 1 to the Statutory Financial Statements for changes in accounting
principles and reporting.
See discussion in "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAUTIONARY STATEMENT
This Prospectus includes forward-looking statements by the Company under
the Private Securities Litigation Reform Act of 1995. These statements are not
matters of historical fact; they relate to such topics as future product sales,
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.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998:
NET INCOME
Net income decreased by $35.0 million to $90.4 million in 1999, reflecting
a decrease of $54.7 million in income from operations and an increase of
$19.7 million in net realized capital gains. (In the following discussion,
"income from operations" refers to the statutory statements of operations line
item, "net gain from operations after dividends to policyholders and federal
income tax and before realized capital gains.")
Income from operations decreased from $125.0 million in 1998 to
$70.3 million in 1999, mainly as a result of the following factors:
- A $32.3 million increase, to $63.7 million in 1999, in the income from
operations from the Company's Wealth Management segment. (See "1999
Compared to 1998 -- Wealth Management Segment," below.)
- The effect of terminating certain reinsurance agreements with the
Company's ultimate parent in 1998. The termination of these agreements was
the predominant factor in the $94.2 million decrease in income from
operations for the Company's Protection segment. (See "1999 Compared to
1998 -- Protection Segment," below.)
- An increase of $7.2 million in income from operations from the Corporate
segment, mainly reflecting dividends from a subsidiary. (See "1999
Compared to 1998 -- Corporate Segment," below.)
INCOME FROM OPERATIONS BY SEGMENT
The Company's income from operations reflects the operations of its 3
business segments: the Wealth Management segment, the Protection segment and the
Corporate segment.
28
<PAGE>
The following table provides a summary of income from operations by
segment, which is discussed more fully below.
INCOME FROM OPERATIONS BY SEGMENT*
($ IN MILLIONS)
<TABLE>
<CAPTION>
% CHANGE
---------------------
1999 1998 1997 1999/1998 1998/1997
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Wealth Management $63.7 $ 31.4 $ 14.7 102.9% 113.6%
Protection (5.1) 89.1 18.0 (105.7)% 395.0%
Corporate 11.7 4.5 69.8 160.0% (93.6)%
----- ------ ------ ------ -----
$70.3 $125.0 $102.5 (43.8)% 22.0%
===== ====== ====== ====== =====
</TABLE>
* Before net realized capital gains
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. through independent managers. In 1997, the Company decided to no longer
market group pension and GIC products.
Following are the major factors affecting this segment's results in 1999
as compared to 1998.
- - Deposit-type funds, which primarily comprised annuity deposits, increased by
$457.7 million, or 21%, to $2,598.3 million in 1999. Fixed annuity account
deposits were higher by approximately $625 million in 1999, which management
believes 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 6-month DCA program. Under these programs, which were
redesigned in late 1996, deposits are made into the fixed portion of the
annuity contract and receive a bonus rate of interest for the policy year.
During the year, the fixed deposit is systematically transferred to the
variable portion of the contract in equal periodic installments. While fixed
annuity account deposits increased, deposits directly into variable accounts
declined by approximately 13% in 1999. The Company believes this decline was a
consequence of the heightened interest in the DCA programs in 1999.
Sales of the Futurity line of products, introduced in February 1998,
represented approximately 9% of total annuity deposits in 1999. The Company
expects that sales of the Futurity products will continue to increase in the
future, based on management's beliefs that market demand is growing for multi-
29
<PAGE>
manager variable annuity products, such as Futurity; that the productivity of
Futurity's wholesale distribution network, established in 1998, will continue
to grow; and that the marketplace will respond favorably to introductions of
new Futurity products and product enhancements.
- - Fee income increased as a result of higher variable annuity account balances.
Fee income was higher by approximately $32 million in 1999. The factors
driving this growth in account balances have been market appreciation and net
deposit activity. This growth has generated corresponding increases in fee
income, since fees are determined based on the average assets held in these
accounts. Other income increased by approximately $5 million in 1999, mainly
reflecting a reinsurance agreement entered into in July 1999 with an unrelated
company, which provides reinsurance on certain fixed group annuity contracts.
The net effect of this agreement was to increase income from operations by
approximately $3.4 million.
- - The net year-over-year change in aggregate reserves on policies and contracts
for the Wealth Management segment had the effect of increasing income from
operations for this segment. This change reflected lower reserves related to
minimum guaranteed death benefit product features as well as a variety of
other factors.
- - 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. In 1999, net investment income for the Wealth
Management segment decreased by $44.0 million, to $114.0 million. 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 surrenders and
withdrawals, changes in the liability for premium and other deposit funds, and
related separate account transfers) were higher by approximately $430 million
in 1999, mainly as a result of higher variable annuity surrenders. The
increase in variable annuity surrenders primarily related to a block of
separate account contracts that had been issued seven or more years previously
and for which the surrender charge periods had expired. The Company expects
that as the separate account block of business continues to grow and as 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.
- - Operational expenses, which include general insurance expenses and insurance
taxes, licenses and fees, excluding federal income taxes, increased by
$5.4 million, or 9%, in 1999. This increase reflected costs associated with
operations and technology improvements to support the growth of the Company's
in-force business. Commissions of $153.6 million were higher by $17.7 million
in 1999, mainly as a result of higher sales.
PROTECTION SEGMENT
The Protection Segment comprises two main elements, internal reinsurance
and variable 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). This agreement had the effect of increasing income from operations by
$24.6 million in 1998. In addition, the effect of terminating this agreement was
to further increase 1998 net income by $65.7 million as the termination payment
was less than the
30
<PAGE>
reserves held under the agreement. Because this agreement terminated in 1998, it
had no effect on income from operations in 1999.
VARIABLE LIFE PRODUCTS
The Company's primary individual variable life insurance product is its
variable universal life product marketed to the company-owned life insurance
("COLI") market. This product was introduced in late 1997. The Company's
management expects that the Company's variable life business will grow and
become more significant in the future. In September 1999, the Company introduced
a new variable universal life product as part of the Futurity product portfolio.
Costs related to developing this product were primarily responsible for the
decrease of approximately $4 million in income from operations for this portion
of the Protection segment.
CORPORATE SEGMENT
The Corporate segment includes the capital of the Company, its investments
in subsidiaries and items not otherwise attributable to either the Wealth
Management segment or the Protection segment.
In 1999, income from operations for this segment increased by
$7.2 million to $11.7 million. This increase reflected higher net investment
income, mainly from dividends of $19.3 million received during the 4th quarter
from a subsidiary, New London Trust, F.S.B. Partially offsetting this change in
net investment income were higher operational expenses and higher federal income
taxes attributable to this segment.
1998 COMPARED TO 1997:
NET INCOME
Net income decreased by $3.8 million to $125.4 million in 1998, reflecting
an increase of $22.5 million in income from operations and a decrease of
$26.3 million in net realized capital gains.
Income from operations increased from $102.5 million in 1997 to
$125.0 million in 1998, mainly as a result of the following factors:
- - A $16.7 million increase, to $31.4 million in 1998, in the income from
operations from the Company's Wealth Management segment. (See "1998 Compared
to 1997 -- Wealth Management Segment," below.)
- - The effect of terminating certain reinsurance agreements with Sun Life
(Canada). The termination of these agreements was the predominant factor in
the $71.1 million increase in income from operations for the Company's
Protection segment.
- - The effects of the Company's December 1997 reorganization (described in
"Corporate Segment," below), as a result of which MFS is no longer a
subsidiary of the Company. As a result of this reorganization, dividends from
subsidiaries were lower in 1998 than in 1997 and certain subsidiary tax
benefits were no longer available to the Company. Also affecting income from
operations for the Corporate segment in 1998 was that income earned on the
proceeds of a December 1997 issuance of a $250 million surplus note was lower
than the related interest expense.
Net realized capital gains decreased from $26.7 million in 1997 to
$0.4 million in 1998. This decrease was also due to the Company's December
1997 reorganization which resulted in a realized capital gain of
$21.2 million in 1997.
31
<PAGE>
INCOME FROM OPERATIONS BY SEGMENT
WEALTH MANAGEMENT SEGMENT
Following are the major factors affecting the Wealth Management segment's
results in 1998 as compared to 1997:
- Annuity deposits declined by about $27 million, or 1%, to $2.2 billion
in 1998. Fixed annuity account deposits were lower by approximately 7%
in 1998, while deposits into variable annuity accounts increased in
total and as a proportion of total annuity deposits. These trends
reflected market conditions and competitive factors.
Deposits into the DCA programs, a feature of the Company's combination
fixed/variable annuity products, were a significant element of account
deposits. Under these programs, which were redesigned in late 1996,
deposits are made into the fixed portion of the annuity contract and
receive a bonus rate of interest for the policy year. During the year,
the fixed deposit is systematically transferred to the variable portion
of the contract in equal periodic installments. DCA deposits overall
were flat in 1998 compared to 1997. This pattern resulted, in part, from
heightened competition, as other companies introduced similar DCA
programs within in 1998. During the fourth quarter of 1998, the Company
introduced a higher DCA rate and a new six-month DCA program. DCA
deposits for that quarter were higher, compared to the preceding 1998
quarters.
An increase in variable account deposits in 1998 reflected 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. The continuing strong equity markets, low
interest rate environment, and demographic trends, among other factors,
increased the demand and market for wealth accumulation products in the
U.S., particularly for variable annuities. These factors contributed to
the growth in the Company's variable account deposits in 1998, despite
heightened competition.
The Company introduced its Futurity line of products in February 1998.
Related deposits represented about 6% of the total for the Wealth
Management segment in 1998.
- Fee income increased as a result of higher variable annuity account
balances. The main factors driving this growth in account balances were
market appreciation and net deposit activity. This growth generated
corresponding increases in fee income, since fees are determined based
on the average assets held in these accounts. Fee income increased by
approximately $43 million, or 39%, in 1998.
- Because there was a shift to variable accounts from the general
account, net investment income declined. Net investment income reflects
only income earned on invested assets of the general account. In 1998,
net investment income for the Wealth Management segment decreased by
about $40 million, or 20%, compared to 1997, mainly as a result of the
decline in average invested assets in the Company's general account.
This decline in average general account assets mainly reflected the
shift in deposits in recent years from the fixed account to variable
accounts. It also reflected the Company's decision in 1997 to no longer
market group pension and GICs.
- Policyholder benefits were lower, mainly reflecting lower surrender
activity compared to 1997. During 1997 and into the first half of 1998,
surrender and withdrawal activity had been high. This activity
primarily related to a block of separate account contracts that had
been issued 7 or more years previously and for which the surrender
charge periods had expired. While variable account surrenders continued
to rise, general account surrenders declined in 1998. As a result of
this pattern of activity, policyholder benefits (of which surrenders
and withdrawals, the related changes in the liability for premium and
other deposit funds, and related separate account transfers are the
major elements) increased in 1997 and were lower in 1998.
32
<PAGE>
- As a result of investments in technology and infrastructure to enhance
annuity operations, operational expenses increased by approximately $12
million, or 25%, in 1998 compared to 1997. These increases reflected 3
main factors:
- Higher volumes of annuity business, requiring greater administrative
support.
- Improvements to the computer systems and technology that support the
annuity business. These improvements involved information systems
supporting the growth of the Company's in-force business, particularly
its combination fixed/variable annuities.
- Costs associated with the product design and implementation of the new
Futurity multi-manager annuity product and the development of a new
product within the Regatta product line.
PROTECTION SEGMENT
The reinsurance arrangements in which Sun Life (Canada) has reinsured the
mortality risks of individual life policies sold in prior years by the Company
had an immaterial effect, in the aggregate, on net income in 1997 and 1998.
Under another 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). This agreement had the effect of
increasing income from operations by $37.1 million in 1997. Income from
operations decreased to $24.6 million in 1998, because the agreement was in
place only through the first 9 months of 1998. In addition, the effect of
terminating this agreement was to further increase 1998 net income by $65.7
million. This termination-related increase in 1998 represented a reasonable
approximation of the value of the stream of future earnings that the agreement
would have generated had it remained in effect.
The Company's primary individual variable life insurance product is its
variable universal life product marketed to the company-owned life insurance
("COLI") market. This product was introduced in late 1997.
CORPORATE SEGMENT
In 1998, income from operations decreased by $65.3 million to
$4.5 million for the Corporate segment. This decrease reflected 2 main factors:
- Dividends from subsidiaries were lower than in 1997 by $37.5 million. This
decrease mainly resulted from a December 1997 reorganization, in which the
Company transferred its ownership of MFS to its parent company, Sun Life
of Canada (U.S.) Holdings, Inc. ("Sun Life (U.S.) Holdings.") As a result
of this reorganization, the Company received no dividends from MFS in
1998. By comparison, it received $33.1 million of MFS dividends in 1997.
- Net investment income, other than dividends from subsidiaries, decreased
by $5.9 million in 1998 over 1997, reflecting the effect of the Company's
December 1997 issuance of a $250 million surplus note to Sun Life (U.S.)
Holdings. Interest expense exceeded investment earnings on the related
funds.
FINANCIAL CONDITION AND LIQUIDITY
ASSETS
The Company's total assets comprise those held in its general account and
those held in its separate accounts. General account assets support general
account liabilities. Separate accounts and their assets are of 2 main types:
- Those assets held in a "fixed" separate account, which the Company
established for amounts that contract holders allocate to the fixed
portion of their combination fixed/variable deferred annuity contracts.
Fixed separate account assets are available to fund general account
liabilities and general account assets are available to fund the
liabilities of this fixed separate account. The
33
<PAGE>
Company manages the assets of this fixed separate account according to
general account investment policy guidelines.
- Those assets held in a number of registered and non-registered "variable"
separate accounts as investment vehicles for the Company's variable life
and annuity contracts. Policyholders may choose from among various
investment options offered under these contracts according to their
individual needs and preferences. Policyholders assume the investment
risks associated with these choices. General account and fixed separate
account assets are not available to fund the liabilities of these variable
accounts.
The following table summarizes significant changes in asset balances
during 1999, 1998 and 1997. The changes are discussed below.
<TABLE>
<CAPTION>
ASSETS % CHANGE
1999 1998 1997 1999/1998 1998/1997
--------- --------- --------- --------- ---------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
General account assets.................. $ 2,377.1 $ 2,932.2 $ 4,513.5 (18.9)% (35.0)%
Fixed separate account assets........... 2,080.7 2,195.6 2,343.9 (5.2)% (6.3)%
--------- --------- --------- ----- -----
$ 4,457.8 $ 5,127.8 $ 6,857.4 (13.1)% (25.2)%
Variable separate account assets........ 15,490.3 11,774.8 9,068.0 31.6% 29.9%
--------- --------- --------- ----- -----
Total assets............................ $19,948.1 $16,902.6 $15,925.4 18.0% 6.1%
========= ========= ========= ===== =====
</TABLE>
General account and fixed separate account assets, taken together,
decreased by 13.2% in 1999; but variable separate account assets increased by
31.6%. In 1998, the combined general account and fixed separate account
decreased by 25.2%, while variable separate account assets increased by 29.9%.
This growth in variable accounts relative to the general and fixed accounts
reflects 2 main factors: (1) appreciation of the funds held in the variable
separate accounts has exceeded that of the funds held in the general and fixed
separate accounts; and (2) annuity deposits and exchanges into variable accounts
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 and invested assets, which
represented essentially all of general account assets at year-end 1999. Major
types of invested asset holdings included bonds, mortgages, real estate and
common stock. The Company's bond holdings comprised 51.5% of the Company's
portfolio at year-end 1999. Bonds 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 bond portfolio is high. At year-end 1999, only 0.5%
were rated below-investment-grade; i.e., they had National Association of
Insurance Commissioners ("NAIC") ratings lower than "1" or "2." The Company's
mortgage holdings amounted to $528.9 million at year-end 1999, representing
22.3% of the total portfolio. All mortgage holdings at year-end 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
year-end 1999, investment real estate amounted to $79.2 million, representing
about 3.3% 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. Common stock holdings amounted to $75.3 million, representing about
3.2% of the portfolio. These holdings comprised the Company's ownership shares
in subsidiaries.
34
<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.
CAPITAL MARKETS RISK MANAGEMENT
See "Quantitative and Qualitative Disclosures About Market Risk," below,
for a discussion of the Company's capital markets risk management.
CAPITAL RESOURCES
CAPITAL ADEQUACY
The National Association of Insurance Commissioners ("NAIC") adopted
regulations at the end of 1993 that established minimum capitalization
requirements for insurance companies, based on risk-based capital ("RBC")
formulas. These requirements are intended to identify undercapitalized
companies, so that specific regulatory actions can be taken on a timely basis.
The RBC formula for life insurance companies 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 and fixed separate account assets in
relation to its liabilities, the Company has segmented these assets by product
or by groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. Among other matters,
this investment policy considers liquidity requirements and provides cash flow
estimates. The Company reviews these policies quarterly.
The Company's liquidity targets are intended to enable it to meet its
day-to-day cash requirements. On a quarterly basis, the Company compares its
total "liquifiable" assets to its total demand liabilities. Liquifiable assets
comprise cash and assets that could quickly be converted to cash should the need
arise. These assets include short-term investments and other current assets and
investment-grade bonds. The Company's policy is to maintain a liquidity ratio in
excess of 100%, and it did so throughout 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
On January 27, 1998, Sun Life (Canada) announced that its Board of
Directors had requested that management develop a plan to demutualize.
Demutualization would involve converting from a mutual structure, with ownership
by policyholders, to a shareholder-owned company. It would provide that the
ownership interest currently held by policyholders be distributed to them in the
form of shares, without affecting their interests as policyholders. In
June 1999, the Sun Life (Canada)'s Board of
35
<PAGE>
Directors approved the demutualization timetable recommended by management, and
on September 28, 1999, Sun Life (Canada)'s Board of Directors approved the
demutualization plan. On December 6, 1999, Sun Life (Canada) received approval
for its demutualization plan from the Michigan Commissioner of Insurance. At a
Special Meeting on December 15, 1999, eligible policyholders of Sun Life
(Canada) voted in favor of the Company's plans to demutualize. Sun Life (Canada)
completed its demutualization on March 22, 2000 and its Initial Public Offering
("IPO") on March 29, 2000. The demutualization of Sun Life (Canada) is not
expected to have any significant impact on the Company.
SALE OF SUBSIDIARIES
On February 5, 1999, the Company sold Massachusetts Casualty Insurance
Company ("MCIC"), a disability insurance company, to an unaffiliated party. The
net proceeds of this sale were $34.0 million and the Company realized a post tax
gain of $4.9 million.
On October 29, 1999, the Company completed the sale of its wholly-owned
subsidiary, New London Trust F.S.B. ("NLT"), for approximately $30.3 million to
an unaffiliated party. The Company realized a post-tax gain of $13.2 million
from this sale. This transaction is not expected to have a significant effect on
the ongoing operations of the Company.
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 stringent underwriting standards and practices have resulted
in high-quality portfolios and have the effect of limiting credit risk. It is
the Company's policy, for example, not to purchase below-investment-grade
securities. Also, as a matter of investment policy, the Company assumes no
foreign currency or commodity risk; nor does it assume equity price risk except
to the extent that it holds real estate in its portfolios. (At year-end 1999,
investment real estate holdings represented less than 4% of its total general
account portfolio.) 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
36
<PAGE>
and to collateralized mortgage obligations, which are expected to exhibit
relatively low volatility. The Company does not engage in lever-aged
transactions and it does not invest in the more speculative forms of these
instruments such as the interest-only, principal-only, inverse floater, or
residual tranches.
Changes in the level of domestic interest rates affect the market value of
fixed interest assets and liabilities. Segments whose liabilities mainly arise
from the sale of products containing interest rate guarantees for certain terms
are sensitive to changes in interest rates. In these segments, the Company uses
"immunization" strategies, which are specifically designed to minimize the loss
from wide fluctuations in interest rates. The Company supports these strategies
using analytical and modeling software acquired from outside vendors.
Significant features of the Company's immunization models include:
- an economic or market value basis for both assets and liabilities;
- an option pricing methodology;
- the use of effective duration and convexity to measure interest rate
sensitivity;
- the use of key rate durations to estimate interest rate exposure at
different parts of the yield curve and to estimate the exposure to
non-parallel shifts in the yield curve.
The Company's Interest Rate Risk Committee meets monthly. After reviewing
duration analyses, market conditions and forecasts, the Committee develops
specific asset management strategies for the interest-sensitive portfolios.
These strategies may involve managing to achieve small intentional mismatches,
either in terms of total effective duration or for certain key rate durations,
between the liabilities and related assets of particular segments. The Company
manages these mismatches to a tolerance range of plus or minus 0.5.
Asset strategies may include the use of Treasury futures or interest rate
swaps to adjust the duration profiles for particular portfolios. All derivative
transactions are conducted under written operating guidelines and are marked to
market. Total positions and exposures are reported to the Board of Directors on
a monthly basis. The counterparties to hedging transactions are major highly
rated financial institutions, with respect to which the risk of the Company's
incurring losses related to credit exposures is considered remote.
Liabilities categorized as financial instruments and held in the Company's
general account at December 31, 1999 had a fair value of $1,024.6 million. Fixed
income investments supporting those liabilities had a fair value of $2,072.1
million at that date. The Company performed a sensitivity analysis on these
interest-sensitive liabilities and assets at December 31, 1999. The analysis
showed that if there were an immediate increase of 100 basis points in interest
rates, the fair value of the liabilities would show a net decrease of $30.6
million and the corresponding assets would show a net decrease of $80.5 million.
By comparison, liabilities categorized as financial instruments and held
in the Company's general account at December 31, 1998 had a fair value of
$1,538.3 million. Fixed income investments supporting those liabilities had a
fair value of $2,710.1 million at that date. The Company performed a sensitivity
analysis on these interest-sensitive liabilities and assets at December 31,
1998. The analysis showed that if there were an immediate increase of 100 basis
points in interest rates, the fair value of the liabilities would show a net
decrease of $46.3 million and the corresponding assets would show a net decrease
of $113.2 million.
The Company produced these estimates using computer models. Since these
models reflect assumptions about the future, they contain an element of
uncertainty. For example, the models contain assumptions about future
policyholder behavior and asset cash flows. Actual policyholder behavior and
asset cash flows could differ from what the models show. As a result, the
models' estimates of duration and market values may not reflect what actually
will occur. The models are further limited by the fact that they do not provide
for the possibility that management action could be taken to mitigate adverse
results. The Company believes that this limitation is one of conservatism; that
is, it will tend to cause
37
<PAGE>
the models to produce estimates that are generally worse than one might actually
expect, all other things being equal.
Based on its processes for analyzing and managing interest rate risk, the
Company believes its exposure to interest rate changes will not materially
affect its near-term financial position, results of operations, or cash flows.
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. Reinsurance transactions under these agreements
in 1999 had the effect of decreasing net income from operations by approximately
$1,527,000.
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. These agreements had the effect of increasing income from
operations by approximately $24,579,000 for the year ended December 31, 1998.
The Company terminated these agreements effective October 1, 1998, resulting in
an increase in income from operations in 1998 of $65,679,000 which included a
cash settlement.
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. Reinsurance transactions under this agreement had the effect of
increasing income from operations by $193,000 in 1999.
During 1999, the Company entered into an agreement with an unrelated
company which provides reinsurance on certain fixed group annuity contracts. The
net effect of this agreement was to increase income from operations by
approximately $3,400,000. 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 net effect of these agreements was to
increase income from operations by approximately $157,000.
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 $19.9 billion at December 31, 1999, 88.1%
($17.6 billion) consisted of unitized and non-unitized separate account assets,
6.1% ($1.2 billion) was invested in bonds and similar securities, 2.7%
($528 million) was invested in mortgages, 0.4% ($75.3 million) was invested in
subsidiaries, 0.4% ($94.8 million) was invested in real estate, and the
remaining 2.3% ($456.1 million) was invested in cash and other assets.
38
<PAGE>
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 total 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 March 31, 2000, the Company had 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 1st 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 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 affecting the taxation of insurance companies, the tax treatment
of insurance products and its impact on the relative desirability of various
personal investment vehicles.
39
<PAGE>
ACCOUNTANTS
The statutory financial statements of the Company as of December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999,
included and incorporated by reference in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and elsewhere in the registration statement, which are included
and incorporated by reference herein, and have been so included and incorporated
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
REGISTRATION STATEMENTS
Registration statements have been filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 as amended, with
respect to the Contracts. This Prospectus does not contain all the information
set forth in the registration statements and the exhibits filed as part of the
registration statements, to all of which reference is hereby made for further
information concerning the Fixed Account, the Company and the Contracts.
Statements found in this Prospectus as to the terms of the Contracts and other
legal instruments are summaries, and reference is made to such instruments as
filed.
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 the death benefit and the Company's
assumption of the mortality and expense risks.
------------------------
40
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
DECEMBER 31, 1999 AND 1998 (IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 1,221,970 $ 1,763,468
Common stocks 75,283 128,445
Mortgage loans on real estate 528,911 535,003
Properties acquired in satisfaction of debt 15,641 17,207
Investment real estate 79,182 78,021
Policy loans 40,095 41,944
Cash and short-term investments 316,971 265,226
Other invested assets 67,938 64,177
Investment income due and accrued 25,303 35,706
Federal income tax recoverable and interest thereon -- 1,110
Other assets 5,807 1,928
----------- -----------
General account assets 2,377,101 2,932,235
Separate account assets
Unitized 15,490,328 11,774,745
Non-unitized 2,080,726 2,195,641
----------- -----------
Total admitted assets $19,948,155 $16,902,621
=========== ===========
LIABILITIES
Aggregate reserve for life policies and contracts $ 1,153,642 $ 1,216,107
Supplementary contracts 3,182 1,885
Policy and contract claims 962 369
Liability for premium and other deposit funds 564,820 1,000,875
Surrender values on cancelled policies 16 5
Interest maintenance reserve 41,771 40,490
Commissions to agents due or accrued 3,253 2,615
General expenses due or accrued 14,055 5,932
Transfers from Separate Accounts due or accrued (467,619) (361,863)
Taxes, licenses and fees due or accrued, excluding FIT 379 401
Federal income taxes due or accrued 89,031 25,019
Unearned investment income 22 23
Amounts withheld or retained by company as agent or
trustee (442) 529
Remittances and items not allocated 1,078 5,176
Asset valuation reserve 44,071 44,392
Payable to parent, subsidiaries, and affiliates 26,284 30,381
Payable for securities -- 428
Other liabilities 16,674 9,770
----------- -----------
General account liabilities 1,491,179 2,022,534
Separate account liabilities:
Unitized 15,489,908 11,774,522
Non-unitized 2,080,726 2,195,641
----------- -----------
Total liabilities 19,061,813 15,992,697
----------- -----------
CAPITAL STOCK AND SURPLUS
Common capital stock 5,900 5,900
----------- -----------
Surplus notes 565,000 565,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 116,087 139,669
----------- -----------
Surplus 880,442 904,024
----------- -----------
Total common capital stock and surplus 886,342 909,924
----------- -----------
Total liabilities, capital stock and surplus $19,948,155 $16,902,621
=========== ===========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
41
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INCOME:
Premiums and annuity considerations $ 69,492 $ 210,198 $ 254,066
Deposit-type funds 2,598,265 2,140,604 2,155,297
Considerations for supplementary contracts without
life contingencies and dividend accumulations 3,461 2,086 1,615
Net investment income 167,035 184,532 270,249
Amortization of interest maintenance reserve 3,702 2,282 1,166
Income from fees associated with investment
management and administration and contract
guarantees from Separate Account 173,417 141,211 109,757
Net gain from operations from Separate Account 61 -- 5
Other income 24,554 87,364 102,889
---------- ---------- ----------
Total Income 3,039,987 2,768,277 2,895,044
---------- ---------- ----------
BENEFITS AND EXPENSES:
Death benefits 4,386 15,335 17,284
Annuity benefits 155,387 153,636 148,135
Disability benefits and benefits under accident and
health policies -- 104 132
Surrender benefits and other fund withdrawals 2,313,179 1,933,833 1,854,004
Interest on policy or contract funds 237 (140) 699
Payments on supplementary contracts without life
contingencies and dividend accumulations 2,345 2,528 1,687
Increase (decrease) in aggregate reserves for life
and accident and health policies and contracts (62,465) (972,135) 127,278
Decrease in liability for premium and other deposit
funds (436,055) (449,831) (447,603)
Increase (decrease) in reserve for supplementary
contracts without life contingencies and for
dividend and coupon accumulations 1,296 (362) 42
---------- ---------- ----------
Total Benefits 1,978,310 682,968 1,701,658
---------- ---------- ----------
Commissions on premiums and annuity considerations
(direct business only) 155,381 137,718 132,700
Commissions and expense allowances on reinsurance
assumed -- 13,032 17,951
General insurance expenses 75,046 58,132 46,624
Insurance taxes, licenses and fees, excluding federal
income taxes 8,710 7,388 8,267
Increase (decrease) in loading on and cost of
collection in excess of loading on deferred and
uncollected premiums -- (1,663) 523
Net transfers to Separate Accounts 727,811 722,851 844,130
Reserve and fund adjustments on reinsurance
terminated -- 1,017,112 --
---------- ---------- ----------
Total Benefits and Expenses $2,945,258 $2,637,538 $2,751,853
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
42
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF OPERATIONS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net gain from operations before dividends to
policyholders and federal income tax expense 94,729 130,739 143,191
Dividends to policyholders -- (5,981) 33,316
------- -------- --------
Net gain from operations after dividends to
policyholders and before federal income tax
expense 94,729 136,720 109,875
Federal income tax expense, (excluding tax on
capital gains) 24,479 11,713 7,339
------- -------- --------
Net gain from operations after dividends to
policyholders and federal income taxes and
before realized capital gains 70,250 125,007 102,536
Net realized capital gains less capital gains
tax and transferred to the Interest
Maintenance Reserve 20,108 394 26,706
------- -------- --------
NET INCOME $90,358 $125,401 $129,242
======= ======== ========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
43
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- --------
<S> <C> <C> <C>
Capital and Surplus, Beginning of Year $909,924 $832,695 $567,143
-------- -------- --------
Net Income 90,358 125,401 129,242
Change in net unrealized capital gains (losses) (36,111) (384) 1,152
Change in non-admitted assets and related items 1,715 (1,086) (463)
Change in reserve due to change in valuation basis -- 39,016
Change in asset valuation reserve 320 3,213 6,307
Surplus (contributed to) withdrawn from Separate
Accounts during period 136 82 --
Other changes in surplus in Separate Accounts
Statements -- 10 --
Change in surplus notes -- -- 250,000
Dividends to stockholders (80,000) (50,000) (159,722)
Aggregate write-ins for gains and (losses) in surplus -- (7) 20
-------- -------- --------
Net change in capital and surplus for the year (23,582) 77,229 265,552
-------- -------- --------
Capital and Surplus, End of Year $886,342 $909,924 $832,695
======== ======== ========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
44
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash Provided by Operations:
Premiums, annuity considerations and deposit
funds received $ 2,667,756 $ 2,361,669 $ 2,410,919
Considerations for supplementary contracts and
dividend accumulations received 3,461 2,086 1,615
Net investment income received 225,038 236,944 345,279
Fees associated with investment management,
administration, and contract guarentees from
Separate Accounts 173,417 141,211 --
Other income received 24,555 111,936 208,223
----------- ----------- -----------
Total receipts 3,094,227 2,853,846 2,966,036
----------- ----------- -----------
Benefits paid (other than dividends) 2,474,693 2,107,736 2,020,747
Insurance expenses and taxes paid (other than
federal income and capital gains taxes) 230,744 217,023 203,650
Net cash transferred to Separate Accounts 833,567 800,636 895,465
Dividends paid to policyholders -- 26,519 28,316
Federal income tax payments
(recoveries),(excluding tax on capital
gains) (40,644) 46,965 1,397
Other--net 237 (138) 698
----------- ----------- -----------
Total payments 3,498,597 3,198,741 3,150,273
----------- ----------- -----------
Net cash used in operations (404,370) (344,895) (184,237)
----------- ----------- -----------
Proceeds from long-term investments sold,
matured or repaid (after deducting taxes on
capital gains (losses) of $(1,768) for 1999,
$2,038 for 1998, and $750 for 1997) 1,065,307 1,261,396 1,343,803
Issuance of surplus notes -- -- 250,000
Other cash provided (used) 13,797 (40,529) 71,095
----------- ----------- -----------
Total cash provided 1,079,104 1,220,867 1,664,898
----------- ----------- -----------
Cash Applied:
Cost of long-term investments acquired (484,417) (967,901) (773,783)
Other cash applied (138,572) (187,263) (310,519)
----------- ----------- -----------
Total cash applied (622,989) (1,155,164) (1,084,302)
Net change in cash and short-term investments 51,745 (279,192) 396,359
Cash and short-term investments:
Beginning of year 265,226 544,418 148,059
----------- ----------- -----------
End of year $ 316,971 $ 265,226 $ 544,418
=========== =========== ===========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
45
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY 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 and is currently engaged in the sale of individual
variable life insurance, individual fixed and variable annuities, group fixed
and variable annuities, and group pension contracts.
Effective May 1, 1997, the Company became a wholly-owned subsidiary of the newly
established Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On
December 18, 1997, Life Holdco became a wholly-owned subsidiary of Sun Life
Assurance Company of Canada - U.S. Operations Holdings, Inc. ("US Holdco"). US
Holdco is a wholly-owned subsidiary of Sun Life Assurance Company of Canada
("SLOC"), a mutual insurance company.
The Company, which is domiciled in the State of Delaware, prepares its financial
statements in accordance with statutory accounting practices prescribed or
permitted by the State of Delaware Insurance Department. Prescribed accounting
practices include practices described in a variety of publications of the
National Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations and general administrative rules. Permitted accounting practices
encompass all accounting practices not so prescribed. The permitted accounting
practices adopted by the Company are not material to the financial statements.
Prior to 1996, statutory accounting practices were recognized by the insurance
industry and the accounting profession as generally accepted accounting
principles for mutual life insurance companies and stock life insurance
companies wholly-owned by mutual life insurance companies. In April 1993, the
Financial Accounting Standards Board ("FASB") issued an interpretation (the
"Interpretation"), that became effective in 1996, which changed the previous
practice of mutual life insurance companies (and stock life insurance companies
that are wholly-owned subsidiaries of mutual life insurance companies) with
respect to utilizing statutory basis financial statements for general purposes,
in that it will no longer allow such financial statements to be described as
having been prepared in conformity with generally accepted accounting principles
("GAAP"). Consequently, these financial statements prepared in conformity with
statutory accounting practices, as described above, vary from and are not
intended to present the Company's financial position, results of operations or
cash flow in conformity with generally accepted accounting principles. (See Note
19 for further discussion relative to the Company's basis of financial statement
presentation.) The effects on the financial statements of the variances between
the statutory basis of accounting and GAAP, although not reasonably
determinable, are presumed to be material.
INVESTED ASSETS
Bonds are carried at cost, adjusted for amortization of premium or accrual of
discount. Investments in mortgage backed securities are generally carried at
amortized cost. Changes in prepayment assumptions and resulting cash flows are
confirmed retrospectively. The adjusted yield is used to calculate investment
income in future periods. If current book value exceeds future undiscounted cash
flows, a realized capital loss is recorded and amortized through the Interest
Maintenance Reserve (IMR). Investments in non-insurance subsidiaries are carried
on the equity basis. Investments in insurance subsidiaries are carried at their
statutory surplus values. Mortgage loans acquired at a premium or discount are
carried at amortized values and other mortgage loans are carried at the amounts
of the unpaid balances. Real estate investments are carried at the lower of
cost, adjusted for accumulated depreciation or appraised value, less
encumbrances. Short-term investments are carried at amortized cost, which
approximates 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.
46
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
POLICY AND CONTRACT RESERVES
The reserves for life insurance and annuity contracts are computed in accordance
with presently accepted actuarial standards, and are based on actuarial
assumptions and methods (including use of published mortality tables and
prescribed interest rates) which produce reserves at least as great as those
required by law and contract provisions.
INCOME AND EXPENSES
For life and annuity contracts, premiums are recognized as revenues over the
premium paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
SEPARATE ACCOUNTS
The Company has established unitized 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.
The Company has also established a non-unitized separate account for amounts
allocated to the fixed portion of certain combination fixed/variable deferred
annuity contracts. The assets of this account are available to fund general
account liabilities, and general account assets are available to fund
liabilities of this account.
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 as determined
by quoted market prices of the underlying investments.
Gains (losses) from mortality experience and investment experience of the
separate accounts, not applicable to contract owners, and accrued expense
allowances recognized in reserves are receivable from or payable to the general
account. Accumulated amounts that have not been transferred are recorded as a
payable (receivable) to (from) the general account. Amounts payable to the
general account of the Company were $467,619,000 in 1999 and $361,863,000 in
1998.
CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING
As described more fully in Note 10, during 1997 the Company changed certain
assumptions used in determining actuarial reserves.
In March 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles ("Codification"). The
Codification, which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be effective January 1,
2001. However, statutory accounting principles will continue to be established
by individual state laws and permitted practices and it is uncertain when, or
if, the state of Delaware will require adoption of Codification for the
preparation of statutory financial statements. The Company has not finalized the
quantification of the effects of Codification on its statutory financial
statements.
OTHER
Preparation of the financial statements requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to amounts as
presented in the current year.
47
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. INVESTMENTS IN SUBSIDIARIES
The Company owns all of the outstanding shares of the following subsidiaries:
Sun Life Insurance and Annuity Company of New York ("Sun Life (N.Y.)") is
engaged in the sale of individual fixed and variable annuity contracts and group
life and group long term disability insurance contracts in the State of New
York;
Sun Life of Canada (U.S.) Distributors, Inc. (formerly Sun Investment Services
Company) ("Sundisco"), is a registered broker-dealer;
Sun Life Financial Services Limited ("SLFSL"), serves as the marketing
administrator for the distribution of the offshore products of SLOC (Bermuda
branch), an affiliate;
Sun Benefit Services Company, Inc. ("Sunbesco") receives renewal commissions on
a disability product and is currently inactive;
Sun Capital Advisers, Inc. ("Sun Capital") is a registered investment adviser;
Sun Life Finance Corporation ("Sunfinco") is a finance company and currently
inactive;
Sun Life of Canada (U.S.) SPE 97-1, Inc. ("SPE 97-1") is a special purpose
corporation engaging in activities incidental to securitizing mortgage loans;
Clarendon Insurance Agency, Inc. ("Clarendon") is a registered broker-dealer
that acts as the general distributor of certain annuity and life insurance
contracts issued by the Company and its affiliates;
Sun Life Information Services Ireland Limited ("SLISL") is an offshore
technology services center for affiliates.
On October 29,1999, the Company sold New London Trust F.S.B. ("NLT") to an
unaffiliated party for $30,254,000. The Company realized a post tax gain of
$13,170,000.
On February 5, 1999, the Company sold Massachusetts Casualty Insurance Company
("MCIC"), a disability insurance company, to an unaffiliated party. The net
proceeds of this sale were $33,965,000. The Company realized a post tax gain of
$4,900,000.
The impact of the sales of NLT and MCIC on continuing operations of the Company
is not expected to be material.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares of
Massachusetts Financial Services Company ("MFS"), a registered investment
adviser. On December 24, 1997, the Company transferred all of its shares of MFS
to Life Holdco in the form of a dividend valued at $159,722,000. As a result of
this transaction, the Company realized a gain of $21,195,000 of undistributed
earnings.
48
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED)
During 1999, 1998, and 1997, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
MCIC $ -- $ -- $ 2,000
SLFSL 1,000 750 1,000
SPE 97-1 -- -- 20,377
Sundisco 19,000 10,000 --
Sun Capital -- 500 --
Clarendon -- 10 --
SLISL -- 502 --
</TABLE>
During 1999, 1998, and 1997, the Company received dividends from the following
subsidiaries:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
SUN Life (N.Y.) $ 6,500 $ 3,000 $ --
NLT 19,319 -- 7,500
MFS -- -- 33,110
SPE 97-1 -- 675 --
SUNDISCO -- -- 571
</TABLE>
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1999, 1998 and 1997 and for the years then ended, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Assets $ 877,939 $ 1,315,317 $ 1,190,951
Liabilities (802,656) (1,186,872) (1,073,966)
----------- ----------- -----------
Total net assets $ 75,283 $ 128,445 $ 116,985
=========== =========== ===========
Total revenues $ 82,443 $ 222,853 $ 750,364
Operating expenses (90,318) (221,933) (646,896)
Income tax expense 3,249 (1,222) (43,987)
----------- ----------- -----------
Net income (loss) $ (4,626) $ (302) $ 59,481
=========== =========== ===========
</TABLE>
49
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. BONDS
Investments in debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term bonds:
United States government and government
agencies and authorities $ 78,161 $ 2,091 $ (2,454) $ 77,798
States, provinces and political subdivisions 20,428 69 (57) 20,440
Public utilities 181,466 6,854 (5,907) 182,413
Transportation 188,285 7,689 (2,709) 193,265
Finance 88,517 4,631 (518) 92,630
All other corporate bonds 665,113 18,353 (17,152) 666,314
---------- -------- -------- ----------
Total long-term bonds 1,221,970 39,687 (28,797) 1,232,860
---------- -------- -------- ----------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 312,585 -- -- 312,585
---------- -------- -------- ----------
Total short-term bonds 312,585 -- -- 312,585
---------- -------- -------- ----------
Total bonds $1,534,555 $ 39,687 $(28,797) $1,545,445
========== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term bonds:
United States government and government
agencies and authorities $ 140,417 $ 7,635 $ (177) $ 147,875
States, provinces and political subdivisions 16,632 2,219 -- 18,851
Public utilities 397,670 38,740 (238) 436,172
Transportation 197,207 22,481 (18) 219,670
Finance 144,958 12,542 (494) 157,006
All other corporate bonds 866,584 50,814 (6,419) 910,979
---------- -------- ------- ----------
Total long-term bonds 1,763,468 134,431 (7,346) 1,890,553
---------- -------- ------- ----------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 43,400 -- -- 43,400
Affiliates 220,000 -- -- 220,000
---------- -------- ------- ----------
Total short-term bonds 263,400 -- -- 263,400
---------- -------- ------- ----------
Total bonds $2,026,868 $134,431 $(7,346) $2,153,953
========== ======== ======= ==========
</TABLE>
50
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. BONDS (CONTINUED)
The amortized cost and estimated fair value of bonds at December 31, 1999 are
shown below by contractual maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call and/or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
---- ----------
(IN THOUSANDS)
<S> <C> <C>
Maturities:
Due in one year or less $ 376,761 $ 376,823
Due after one year through five years 184,077 182,788
Due after five years through ten years 259,042 263,321
Due after ten years 542,678 543,301
---------- ----------
1,362,558 1,366,233
Mortgage-backed securities 171,997 179,212
---------- ----------
Total bonds $1,534,555 $1,545,445
========== ==========
</TABLE>
Proceeds from sales and maturities of investments in debt securities during
1999, 1998, and 1997 were $740,081,000, $1,016,811,000 and $980,264,000, gross
gains were $7,688,000, $17,025,000, and $10,732,000 and gross losses were
$4,477,000, $866,000, and $2,446,000, respectively.
Bonds included above with an amortized cost of approximately $2,604,000,
$2,572,000, and $2,578,000 at December 31, 1999, 1998 and 1997, respectively,
were on deposit with governmental authorities as required by law.
Excluding investments in U.S. government and agencies securities, the Company is
not exposed to significant concentrations of credit risk in its portfolio.
4. SECURITIES LENDING
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chase Manhattan Bank of New York. The custodian has
indemnified the Company against losses arising from this program. There were no
securities on loan as of December 31, 1999, 1998 or 1997. Income resulting from
this program was $20,000, $94,000, and $200,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
5. MORTGAGE LOANS
The Company invests in commercial first mortgage loans throughout the United
States. 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. In those cases where, in management's
judgment, the mortgage loans' values are impaired, appropriate losses are
recorded.
51
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
5. MORTGAGE LOANS (CONTINUED)
The following table shows the geographical distribution of the mortgage loan
portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
California $ 72,693 $ 82,397
Massachusetts 38,083 53,528
Michigan 32,941 34,357
New York 22,912 21,190
Ohio 31,914 36,171
Pennsylvania 92,825 93,587
Washington 30,265 36,548
All other 207,278 177,225
-------- --------
$528,911 $535,003
======== ========
</TABLE>
The Company has restructured mortgage loans totaling $15,644,000 and $30,743,000
and corresponding allowances for losses of $1,043,000 and $2,120,000 at December
31, 1999 and 1998, respectively.
On December 22, 1999, the Company acquired 28 mortgages from SLOC at a cost of
$118,091,637. The Company in turn sold a 90% participation in these 28 plus an
additional 11 existing mortgage loans to a third party as part of two mortgage
participation agreements, for which the Company received proceeds of
$146,974,851.
The Company has outstanding mortgage loan commitments on real estate totaling
$2,384,000 and $18,005,000 at December 31, 1999 and 1998, respectively.
6. INVESTMENT GAINS AND LOSSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net realized gains (losses):
Bonds $ 70 $ 5,659 $ 2,882
Common stock of affiliates 15,290 -- 21,195
Common stocks -- 48 --
Mortgage loans 787 2,374 3,837
Real estate (481) 955 2,912
Other invested assets -- (3,827) (717)
-------- ------- -------
Subtotal 15,666 5,209 30,109
Capital gains tax expense (benefit) (4,442) 4,815 3,403
-------- ------- -------
Total $ 20,108 $ 394 $26,706
======== ======= =======
Changes in unrealized gains (losses):
Bonds $ (6,689) $ -- $ --
Common stock of affiliates (30,966) (302) (2,894)
Mortgage loans 83 (1,312) 1,524
Real estate 1,461 403 3,377
Other invested assets -- 827 (855)
-------- ------- -------
Total $(36,111) $ (384) $ 1,152
======== ======= =======
</TABLE>
52
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
6. INVESTMENT GAINS AND LOSSES (CONTINUED)
Realized capital gains and losses on bonds and mortgages and interest rate swaps
which relate to changes in levels of interest rates are charged or credited to
an interest maintenance reserve ("IMR") and amortized into income over the
remaining contractual life of the security sold. The net realized capital gains
credited to the interest maintenance reserve were $4,965,000 in 1999, $8,943,000
in 1998, and $6,321,000 in 1997. All gains and losses are transferred net of
applicable income taxes.
7. NET INVESTMENT INCOME
Net investment income consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income from bonds $128,992 $167,436 $188,924
Income from investment in common stock of affiliates 25,819 3,675 41,181
Interest income from mortgage loans 50,327 53,269 76,073
Real estate investment income 15,696 15,932 17,161
Interest income from policy loans 3,118 2,881 3,582
Other investment income (loss) (1,700) (641) (193)
-------- -------- --------
Gross investment income 222,252 242,552 326,728
-------- -------- --------
Interest on surplus notes and notes payable (43,266) (44,903) (42,481)
Investment expenses (11,951) (13,117) (13,998)
-------- -------- --------
Net investment income $167,035 $184,532 $270,249
======== ======== ========
</TABLE>
8. DERIVATIVES
The Company uses derivative instruments for interest rate risk management
purposes, including hedges against specific interest rate risk and to minimize
the Company's exposure to fluctuations in interest rates and foreign currency
exchange rates. The Company's use of derivatives has included U.S. Treasury
futures, conventional interest rate swaps, and currency and interest rate swap
agreements structured as forward spread lock interest rate swaps.
In the case of interest rate futures, 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 or losses to specific hedged
assets or liabilities, gains or losses are deferred in IMR and amortized over
the remaining life of the hedged assets. At December 31, 1999 and 1998, there
were no futures contracts outstanding.
In the case of interest rate and foreign currency swap agreements and forward
spread lock interest rate swap agreements, gains or losses on terminated swaps
are deferred in IMR and amortized over the shorter of the remaining life of the
hedged asset or the remaining term of the swap contract. The net differential to
be paid or received on interest rate swaps is recorded monthly as interest rates
change.
53
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. DERIVATIVES (CONTINUED)
The Company's open positions are as follows:
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1999
--------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
----------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Conventional interest rate swaps $20,000 $249
Foreign currency swap 648 113
</TABLE>
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1998
--------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
----------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Conventional interest rate swaps $45,000 $508
Foreign currency swap 1,178 263
</TABLE>
The market value of swaps is the estimated amount that the Company would receive
or pay on termination or sale, taking into account current interest rates and
the current creditworthiness of the counterparties. The Company is exposed to
potential credit loss in the event of nonperformance by counterparties. The
counterparties are major financial institutions and management believes that the
risk of incurring losses related to credit risk is remote.
9. LEVERAGED LEASES
The Company is a lessor in a leveraged 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 9.75 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:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---- ----
(IN THOUSANDS)
<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 leveraged leases 33,359 32,235
Less fees (113) (138)
-------- --------
Net investment in leveraged leases $ 33,246 $ 32,097
======== ========
</TABLE>
The net investment is included in "Other invested assets" on the balance sheet.
54
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10. REINSURANCE
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.
Reinsurance transactions under these agreements had the effect of decreasing
income from operations by approximately $1,527,000, $2,128,000 and $1,381,000
for the years ended December 31, 1999, 1998 and 1997, 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. During 1997, SLOC changed certain
assumptions used in determining the gross and the ceded reserve balance. The
Company reflected the effect of the changes in assumptions to its assumed
reserves as a direct credit to surplus. The effect of the change was a
$39,016,000 decrease in reserves. Also, the agreement required SLOC to reinsure
the mortality risks in excess of $500,000 per policy for the individual life
insurance contracts assumed by the Company. Such death benefits are reinsured on
a yearly renewable term basis. The life reinsurance assumed agreement required
the reinsurer to withhold funds in amounts equal to the reserves assumed. These
agreements had the effect of increasing income from operations by approximately
$24,579,000, and $37,050,000 for the years ended December 31, 1998 and 1997,
respectively. The Company terminated this agreement effective October 1, 1998,
resulting in an increase in income from operations of $65,679,000 which included
a cash settlement.
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1999, 1998 and 1997 before the effect of
reinsurance transactions with SLOC:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $2,874,513 $2,377,364 $2,340,733
Net investment income and realized gains 190,845 187,208 298,120
---------- ---------- ----------
Subtotal 3,065,358 2,564,572 2,638,853
---------- ---------- ----------
Benefits and Expenses:
Policyholder benefits 2,709,712 2,312,247 2,350,354
Other expenses 239,282 203,238 187,591
---------- ---------- ----------
Subtotal 2,948,994 2,515,485 2,537,945
---------- ---------- ----------
Income from operations $ 116,364 $ 49,087 $ 100,908
========== ========== ==========
</TABLE>
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. Reinsurance transactions under this agreement had the
effect of increasing income from operations by $193,000 in 1999, $3,008,000 in
1998, and decreasing income from operations by $2,658,000 in 1997.
During 1999 the Company entered into an agreement with an unrelated company
which provides reinsurance on certain fixed group annuity contracts. The net
effect of this agreement was to increase income from operations by approximately
$3,400,000. 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 net effect of these agreements was to increase income from
operations by approximately $157,000.
55
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10. REINSURANCE (CONTINUED)
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.
11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT
LIABILITIES
The withdrawal characteristics of general account and separate account annuity
reserves and deposits are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------
AMOUNT % OF TOTAL
------ ----------
(IN THOUSANDS)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 2,346,853 13
At market value 15,010,696 81
At book value less surrender charges (surrender charge
>5%) 45,722 --
At book value (minimal or no charge or adjustment) 104,539 1
Not subject to discretionary withdrawal provision 1,015,108 5
----------- ---
Total annuity actuarial reserves and deposit liabilities $18,522,918 100
=========== ===
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------
AMOUNT % OF TOTAL
------ ----------
(IN THOUSANDS)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 2,896,529 19
At market value 11,368,059 73
At book value less surrender charges (surrender charge
>5%) 62,404 --
At book value (minimal or no charge or adjustment) 111,757 1
Not subject to discretionary withdrawal provision 1,055,642 7
----------- ---
Total annuity actuarial reserves and deposit liabilities $15,494,391 100
=========== ===
</TABLE>
12. SEGMENT INFORMATION
The Company offers financial products and services such as fixed and variable
annuities, retirement plan services and life insurance on an individual basis.
Within these areas, the Company conducts business principally in two operating
segments and maintains a corporate segment to provide for the capital needs of
the various operating segments and to engage in other financing related
activities.
The Protection segment markets and administers a variety of life insurance
products sold to individuals and corporate owners of individual life insurance.
The products include whole life, universal life and variable life products.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.
56
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
12. SEGMENT INFORMATION (CONTINUED)
The following amounts pertain to the various business segments:
<TABLE>
<CAPTION>
FEDERAL
TOTAL TOTAL PRETAX INCOME TOTAL
REVENUES EXPENDITURES* INCOME TAX ASSETS
---------- ------------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1999
Protection $ 33,236 $ 41,030 $ (7,794) $ (2,661) $ 136,127
Wealth Management 2,979,450 2,898,158 81,292 18,593 19,015,394
Corporate 27,301 6,070 21,231 8,547 796,634
---------- ---------- -------- -------- -----------
Total $3,039,987 $2,945,258 $ 94,729 $ 24,479 $19,948,155
---------- ---------- -------- -------- -----------
1998
Protection $ 229,710 $ 144,800 $ 84,910 $ (4,148) $ 199,683
Wealth Management 2,527,608 2,483,715 43,893 12,486 16,123,905
Corporate 10,959 3,042 7,917 3,375 579,033
---------- ---------- -------- -------- -----------
Total $2,768,277 $2,631,557 $136,720 $ 11,713 $16,902,621
---------- ---------- -------- -------- -----------
1997
Protection $ 304,141 $ 272,333 $ 31,808 $ 13,825 $ 1,143,697
Wealth Management 2,533,006 2,507,592 25,414 10,667 14,043,221
Corporate 57,897 5,244 52,653 (17,153) 738,439
---------- ---------- -------- -------- -----------
Total $2,895,044 $2,785,169 $109,875 $ 7,339 $15,925,357
---------- ---------- -------- -------- -----------
</TABLE>
- ------------------------
* Total expenditures includes dividends to policyholders of $0 for 1999,
$(5,981) for 1998, and $33,316 for 1997.
13. RETIREMENT PLANS
The Company participates with SLOC in a noncontributory defined benefit pension
plan covering essentially all employees. The benefits are based on years of
service and compensation.
The funding policy for the pension plan is to contribute an amount, which at
least satisfies the minimum amount required by ERISA; currently, the plan is
fully funded. The Company is charged for its share of the pension cost based
upon its covered participants. Pension plan assets consist principally of
separate accounts of SLOC.
The Company's share of the group's accrued pension obligation was $1,914,000,
and $1,178,000 at December 31, 1999 and 1998, respectively. The Company's share
of net periodic pension cost was $736,000, $586,000, and $146,000 for 1999, 1998
and 1997, respectively.
The Company also participates with SLOC and certain affiliates in a 401(k)
savings plan for which substantially all employees are eligible. The Company
matches, up to specified amounts, employees' contributions to the plan. Company
contributions were $284,000, $231,000, and $259,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
OTHER POST-RETIREMENT BENEFIT PLANS
In addition to pension benefits the Company provides certain health, dental, and
life insurance benefits ("post-retirement benefits") for retired employees and
dependents. Substantially all employees 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.
57
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
13. RETIREMENT PLANS (CONTINUED)
The Company records an accrual of the estimated cost of retiree benefit payments
during the years the employee provides services, and amortizes an obligation of
approximately $400,000 over a period of ten years. The Company's cash flows are
not affected by this method, however the net effect decreased income by
$185,000, $95,000, and $117,000, for the years ended December 31, 1999, 1998,
and 1997, respectively. The Company's post-retirement health, dental and life
insurance benefits currently are not funded.
The following table sets forth the change in the pension and other
post-retirement benefit plans' benefit obligations and assets as well as the
plans' funded status reconciled with the amount shown in the Company's financial
statements at December 31:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $110,792 $ 79,684 $ 10,419 $ 9,845
Service cost 5,632 4,506 413 240
Interest cost 6,952 6,452 845 673
Actuarial loss (gain) (21,480) 21,975 1,048 308
Benefits paid (2,376) (1,825) (508) (647)
-------- -------- -------- --------
Benefit obligation at end of year $ 99,520 $110,792 $ 12,217 $ 10,419
======== ======== ======== ========
The Company's share:
Benefit obligation at beginning of year $ 9,125 $ 5,094 $ 416 $ 385
Benefit obligation at end of year $ 8,816 $ 9,125 $ 743 $ 416
Change in plan assets:
Fair value of plan assets at beginning of year $151,575 $136,610 $ -- $ --
Actual return on plan assets 9,072 16,790 -- --
Employer contribution -- -- 508 647
Benefits paid (2,376) (1,825) (508) (647)
-------- -------- -------- --------
Fair value of plan assets at end of year $158,271 $151,575 $ -- $ --
======== ======== ======== ========
Funded status $ 58,752 $ 40,783 $(12,217) $(10,419)
Unrecognized net actuarial gain (loss) (20,071) (2,113) 1,469 586
Unrecognized transition obligation (asset) (22,617) (24,674) 140 185
Unrecognized prior service cost 7,081 7,661 -- --
-------- -------- -------- --------
Prepaid (accrued) benefit cost $ 23,145 $ 21,657 $(10,608) $ (9,648)
======== ======== ======== ========
The Company's share of accrued benefit cost $ (1,914) $ (1,178) $ (381) $ (195)
Weighted-average assumptions as of December 31:
Discount rate 7.50% 6.75% 7.50% 6.75%
Expected return on plan assets 8.75% 8.00% N/A N/A
Rate of compensation increase 4.50% 4.50% N/A N/A
</TABLE>
58
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
13. RETIREMENT PLANS (CONTINUED)
For measurement purposes, a 10.9% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1999 (5.6% for dental benefits).
The rates were assumed to decrease gradually to 5% for 2005 and remain at that
level thereafter.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 5,632 $ 4,506 $ 413 $ 240
Interest cost 6,952 6,452 845 673
Expected return on plan assets (12,041) (10,172) -- --
Amortization of transition obligation (asset) (2,056) (2,056) 45 45
Amortization of prior service cost 580 580 -- --
Recognized net actuarial (gain) loss (554) (677) 164 (20)
-------- ------- ------ ------
Net periodic benefit cost $ (1,487) $(1,367) $1,467 $ 938
======== ======= ====== ======
The Company's share of net periodic benefit cost $ 736 $ 586 $ 185 $ 95
======== ======= ====== ======
</TABLE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
INCREASE DECREASE
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Effect on total of service and interest cost components $ 288 $ (518)
Effect on postretirement benefit obligation 2,754 (2,279)
</TABLE>
59
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1999
--------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
--------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Bonds (including short-term) $1,534,555 $1,545,445
Mortgages 528,911 526,608
Derivatives -- 362
Other Invested Assets 67,938 67,938
Policy loans 40,095 40,095
LIABILITIES:
Insurance reserves $ 120,536 $ 120,536
Individual annuities 247,619 238,229
Pension products 661,806 665,830
<CAPTION>
1998
--------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
--------------- --------------------
(IN THOUSANDS)
ASSETS:
<S> <C> <C>
Bonds (including short-term) $2,026,868 $2,153,953
Mortgages 535,003 556,143
Derivatives -- 771
Policy loans 41,944 41,944
LIABILITIES:
Insurance reserves $ 121,100 $ 121,100
Individual annuities 274,448 271,849
Pension products 1,104,489 1,145,351
</TABLE>
The major methods and assumptions used in estimating the fair values of
financial instruments are as follows:
The fair values of short-term bonds are estimated to be the amortized cost. The
fair values of long-term bonds which are publicly traded are based upon market
prices or dealer quotes. For privately placed bonds, fair values are estimated
by taking into account prices for publicly traded bonds of similar credit risk
and maturity and repayment and liquidity characteristics.
The fair values of mortgages 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.
The fair values of policy loans approximate carrying amounts.
The fair values of derivative financial instruments are estimated using the
process described in Note 8.
The fair values of the Company's general account insurance reserves and
liabilities 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. Those contracts that are
deemed to have short-term guarantees have a carrying amount equal to the
estimated fair value.
60
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
15. STATUTORY INVESTMENT VALUATION RESERVES
The asset valuation reserve ("AVR") provides a reserve for losses from
investments in bonds, stocks, mortgage loans, real estate and other invested
assets with related increases or decreases being recorded directly to surplus.
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve and amortized into income over the remaining contractual life of the
security sold.
The table shown below presents changes in the major elements of the AVR and IMR.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998
------------------- -------------------
AVR IMR AVR IMR
--- --- --- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of year $44,392 $40,490 $47,605 $33,830
Net realized investment gains, net of tax 9,950 4,983 256 8,942
Amortization of net investment gains -- (3,702) -- (2,282)
Unrealized investment losses (9,705) -- (6,550) --
Required by formula (566) -- 3,081 --
------- ------- ------- -------
Balance, end of year $44,071 $41,771 $44,392 $40,490
======= ======= ======= =======
</TABLE>
16. FEDERAL INCOME TAXES
The Company, its subsidiaries and certain other affiliates file a consolidated
federal income tax return. Federal income taxes are calculated for the
consolidated group based upon amounts determined to be payable as a result of
operations within the current year. No provision is recognized for timing
differences which may exist between financial statement and taxable income. Such
timing differences include reserves, depreciation and accrual of market discount
on bonds. Cash payments for federal income taxes were approximately $3,000,000,
$48,144,000, and $31,000,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
The Company is currently undergoing an audit by the Internal Revenue Service.
The Company believes that there will be no material audit adjustments for the
periods under examination.
17. RELATED PARTY TRANSACTIONS
A. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE)
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 19, 1995, the Company issued surplus notes totaling $315,000,000 to
an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and
7.25%. Of these notes, $157,500,000 will mature in the year 2007 and
$157,500,000 will mature in the year 2015. Interest on these notes is payable
semiannually.
Principal and interest on surplus notes are payable only to the extent that the
Company meets specified requirements regarding free surplus exclusive of the
principal amount and accrued interest, if any, on these notes and with the
consent of the Delaware Insurance Commissioner.
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.
61
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
17. RELATED PARTY TRANSACTIONS
A. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE) (CONTINUED)
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.
On September 28, 1998 a $500,000 note was issued by SLISL to the Company at a
rate of 6.0%, maturing on September 28, 2002.
A $110,000,000 note was issued to the Company by MFS on February 11, 1998 at an
interest rate of 6.0% due February 11, 1999. Another $110,000,000 note was
issued to the Company on December 22, 1998 at an interest rate of 5.55% due
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 January 14, 2000, the Company purchased $200,000,000 of notes from MFS.
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.
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.
On December 31, 1998, the Company had an additional $20,000,000 in notes issued
by MFS, scheduled to mature in 2000. These notes were repaid to the Company on
December 21,1999.
B. STOCKHOLDER DIVIDENDS
The maximum amount of dividends which can be paid by the Company without prior
approval of the Insurance Commissioner of the State of Delaware is subject to
restrictions relating to statutory surplus. In 1999, a dividend in the amount of
$80,000,000 was declared and paid by the Company to its parent, Life Holdco.
This dividend was approved by the Board of Directors, but did not require
approval of the Insurance Commissioner. In 1998, a dividend in the amount of
$50,000,000 was declared and paid by the Company to its parent, Life Holdco.
This dividend was approved by the Insurance Commissioner and the Board of
Directors. On December 24, 1997 the Company transferred all of its shares of MFS
to Life Holdco in the form of a dividend valued at $159,722,000. This dividend
was approved by the Insurance Commissioner and the Board of Directors.
C. SERVICE AGREEMENTS
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 $28,700,000 in 1999, $16,344,000 in 1998, and $15,997,000 in 1997.
The Company leases office space to SLOC under lease agreements with terms
expiring in December, 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 1999 amounted to approximately $6,943,000.
18. RISK-BASED CAPITAL
Effective December 31, 1993, the NAIC adopted risk-based capital requirements
for life insurance companies. The risk-based capital requirements provide a
method for measuring the minimum acceptable amount of adjusted capital that a
life insurer should have, as determined under statutory accounting
62
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
18. RISK-BASED CAPITAL (CONTINUED)
practices, taking into account the risk characteristics of its investments and
products. The Company has met the minimum risk-based capital requirements at
December 31, 1999, 1998 and 1997.
19. 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 or 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 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.
20. ACCOUNTING POLICIES AND PRINCIPLES
The financial statements of the Company have been prepared on the basis of
statutory accounting practices which, prior to 1996, were considered by the
insurance industry and the accounting profession to be in accordance with GAAP
for mutual life insurance companies. The primary differences between statutory
accounting practices and GAAP are described as follows. Under statutory
accounting practices, financial statements are not consolidated and investments
in subsidiaries are shown at net equity value. Accordingly, the assets,
liabilities and results of operations of the Company's subsidiaries are not
consolidated with the assets, liabilities and results of operations,
respectively, of the Company. Changes in net equity value of the common stock of
the Company's United States life insurance subsidiaries are directly reflected
in the Company's surplus. Changes in the net equity value of the common stock of
all other subsidiaries are directly reflected in the Company's Asset Valuation
Reserve. Dividends paid by subsidiaries to the Company are included in the
Company's net investment income.
Other differences between statutory accounting practices and GAAP include the
following items. Statutory accounting practices do not recognize the following
assets or liabilities which are reflected under GAAP: deferred policy
acquisition costs, deferred federal income taxes and statutory nonadmitted
assets. Asset Valuation Reserves and Interest Maintenance Reserves are
established under statutory accounting practices but not under GAAP. Methods for
calculating real estate depreciation and investment valuation allowances differ
under statutory accounting practices and GAAP. Actuarial assumptions and
reserving methods differ under statutory accounting practices and GAAP. Premiums
for universal life and investment-type products are recognized as income for
statutory purposes and as deposits to policyholders' accounts for GAAP.
Investments in fixed maturity securities classified as available-for-sale are
carried at aggregate fair value with changes in unrealized gains and losses
reported net of taxes in a separate component of stockholder's equity for GAAP
and generally at amortized cost under statutory accounting practices.
63
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We have audited the accompanying statutory statements of admitted assets,
liabilities and capital stock and surplus of Sun Life Assurance Company of
Canada (U.S.) (the "Company") as of December 31, 1999 and 1998, and the related
statutory statements of operations, changes in capital stock and surplus, and
cash flow for each of the three years in the period ended December 31, 1999.
These 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 generally accepted auditing
standards. 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.
As described more fully in Notes 1 and 20 to the 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 effects on the financial statements of the
differences between the statutory basis of accounting and generally accepted
accounting principles, although not reasonably determinable, are presumed to be
material.
In our opinion, the statutory financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities, and capital
stock and surplus of Sun Life Assurance Company of Canada (U.S.) as of
December 31, 1999 and 1998, and the results of its operations and its cash flow
for each of the three years in the period ended December 31, 1999 on the basis
of accounting described in Notes 1 and 20.
However, because of the differences between the two bases of accounting referred
to in the second preceding paragraph, in our opinion, the statutory financial
statements referred to above do not present fairly, in conformity with generally
accepted accounting principles, the financial position of Sun Life Assurance
Company of Canada (U.S.) as of December 31, 1999 and 1998 or the results of its
operations or its cash flow for each of the three years in the period ended
December 31, 1999.
Deloitte & Touche
Boston, Massachusetts
February 10, 2000
64
<PAGE>
APPENDIX
EXAMPLES OF THE MARKET VALUE ADJUSTMENT (MVA)
1. The MVA factor for all Guarantee Periods, except Floating Rate Guarantee
Periods, is:
<TABLE>
<C> <C> <S> <C> <C>
N/12
1 + I
( -------- ) -1
1 + J + b
</TABLE>
The following examples assume the following:
(a) The Guarantee Amount was allocated to a five year Guarantee Period
with a Guaranteed Interest Rate of 6% or .06 (I).
(b) The date of surrender is two years from the Expiration Date (N =
24).
(c) The value of the Guarantee Amount on the date of surrender is
$11,910.16.
(d) The Accumulation Account Value at the beginning of the current
Account Year was $11,236.00.
(e) No transfers or partial withdrawals have been made.
(f) Withdrawal charges, if any, are calculated in the same manner
described in the Prospectus (See "Withdrawal Charges").
(g) The b factor for the Contract is .0025 (b).
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender, the current rate (J) is 8% or .08.
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
N/12
1 + I
The MVA factor = ( -------- ) -1
1 + J + b
</TABLE>
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
24/12
1 + .06
= ( -------------- ) -1
1 + .08 + .0025
2
= (.979) -1
= .959 -1
= - .041
</TABLE>
The value of the Guarantee Amount less the free withdrawal amount is
multiplied by the MVA factor to determine the MVA:
($11,910.16 - $11,236.00 X .1) X (-.041) = -$443.74
-$443.74 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 - $11,236.00 X .1) X (-$.041) = -$36.05. -$36.05. represents
the MVA that will be deducted from the partial withdrawal amount before the
deduction of any withdrawal charge.
65
<PAGE>
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of surrender, the current rate (J) is 5% or .05.
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
N/12
1 + I
The MVA factor = ( -------- ) -1
1 + J + b
</TABLE>
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
24/12
1 + .06
= ( -------------- ) -1
1 + .05 + .0025
2
= (1.007) -1
= 1.014 -1
= .014
</TABLE>
The value of the Guarantee Amount less the free withdrawal amount is
multiplied by the MVA factor to determine the MVA:
($11,910.16 - $11,236.00 X .1) X .014 = $154.28
$154.28 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 - $11,236.00 X .1) X (.019) = $12.53.
$12.53 represents the MVA that would be added to the partial withdrawal
amount before the deduction of any withdrawal charge.
2. The MVA factor for Floating Rate Guarantee Periods is calculated similarly
applying the following formula:
[(1 + F - X)/(1 + F - Y + b)]N/12 -1
where,
F is the Floating Rate currently being used in determining the Floating
Rate Guarantee Period's Guaranteed Interest Rate,
X is the Floating Rate Spread in effect during the current Floating Rate
Guarantee Period,
Y is the Floating Rate Spread, as of the date of the application of the
MVA, for current allocations to new Floating Rate Guarantee Periods equal
to the balance of the current Floating Rate Guarantee Period, rounded up
to the next higher number of complete years,
b is a factor which the Company will determine for a Contract and which
will not exceed 0.25%, and
N is the number of complete months remaining in the current Floating Rate
Guarantee Period.
In the determination of Y, if the Company currently does not offer the
applicable Floating Rate Guarantee Period, then the rate will be determined by
using the next longer Floating Rate Guarantee Period that is available. If the
Company currently does not offer a longer Floating Rate Guarantee Period, the
Company will determine, in an equitable manner and in its sole discretion, the
value of Y.
3. The following examples assume the following:
(a) The Guarantee Amount was allocated to a five year Guarantee Period
with a Guaranteed Interest Rate of LIBOR - 1.25% (X = 1.25%).
(b) The date of surrender is two years from the Expiration Date (N =
24).
(c) The value of the Floating Rate Guarantee Amount on the date of
surrender is $11,910.16.
66
<PAGE>
(d) The Account Value at the beginning of the current Account Year was
$11,236.00.
(e) No transfers or partial withdrawals affecting this Guarantee
Amount have been made.
(f) Withdrawal charges, if any, are calculated in the same manner
described in the Prospectus (See "Withdrawal Charges").
(g) The LIBOR rate currently used for crediting interest to the
Contract equals 7.25% (F).
(h) The b factor for the Contract is .0025 (b).
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender, the current Floating Rate Spread (Y)
is .90%.
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
N/12
1 + F - X
The MVA factor = ( --------------- ) -1
1 + F - Y + b
</TABLE>
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
24/12
1 + .0725 - .0125
= ( ------------------------- ) -1
1 + .0725 - .0090 + .0025
2
= (.994) -1
= .989 -1
= -.011
</TABLE>
The value of the Guarantee Amount less the free withdrawal amount is
multiplied by the MVA factor to determine the MVA:
($11,910.16 - $11,236 X .1) X (-.011) = -$121.08
-$121.08 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 - $11,236 X .1) X (-.011) = -$9.84. -$9.84 represents the MVA that
will be deducted from the value of the Gurantee Amount before the deduction of
any withdrawal charge.
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of surrender, the current Floating Rate Spread (Y)
is 1.60%.
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
N/12
1 + F - X
The MVA factor = ( --------------- ) -1
1 + F - Y + b
</TABLE>
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
24/12
1 + .0725 - .0125
= ( ------------------------ ) -1
1 + .0725 - .0160 + .0025
2
= (1.001) -1
= 1.002 -1
= .002
</TABLE>
The value of the Guarantee Amount less the free withdrawal amount is
multiplied by the MVA factor to determine the MVA:
($11,910.16 - $11,236 X .1) X .002 = $20.38
$20.38 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 - $11,236 X .1) X (.002) = $1.66.
$1.66 represents the MVA that would be added to the partial withdrawal
amount before the deduction of any withdrawal charge.
67
<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
FUTFIX-1 5/2000
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not Applicable
Item 15. INDEMNIFICATION
Article 8 of the By-Laws of Sun Life Assurance Company of Canada (U.S.)
provides for indemnification of directors and officers as follows:
Section 8.01 (a). Every person who is or was a director or 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 expense 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.
(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 Chanceery 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 to 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 corporations 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 be contract, vote of 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
<PAGE>
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 by subject by reason of wilful malfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his office.
Item 16. EXHIBITS
(1) Underwriting Agreement (Incorporated by reference from
Post-Effective Amendment No. 1 to the Registration Statement
on Form S-2, File No. 333-45923.)
(4) (a) Single Payment Deferred Fixed Individual Annuity Contract
(Incorporated by reference from Registration Statement on Form
S-2, File No. 333-62837.)
(b) Single Payment Deferred Fixed Group Annuity Contract
(Incorporated by reference from Registration Statement on Form
S-2, File No. 333-62837.)
(c) Certificate to be used in connection with Contract filed as
Exhibit 4(b) (Incorporated by reference from Registration
Statement on Form S-2, File No. 333-62837.)
(5) Opinion re Legality (Incorporated by reference from
Post-Effective Amendment No. 1 to the Registration Statement
on Form S-2, File No. 333-62837.)
(23) Independent Auditor's Consent*
(24) Powers of Attorney (Incorporated by reference from Registration
Statement on Form S-6, File No. 333-94359 filed
January 10, 2000)
(b) Powers of Attorney David D. Horn (Incorporated by reference from
Post-Effective Amendment No. 1 to the Registration Statement on
Form N-4, File No. 333-82957 filed February 3, 2000)
(c) Power of Attorney of Richard B. Bailey (Incorporated by
reference from Post-Effective Amendment No. 6 to the Registration
Statement on Form N-4, File No. 333-05227, filed April 5, 2000)
* Filed herewith.
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.
<PAGE>
(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 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.
<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 Amendment No. 3 to its
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 10 day of April, 2000.
Sun Life Assurance Company of Canada (U.S.)
(Registrant)
By: /s/ JAMES A. MCNULTY, III
---------------------------
James A. McNulty, III
President
Attest:/s/ EDWARD M. SHEA
--------------------
Edward M. Shea
Assistant Vice President and Senior Counsel
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Form S-2 Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JAMES A. MCNULTY, III President and Director April 10, 2000
- ---------------------------- (Principal Executive Officer)
James A. McNulty, III
/s/ DAVEY S. SCOON Vice President, Finance April 10, 2000
- ------------------------- and Treasurer
Davey S. Scoon (Principal Financial and
Accounting Officer)
* /s/ DONALD A. STEWART Chairman and Director April 10, 2000
- -------------------------
Donald A. Stewart
* /s/ C. JAMES PRIEUR Vice Chairman and Director April 10, 2000
- -------------------------
C. James Prieur
*** /s/ RICHARD B. BAILEY Director April 10, 2000
- -------------------------
Richard B. Bailey
* /s/ GREGORY W. GEE Director April 10, 2000
- -------------------------
Gregory W. Gee
** /s/ DAVID D. HORN Director April 10, 2000
- -------------------------
David D. Horn
* /s/ ANGUS A. MACNAUGHTON Director April 10, 2000
- -------------------------
Angus A. MacNaughton
</TABLE>
- ------------
* 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
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 February 3, 2000.
*** By Edward M. Shea pursuant to Power of Attorney filed as an Exhibit to
Post-Effective Amendment No. 6 to the Registration Statement on Form N-4,
File No. 333-05227, filed April 5th 2000.
<PAGE>
<TABLE>
<S> <C> <C>
* /s/ S. CAESAR RABOY Director April 10, 2000
- -------------------------
S. Caesar Raboy
Director
- -------------------------
William W. Stinson
</TABLE>
- ------------
* 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
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 February 3, 2000.
*** By Edward M. Shea pursuant to Power of Attorney filed as an Exhibit to
Post-Effective Amendment No. 6 to the Registration Statement on Form N-4,
File No. 333-05227, filed April 5th 2000.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Post-Effective Amendment No. 3 to the Registration
Statement on Form S-2 (Reg. No. 333-62837) of Sun Life Assurance Company of
Canada (U.S.) of our report dated February 10, 2000 accompanying the
statutory financial statements of Sun Life Assurance Company of Canada
(U.S.), which includes explanatory paragraphs relating to the use of
statutory accounting practices which differ from generally accepted
accounting principles, appearing in the Prospectus, which is part of such
Registration Statement, and to the incorporation by reference of our report
dated February 10, 2000 appearing in the Annual Report on Form 10-K of Sun
Life Assurance Company of Canada (U.S.) for the year ended December 31, 1999,
which includes explanatory paragraphs relating to the use of statutory
accounting practices which differ from generally accepted accounting
principles.
We also consent to the reference to us under the heading "Accountants"
appearing in such Prospectus.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 10, 2000
