<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file numbers
DECEMBER 31, 1999 2-99959, 33-29851,
33-31711, 33-41858,
33-43008, 33-58853
AND 333-11699
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SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
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(Exact name of registrant as specified in its charter)
DELAWARE 04-2461439
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE SUN LIFE EXECUTIVE PARK,
WELLESLEY HILLS, MASSACHUSETTS 02481
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(Address of principal
executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 237-6030
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None
Securities registered pursuant to Section 12(g) of the Act:
None
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(TITLE OF CLASS)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. _X_
Registrant has no voting stock outstanding held by non-affiliates.
Registrant has 5,900 shares of common stock outstanding on March 21, 2000,
all of which are owned by Sun Life of Canada (U.S.) Holdings, Inc.
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ITEM 1. BUSINESS.
Sun Life Assurance Company of Canada (U.S.) (the "Company") is a stock life
insurance company incorporated under the laws of Delaware on January 12, 1970.
Its Executive Office mailing address is One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02481, Tel. (781) 237-6030. It has obtained authorization
to do business in 48 states, the District of Columbia and Puerto Rico and it is
anticipated that it will be authorized to do business in all states except New
York. The Company's wholly-owned subsidiaries include Sun Life Insurance and
Annuity Company of New York, which issues individual fixed and variable annuity
contracts and group life and long-term disability insurance in New York; Sun
Life of Canada (U.S.) Distributors, Inc. (formerly Sun Investment Services
Company), a registered broker-dealer and investment adviser; Clarendon Insurance
Agency, Inc., a registered broker-dealer; Sun Life Financial Services Limited,
which serves as the marketing administrator for the distribution of certain
offshore products of Sun Life Assurance Company of Canada, the Company's
ultimate parent; Sun Life of Canada (U.S.) SPE 97-1, Inc., organized for the
purpose of engaging in activities incidental to securitizing mortgage loans; Sun
Capital Advisers, Inc., a registered investment adviser; and Sun Life
Information Services Ireland Limited, an offshore technology center for
affiliates. Other wholly-owned subsidiaries which are currently inactive include
Sun Benefit Services Company, Inc. and Sun Life Finance Corporation.
Effective May 1, 1997, the Company became a wholly-owned subsidiary of 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"), 150
King Street West, Toronto, Ontario, Canada. SLOC is a mutual life insurance
company incorporated pursuant to a Special Act of Parliament of Canada in 1865
and currently transacts business in all of the Canadian provinces and
territories, all states but New York, the District of Columbia, Puerto Rico, the
Virgin Islands, Great Britain, Ireland, Hong Kong, Bermuda, Barbados, the
Philippines, and Indonesia.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding
shares of Massachusetts Financial Services Company ("MFS"). On December 24,
1997, the Company transferred all of its shares of MFS to its parent, Life
Holdco, in the form of a dividend. On December 31, 1997, the Company purchased
all of the outstanding shares of Clarendon Insurance Agency, Inc. from MFS.
On February 5, 1999, the Company sold Massachusetts Casualty Insurance
Company, a wholly-owned subsidiary that issued only individual disability
insurance contracts, to an unaffiliated party for approximately $34 million.
On October 29, 1999, the Company sold its subsidiary, New London Trust
F.S.B. ("NLT"), to an unaffiliated party for approximately $30 million.
DEMUTUALIZATION
On January 27, 1998, SLOC 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 SLOC Board
of Directors approved the demutualization timetable recommended by management,
and on September 28, 1999, the SLOC Board of Directors approved the
demutualization plan. On December 6, 1999, SLOC received approval for its
demutualization plan from the Michigan Commissioner of Insurance. At a Special
Meeting on December 15, 1999, eligible policyholders of SLOC voted in favor of
the Company's plans to demutualize. SLOC expects to complete its demutualization
and Initial Public Offering ("IPO") in late March or April of 2000.
Demutualization is subject to final regulatory approval from Canada's Minister
of Finance. Based on information known to date, the potential demutualization of
SLOC is not expected to have any significant impact on the Company.
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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 three years. See notes to the statutory
Financial Statements 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>
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 in 1999 had the
effect of decreasing income from operations by approximately $1,527,000.
Effective January 1, 1991, the Company entered into an agreement with SLOC
under which certain individual life insurance contracts issued by SLOC were
reinsured by the Company on a 90% coinsurance basis. Also effective January 1,
1991 the Company entered into an agreement which required SLOC to 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 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 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 and 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.
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INVESTMENTS
Of the Company's total assets of $19.9 billion at December 31, 1999, 88.2%
consisted of unitized and non-unitized separate account assets, 6.1% were
invested in bonds and similar securities, 2.7% in mortgages, 0.4% in
subsidiaries, 0.5% in real estate, and the remaining 2.1% in cash and other
assets.
COMPETITION
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing insurance products. According to a 1999 statistical study, published
by A.M. Best, the Company ranked 36th among North American life insurance
companies based upon admitted assets as of December 31, 1998. Standard & Poors
has assigned the Company their AA+ rating for financial strength, their second
highest rating. A.M. Best has assigned the Company its highest classification,
A++, as of December 31, 1998. Duff & Phelps has assigned the Company their AAA
rating, their highest ratings for insurer claims-paying ability. Moody's
Investor Service, Inc. has assigned the Company an unsolicited rating of Aa2 for
financial strength, which is their third highest rating level.
EMPLOYEES
The Company and SLOC 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
December 31, 1999 the Company had 410 direct employees who are employed at its
Principal Executive Office in Wellesley Hills, Massachusetts and its Retirement
Products & Services Division in Boston, Massachusetts.
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 amount of
investments permitted. Each insurance company is required to file detailed
annual reports with supervisory agencies in each of the five 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, SLOC 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 may also
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
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which may significantly affect the insurance business include employee benefit
regulation, removal of barriers preventing banks from engaging in the insurance
business and tax law changes affecting the taxation of insurance companies, the
tax treatment of insurance products and the subsequent impact on the relative
desirability of various personal investment vehicles.
ITEM 2. PROPERTIES
The Company occupies office space owned by it and leased to SLOC and certain
unrelated parties for lease terms not exceeding five years.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are engaged in various kinds of routine
litigation, which, in management's judgment, is not expected to have a material
impact on capital and surplus.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted by the Company to a vote of security holders
during the three months ended December 31, 1999.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc.; there is no market for its common stock.
During 1999 and 1998 the Company declared and paid $80,000,000 and
$50,000,000, respectively, in dividends to its parent, Life Holdco.
On December 24, 1997, the Company transferred all of its shares of MFS to
its parent, Life Holdco, in the form of a dividend valued at $159,722,000.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
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1999 1998 1997 1996 1995
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(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>
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See Item 1 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY STATEMENT
This Form 10-K includes forward-looking statements by the Company under the
Private Securities Litigation Reform Act of 1995. These statements are not
matters of historical fact; they relate to such topics as future product sales,
Year 2000 compliance, volume growth, market share, market risk and financial
goals. It is important to understand that these forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those that the statements anticipate. These risks and
uncertainties may concern, among other things:
- - Heightened competition, particularly in terms of price, product features, and
distribution capability, which could constrain the Company's growth and
profitability.
- - Changes in interest rates and market conditions.
- - Regulatory and legislative developments.
- - Developments in consumer preferences and behavior patterns.
- - The Company's ability to identify and address any remaining Year 2000 issues
successfully, in a timely manner, and at reasonable cost. They also may
concern the ability of the Company's vendors, suppliers, other service
providers, and customers to successfully address any of their own remaining
Year 2000 issues in a timely manner.
RESULTS OF OPERATIONS
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 the "Wealth
Management Segment" section 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 the "Protection Segment" section
below.)
- - An increase of $7.2 million in income from operations from the Corporate
segment, mainly reflecting dividends from a subsidiary. (See the "Corporate
Segment" section below.)
INCOME FROM OPERATIONS BY SEGMENT
The Company's income from operations reflects the operations of its three
business segments: the Wealth Management segment, the Protection segment and the
Corporate segment.
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The following table provides a summary of income from operations by segment,
which is discussed more fully below.
Income from Operations by Segment*
($ in millions)
<TABLE>
<CAPTION>
% CHANGE
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1999 1998 1997 1999/1998 1998/1997
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<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.
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 six-month DCA program. Under these programs, which were
redesigned in late 1996, deposits are made into the fixed portion of the
annuity contract and receive a bonus rate of interest for the policy year.
During the year, the fixed deposit is systematically transferred to the
variable portion of the contract in equal periodic installments. While fixed
annuity account deposits increased, deposits directly into variable accounts
declined by approximately 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 product will continue to increase in the
future, based on management's beliefs that market demand is growing for
multi-manager
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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 its
ultimate parent, SLOC. In some of these arrangements, SLOC 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 SLOC. 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
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.
7
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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 or the Protection segments.
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. (This is discussed in
the "Wealth Management Segment" section below.)
- - The effect of terminating certain reinsurance agreements with SLOC. 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 the
"Corporate Segment" section 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
$.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.
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
8
<PAGE>
introduced similar DCA programs within in 1998. During the 4th 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 GIC products.
- - 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 seven 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.
- - 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 three 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 SLOC 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 SLOC. 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 nine 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.
9
<PAGE>
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 two 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. 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 $250 million surplus note to its parent, Sun Life
of Canada (U.S.) Holdings, Inc. Interest expense exceeded investment earnings
on the related funds.
FINANCIAL CONDITION & LIQUIDITY
ASSETS
The Company's total assets comprise those held in its general account and
those held in its separate accounts. General account assets support general
account liabilities. Separate accounts and their assets are of two main types:
- Those assets held in a "fixed" separate account, which the Company
established for amounts that contract holders allocate to the fixed
portion of their combination fixed/variable deferred annuity contracts.
Fixed separate account assets are available to fund general account
liabilities and general account assets are available to fund the
liabilities of this fixed separate account. The Company manages the assets
of this fixed separate account according to general account investment
policy guidelines.
- Those assets held in a number of registered and non-registered "variable"
separate accounts as investment vehicles for the Company's variable life
and annuity contracts. Policyholders may choose from among various
investment options offered under these contracts according to their
individual needs and preferences. Policyholders assume the investment
risks associated with these choices. General account and fixed separate
account assets are not available to fund the liabilities of these variable
accounts.
The following table summarizes significant changes in asset balances during
1999, 1998 and 1997. The changes are discussed below.
<TABLE>
<CAPTION>
ASSETS % CHANGE
1999 1998 1997 1999/1998 1998/1997
--------- --------- --------- --------- ---------
($ 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 general account and fixed separate account, combined, 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 two main
factors: 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
annuity deposits and exchanges into variable accounts have increased, while
10
<PAGE>
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 .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.
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 Item 7A, "Quantitative and Qualitative Disclosures About Market Risk,"
in this Annual Report on Form 10-K 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.
11
<PAGE>
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, SLOC 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 SLOC Board
of Directors approved the demutualization timetable recommended by management,
and on September 28, 1999, the SLOC Board of Directors approved the
demutualization plan. On December 6, 1999, SLOC received approval for its
demutualization plan from the Michigan Commissioner of Insurance. At a Special
Meeting on December 15, 1999, eligible policyholders of SLOC voted in favor of
the Company's plans to demutualize. SLOC expects to complete its demutualization
and Initial Public Offering ("IPO") in late March or April of 2000.
Demutualization is subject to final regulatory approval from Canada's Minister
of Finance. Based on information known to date, the potential demutualization of
SLOC is not expected to have any significant impact on the Company.
YEAR 2000 COMPLIANCE
The statements in this section include "Year 2000 Readiness Disclosures"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
During the fourth quarter of 1996, the Company, its ultimate parent and
affiliates began a comprehensive analysis of its information technology ("IT")
and non-IT systems, including its hardware, software, data, data feed products,
and internal and external supporting services, to address the ability of these
systems to correctly process date calculations through the year 2000 and beyond.
The Company created a full-time Year 2000 project team in early 1997 to manage
this endeavor across the Company. This team, which worked with dedicated
personnel from all business units and with the legal and audit departments,
reported directly to the Company's senior management on a monthly basis. In
addition, the Company's Year 2000 project was periodically reviewed by internal
and external auditors.
Relevant systems were identified and their components inventoried, needed
resolutions were documented, timelines and project plans were developed, and
remediation and testing were completed. All of the Company's critical systems
were assessed, fixed where necessary, tested, and, based on those tests, are
considered to be Year 2000 compliant. The Company regards Year 2000 compliance
as meaning that its business systems will have passed tests that indicate they
will operate accurately before, during, and after January 1, 2000 with respect
to Year 2000 issues.
In mid-1997, the Company's Year 2000 project team contacted all key vendors
to obtain their representation that the products and services provided would not
have a Year 2000 issue. Where appropriate, vendor testing was conducted. In
addition, the project team worked with critical business partners, such as
third-party administrators, investment property managers, investment mortgage
correspondents, and others, with the goal of verifying that these partners would
continue to be able to support the Company's business during and after the Year
2000.
Non-IT applications, including building security, HVAC systems, and other
such systems, as well as IT applications, were tested. Compliant client server
and mainframe environments were used to allow for testing of critical dates such
as December 31, 1999, January 1, 2000, February 28, 2000, February 29, 2000 and
March 1, 2000 without impact to the Company's production environment.
The Company has completed an assessment of its systems, and has not
identified any significant Year 2000 problems. No material problems were
encountered on key dates including December 31, 1999,
12
<PAGE>
January 1, 2000, January 31, 2000 and February 28, 2000 through March 1, 2000.
Although we continue to be free of any Year 2000 issues, the Company will
continue to monitor its systems over the coming months as part of its normal
practices. The Company does not currently anticipate that it will experience any
material Year 2000 problems, however there can be no assurance that a Year 2000
issue will not arise. Factors giving rise to this uncertainty include loss of
knowledgeable technical resources, failure to identify all susceptible system
processing, compliance issues of third parties whose systems and operations
affect the Company, and other similar uncertainties. A possible worst-case
scenario might include identification of a Year 2000 issue in one or more of the
Company's systems. Such a scenario could result in disruption to the Company's
operations. Consequences of such disruption could include, among other
possibilities, the inability to update customers' accounts, process payments and
other financial transactions; and the inability to report accurate data to
customers, management, regulators, and others. Consequences also could include
business interruptions or shutdowns, reputational harm, increased scrutiny by
regulators, and litigation related to Year 2000 issues. Such potential
consequences, depending on their nature and duration, could have an impact on
the Company's results of operations and financial position.
In order to mitigate the risks to the Company of material adverse
operational or financial impacts from the Year 2000 problem, the Company
established contingency planning at the business unit and corporate levels. Each
business unit ranked its applications as being of high, medium or low business
risk, identified its critical business processes, developed alternative plans of
action where possible, and conducted walkthroughs of those plans. On the
corporate level, the Company enhanced its business continuation plan by
identifying minimum requirements for facilities, computing, staffing, and other
factors and developed a plan to support those requirements.
As of year-end 1999, the Company had expended, cumulatively, approximately
$5.5 million ($1.3 million in 1999) on its Year 2000 effort. The Company has
budgeted $200 thousand in 2000 for post-project tasks such as document
retention.
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.
ITEM 7A. 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-
13
<PAGE>
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 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
14
<PAGE>
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 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.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements in the form required by Regulation S-X, are set forth
below. The Company is not subject to the requirement to file supplementary
financial data specified by Item 302 of Regulation S-K.
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.
16
<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.
17
<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.
18
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF 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.
19
<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.
20
<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.
21
<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.
22
<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.
23
<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>
24
<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>
25
<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.
26
<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.
27
<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
<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>
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.
28
<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
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.
29
<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.
30
<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
31
<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):
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.
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
32
<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):
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.
The following amounts pertain to the various business segments:
<TABLE>
<CAPTION>
FEDERAL
TOTAL TOTAL PRETAX INCOME TOTAL
(IN THOUSANDS) REVENUES EXPENDITURES* INCOME TAX ASSETS
- -------------- ---------- ------------- -------- -------- -----------
<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.
33
<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):
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.
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>
34
<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>
35
<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.
36
<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 (CONTINUED):
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.
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.
37
<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):
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.
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.
38
<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
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 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.
39
<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
20. ACCOUNTING POLICIES AND PRINCIPLES (CONTINUED):
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.
* * * * * *
40
<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.
February 10, 2000
41
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No events have occurred which are required to be reported by Item 304 of
Regulation S-K.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and principal officers of the Company are listed below,
together with information as to their ages, dates of election and principal
business occupations during the last five years (if other than their present
business occupations). Except as otherwise indicated, the directors and officers
of the Company who are associated with Sun Life Assurance Company of Canada
and/or its subsidiaries have been associated with Sun Life Assurance Company of
Canada for more than five years either in the position shown or in other
positions.
DONALD A. STEWART, 53, Chairman and Director (1996*)
He is Chairman, Chief Executive Officer, and a Director of Sun Life
Assurance Company of Canada; Chairman and a Director of Sun Life Insurance and
Annuity Company of New York; and a Director of Massachusetts Financial Services
Company.
C. JAMES PRIEUR, 48, President and Director (1998*)
He is President and Chief Operating Officer of Sun Life Assurance Company of
Canada; President and a Director of Sun Life Insurance and Annuity Company of
New York; Chairman and a Director of Sun Capital Advisers, Inc.; Chairman of the
Board and Executive Vice President, Sun Capital Advisers Trust; President and a
Director of Sun Life of Canada (U.S.) Holdings, Inc., Sun Life of Canada (U.S.)
Financial Services Holdings, Inc., and Sun Life Assurance Company of Canada --
U.S. Operations Holdings, Inc.; and a Director of Sun Life Information Services
Ireland Limited and Massachusetts Financial Services Company.
JAMES A. MCNULTY, III, 57, Senior Vice President and General Manager and
Director (1999*)
He is Senior Vice President and General Manager for the United States of Sun
Life Assurance Company of Canada and Senior Vice President and General Manager
and a Director of Sun Life Insurance and Annuity Company of New York. He is
Chairman and Director of Sun Life of Canada (U.S.) Distributors, Inc. He is
President and a Director of Sun Life of Canada (U.S.) SPE 97-I, Inc., Sun
Benefit Services Company, Inc., Sun Life of Canada (U.S.) Holdings General
Partner, Inc., Sun Life Financial Services Limited, and Sun Canada Financial
Co.; Senior Vice President and a Director of Sun Life Assurance Company of
Canada -- U.S. Operations Holdings, Inc., Sun Life of Canada (U.S.) Holdings,
Inc., and Sun Life of Canada (U.S.) Financial Services Holdings, Inc.; and a
Director of Clarendon Insurance Agency, Inc., Sunesco Insurance Agency, Inc.,
and the Support Committee for Battered Women.
RICHARD B. BAILEY, 73, Director (1983*)
He is a Director of Sun Life Insurance and Annuity Company of New York, and
a Director/Trustee of certain funds in the MFS Family of Funds. He is a Director
of Cambridge Bancorp.
M. COLYER CRUM, 67, Director (1986*)
He is Professor Emeritus of the Harvard Business School; a Director of Sun
Life Assurance Company of Canada, Sun Life Insurance and Annuity Company of New
York, Cambridge Bancorp, Cambridge Trust Company, Merrill Lynch Ready Assets
Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Global Growth
Fund, Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch Special Value
Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Michigan Insured Fund II, Merrill Lynch Disciplined
Equity Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniYield Michigan Insured Fund, Inc., and
MuniYield New Jersey Insured Fund, Inc.; and a Trustee of Merrill Lynch Global
Resources Trust, Merrill Lynch Ready Assets Trust, MuniYield Florida Insured
Fund, and MuniYield Pennsylvania Fund. Prior to July 1996, he was a Professor at
the Harvard Business School.
42
<PAGE>
GREGORY W. GEE, 51, Director (1999*)
He is Vice Chairman of Sun Life Assurance Company of Canada and a Director
of Sun Life Insurance and Annuity Company of New York.
DAVID D. HORN, 58, Director (1985*)
He was formerly Senior Vice President and General Manager for the United
States of Sun Life Assurance Company of Canada, retiring in December 1997. He is
a Director of Sun Life Insurance and Annuity Company of New York; a Trustee of
MFS/Sun Life Series Trust; and a Member of the Boards of Managers of Money
Market Variable Account, High Yield Variable Account, Capital Appreciation
Variable Account, Government Securities Variable Account, Global Governments
Variable Account, Total Return Variable Account, and Managed Sectors Variable
Account.
ANGUS A. MACNAUGHTON, 68, Director (1985*)
He is President and Director of Genstar Investment L.L.C. and a Director of
Sun Life Assurance Company of Canada, Sun Life Insurance and Annuity Company of
New York, Canadian Pacific, Ltd., Varian Semiconductor Equipment Associates,
Genstar Capital Corporation, San Francisco Opera, and Diversified Collection
Services, Inc.; Vice Chairman and a Director of Barrick Gold Corporation; and
Trustee of the Board of Governors (Lakefield College School) and World Affairs
Council of Northern California.
S. CAESAR RABOY, 63, Director (1997*)
He is a former Senior Vice President and Deputy General Manager for the
United States of Sun Life Assurance Company of Canada; a Director of Sun Life
Insurance and Annuity Company of New York; and a Director of Fleet International
Bank.
JAMES M.A. ANDERSON, 50, Vice President, Investments (1998)
He is Vice President, Investments of Sun Life Assurance Company of Canada
and Sun Life Insurance and Annuity Company of New York; President and Chief
Executive Officer of Sun Capital Advisers Trust; Vice President and a Director
of Sun Life of Canada (U.S.) Holdings, Inc., Sun Life of Canada (U.S.) Financial
Services Holdings, Inc., Sun Life Assurance Company of Canada -- U.S. Operations
Holdings, Inc., Sun Life of Canada (U.S.) Holdings General Partner, Inc., and
Sun Canada Financial Co.; Vice President, Investments and Director of Sun Life
of Canada (U.S.) Distributors, Inc.; and a Director of Clarendon Insurance
Agency, Inc., Sunesco Insurance Agency, Inc., and Sun Benefit Services Company,
Inc.
DAVEY SCOON, 53, Vice President, Finance and Treasurer (1999)
He is Vice President and Chief Financial Officer of U.S. Operations for Sun
Life Assurance Company of Canada; Vice President, Finance, Controller, and
Treasurer of Sun Life Insurance and Annuity Company of New York; Vice President
and Treasurer and Director of Sun Benefit Services Company, Inc., Sun Life of
Canada (U.S.) Distributors, Inc., and Sun Life of Canada (U.S.) SPE 97-1, Inc.;
Vice President and Director of Sun Life Assurance Company of Canada -- U.S.
Operations Holdings, Inc., Sun Life of Canada (U.S.) Holdings, Inc., Sun Life of
Canada (U.S.) Financial Services Holdings, Inc., Sun Life of Canada (U.S.)
Holdings General Partner, Inc., Sun Life Financial Services Limited, and Sun
Canada Financial Co.; Director and Treasurer of Clarendon Insurance
Agency, Inc.; Regular Trustee of Sun Life of Canada (U.S.) Capital Trust I;
Director of Sunesco Insurance Agency, Inc., and Chairman and Director of Tufts
Associated Health Plan, Lead Director of Tufts Associated Health Maintenance
Organization, and Board Chairman of Managed Comp. Prior to October 1999, he was
Executive Vice President and Chief Operating Officer of Liberty Funds Group.
ROBERT P. VROLYK, 46, Vice President and Actuary (1986)
He is Vice President and Chief Actuary of Sun Life Assurance Company of
Canada; Vice President and Actuary of Sun Life Insurance and Annuity Company of
New York; Vice President and Director of Sun Life of Canada -- U.S. Operations
Holdings, Inc., Sun Life of Canada (U.S.) Holdings, Inc., Sun Life of Canada
(U.S.) Financial Services Holdings, Inc., Sun Life of Canada (U.S.)
Distributors, Inc., Sun Canada Financial Co., and Sun Life of Canada (U.S.)
Holdings General Partner, Inc.; Vice President and Director of Sun Life of
43
<PAGE>
Canada (U.S.) SPE 97-1, Inc.; Treasurer and Chief Financial Officer of Sun
Capital Advisers Trust; a Director of Sun Benefit Services Company, Inc., and
Sun Life Information Services Ireland Limited; and a Regular Trustee of Sun Life
of Canada (U.S.) Capital Trust I.
PETER F. DEMUTH, 41, Vice President and Chief Counsel and Assistant Secretary
(1998)
He is Vice President and Chief Counsel of U.S. Operations for Sun Life
Assurance Company of Canada; Vice President and Chief Counsel and Assistant
Secretary for Sun Life Insurance and Annuity Company of New York; a Director of
Sun Life of Canada (U.S.) Holdings, Inc., Sun Life of Canada (U.S.) Financial
Services Holdings, Inc., and Sun Life Assurance Company of Canada -- U.S.
Operations Holdings, Inc.; Assistant Secretary for Sun Capital Advisers Trust;
and a Regular Trustee of Sun Life of Canada (U.S.) Capital Trust I. Prior to
February 1998, he was a partner at the firm of Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.
ELLEN B. KING, 42, Counsel and Secretary (1998)
She is Counsel of Sun Life Assurance Company of Canada; Counsel and
Secretary of Sun Life Insurance and Annuity Company of New York; and Secretary
of Sun Life of Canada (U.S.) Holdings, Inc., Sun Life of Canada (U.S.) Financial
Services Holdings, Inc., Sun Life Assurance Company of Canada -- U.S. Operations
Holdings, Inc., Sun Benefit Services Company, Inc., Sun Life of Canada (U.S.)
SPE 97-1, Inc., Sun Canada Financial Co., and Sun Life of Canada (U.S.) Holdings
General Partner, Inc.
ROBERT K. LEACH, 44, Vice President, Finance and Product, Retirement Products
and Services (1996)
He has been affiliated with Sun Life Assurance Company of Canada since
January 1987 in various management positions. In October 1999, he was appointed
Vice President, Finance and Product, Retirement Products and Services. Prior to
1987, he was a 2nd Vice President at New England Life Insurance Company.
EDWARD J. RONAN, 46, Vice President, Retirement Products and Services (1997)
He has been affiliated with Sun Life Assurance Company of Canada since
August 1997. From June 1987 to July 1997, he was Vice President, Division
Manager at First Data Investor Services Group.
The Company's directors, officers, and employees are covered under a
commercial blanket bond and a liability policy. The directors, officers, and
employees of Clarendon Insurance Agency, Inc. are covered under a fidelity bond.
All individuals who were directors of Massachusetts Casualty Insurance
Company resigned their positions on February 5, 1999.
* First year elected.
44
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Some of the executive officers of the Company also serve as officers of Sun
Life Assurance Company of Canada and receive no compensation directly from the
Company. Allocations have been made as to such officers' time devoted to duties
as executive officers of the Company and its subsidiaries.
<TABLE>
<CAPTION>
ALL OTHER
NAME/POSITION YEAR SALARY BONUS COMPENSATION
- ------------- -------- -------- -------- ------------
<S> <C> <C> <C> <C>
C. James Prieur -- President* 1999 $ 48,826 $ 36,813 $ 11,355
C. James Prieur -- President* 1998 $104,208 $ 28,606 $ 3,601
Donald A. Stewart -- President and Chairman* 1998 $ 34,913 $ 17,857 $ 0
Donald A. Stewart -- President* 1997 $ 30,891 $ 13,032 $ 0
Edward J. Ronan 1999 $193,000 $ 52,000 $ 7,070
Vice President, Retirement Products & Services 1998 $180,000 $ 30,000 $ 6,968
1997 $ 0 $ 0 $ 0
Robert K. Leach 1999 $185,000 $ 45,400 $ 5,636
Vice President, Finance and Product 1998 $175,000 $ 45,400 $ 7,119
1997 $160,000 $ 40,800 $ 0
Thomas A. Woislaw 1999 $165,000 $ 50,000 $ 5,104
Assistant Vice President, Systems 1998 $ 88,846 $ 0 $ 50,000
1997 $ 0 $ 0 $ 0
Ronald J. Fernandes** 1999 $300,000 $ 0 $110,255
Vice President, Retirement Products 1998 $ 0 $ 0 $ 0
and Services 1997 $ 0 $ 0 $ 0
</TABLE>
- ------------------------
* Allocated Salary.
** Annualized salary. Date of hire is 10/4/99.
1. All other compensation for Mr. Prieur for the year ended 1999 includes Group
Term Life and Individual Life insurance payments of $265 and $534,
respectively; 401K company contributions of $3,904; spouse travel of $4,368;
and a car allowance of $2,162.
2. All other compensation for Mr. Ronan for the year ended 1999 includes Group
Term Life and 401K company contributions of $623 and $4,800, respectively.
3. All other compensation for Mr. Leach for the year ended 1999 includes Group
Term Life and Individual insurance payments of $598 and $238, respectively,
and 401K company contributions of $4,800.
4. All other compensation for Mr. Woislaw for the year ended 1999 includes
Group Term Life insurance payments and 401K company contributions of $535
and $4,569, respectively.
5. All other compensation for Mr. Fernandes for the year ended 1999 includes
sign-on bonus and taxable relocation of $85,000 and $26,000, respectively.
Directors of the Company who are also officers of Sun Life Assurance Company
of Canada or its affiliates receive no compensation in addition to their
compensation as officers of Sun Life Assurance Company of Canada or its
affiliates. Outside directors receive $7,000 annual fees plus $1,000 for board
meetings and $1,000 for committee meetings.
No shares of the Company are owned by any executive officer or director. The
Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc., One Sun Life Executive Park, Wellesley Hills,Massachusetts
02481, which is in turn a wholly-owned subsidiary of Sun Life Assurance Company
of Canada - U.S. Operations Holdings, Inc., a wholly-owned subsidiary of Sun
Life Assurance Company of Canada.
45
<PAGE>
LONG TERM INCENTIVE COMPENSATION
SLOC has a long term incentive compensation plan for certain officers of
SLOC holding positions at the level of Vice President or higher. The Unit Value
Appreciation Plan (the "UVA Plan") provides eligible officers with value
appreciation units ("Value Appreciation Units") designed to reward management
for growth in the value of the Company over a multi-year period. For purposes of
the UVA Plan, the value of the Company is determined by applying predefined
multiples to the net income earned in the Company's various businesses. When the
UVA Plan was introduced, participants were awarded two allotments of Value
Appreciation Units -- a three-year grant and a four-year grant, representing
grants for 1998 and 1999, respectively. The three-year grant will reward
increases in the value of the Company from January 1, 1998 to December 31, 2000.
The four-year grant will reward increases in the value of the Company from
January 1, 1998 to December 31, 2001. The starting value of the Value
Appreciation Units at the time of these grants was established by reference to
the Company's 1997 financial results, adjusted for certain items. Awards are
payable in cash and are based on the increase in the value of Value Appreciation
Units over the performance period. The UVA Plan does not establish minimum
thresholds, targets or maximum payouts.
LONG-TERM INCENTIVE PLAN -- AWARDS IN MOST RECENTLY COMPLETED FINANCIAL YEAR
The following table sets forth information concerning the award of Value
Appreciation Units under the Company's UVA Plan in the year ended December 31,
1999 in respect of the Named Executive Officers:
<TABLE>
<CAPTION>
NAME UNITS PERFORMANCE PERIOD
- ---- -------- ------------------
<S> <C> <C>
Ronald J. Fernandes 8,000 4 Years
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE UPON RETIREMENT FOR EXECUTIVE OFFICERS IN THE
UNITED STATES
The following table illustrates the total annual pension for Company
employees in the United States who are eligible to participate in the Sun Life
of Canada U.S. Employees' Retirement Income Plan and accompanying Trust (the
"Plan"). Under the plan, income is payable for the life of the eligible
employee. The normal form of pension for single employees is a life annuity; for
married individuals it is the actuarially reduced 50% joint and survivor
benefit.
Pensionable earnings for this purpose are calculated using the highest
average of base earnings and officer incentive payment, up to target, earned
over the highest consecutive 36 month period in the last 120 months. The pension
benefit is determined by years of service (maximum of 30) multiplied by 50% of
the pensionable earnings, plus .5% of pensionable earnings for service in excess
of 30 years (maximum 40). Compensation allocated to the Company covered by the
Plan for 1999 was as follows: Mr. Prieur $265,931, Mr. Ronan $241,600,
Mr. Leach $228,750, Mr. Woislaw $180,992 and Mr. Fernandes $69,231. As of
December 31, 1999, the number of years of credited services was as follows:
Mr. Prieur 7 years, Mr. Ronan 3 years, Mr. Leach 13 years, Mr. Woislaw 2 years
and Mr. Fernandes 3 months.
In no event can the pension benefit exceed $135,000 at the normal retirement
age as defined by the United States Social Security Office. The maximum
pensionable earnings that can be used to determine this
46
<PAGE>
benefit is $170,000. The table does not reflect these limits. The Company has
adopted a plan that is not a tax-qualified plan to provide the benefits that
would have been provided under the Company's retirement plan but for these
limits.
<TABLE>
<CAPTION>
PENSIONABLE YEARS OF SERVICE
EARNINGS (US$) 15 20 25 30 35
- -------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
125,000 31,250 41,667 52,083 62,500 65,625
150,000 37,500 50,000 62,500 75,000 78,750
175,000 43,750 58,333 72,917 87,500 91,875
200,000 50,000 66,667 83,333 100,000 105,000
225,000 56,250 75,000 93,750 112,500 118,125
250,000 62,500 83,333 104,167 125,000 131,250
300,000 75,000 100,000 125,000 150,000 157,500
350,000 87,500 116,667 145,833 175,000 183,750
400,000 100,000 133,333 166,667 200,000 210,000
450,000 112,500 150,000 187,500 225,000 236,250
500,000 125,000 166,667 208,333 250,000 262,500
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is not applicable since the Company is wholly-owned by Sun Life of
Canada (U.S.) Holdings, Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
REINSURANCE
See discussion of Reinsurance in Item 1.
SERVICE CONTRACT
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.
LEASES
The Company leases office space to SLOC under lease agreements with initial
terms that expired in September, 1999 and options to extend the terms for each
of thirteen successive five year terms at fair market rental not to exceed 125%
of the fixed rent for the term which is ending. Rent received by the Company
under the leases for 1999 amounted to approximately $6,943,000.
47
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial statements (set forth in Item 8):
-- Statutory Statements of Admitted Assets, Liabilities and Capital Stock
and Surplus as of December 31, 1999 and December 31, 1998.
-- Statutory Statements of Operations for each of the three years ended
December 31, 1999, December 31, 1998 and December 31, 1997.
-- Statutory Statements of Capital Stock and Surplus for each of the
three years ended December 31, 1999, December 31, 1998 and
December 31, 1997.
-- Statutory Statements of Cash Flow for each of the three years ended
December 31, 1999, December 31, 1998 and December 31, 1997.
-- Notes to Statutory Financial Statements.
-- Independent Auditors' Report.
(a) (2) Financial statement schedules (set forth below):
-- Schedule I--Summary of Investments, Other than Investments in Related
Parties.
-- Schedule III--Supplementary Insurance Information. Schedule
VI--Reinsurance.
-- Schedule VI--Reinsurance.
-- Independent Auditors' Report.
48
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
SCHEDULE I
SUMMARY OF INVESTMENTS, OTHER THAN INVESTMENTS IN RELATED PARTIES
<TABLE>
<CAPTION>
AMOUNT AT WHICH SHOWN IN
TYPE OF INVESTMENT COST VALUE THE BALANCE SHEET*
- --------------------------------------------- ---------- ---------- ------------------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States government and government
agencies and authorities $ 78,161 $ 77,798 $ 78,161
States, municipalities and political
subdivisions 20,428 20,440 20,428
Public utilities 181,466 182,413 181,466
Transportation 188,285 193,265 188,285
Finance 88,517 92,630 88,517
All other corporate bonds 665,113 666,314 665,113
---------- ---------- ----------
Total fixed maturities 1,221,970 1,232,860 1,221,970
---------- ---------- ----------
Mortgage loans on real estate 528,911 -- 528,911
Real estate 80,606 -- 79,182
Real estate acquired in satisfaction of debt 15,971 -- 15,641
Other invested assets 67,938 -- 67,938
Policy loans 40,095 -- 40,095
Short-term investments 312,585 -- 312,585
---------- ---------- ----------
Total investments $2,268,076 $2,266,322
========== ========== ==========
</TABLE>
49
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(IN 000'S)
<TABLE>
<CAPTION>
FUTURE POLICY BENEFITS, OTHER POLICY
LOSSES, CLAIMS AND CLAIMS AND
SEGMENT LOSS EXPENSES BENEFITS PAYABLE
- ------- ----------------------- ----------------
<S> <C> <C>
PROTECTION
1999 143,419 913
1998 144,797 369
WEALTH MANAGEMENT
1999 1,578,224 --
1998 2,074,070 --
CORPORATE
1999 -- --
1998 -- --
</TABLE>
<TABLE>
<CAPTION>
BENEFITS CLAIMS, OTHER
PREMIUM NET INVESTMENT LOSSES, AND OPERATING
REVENUE INCOME (1) SETTLEMENT EXPENSES EXPENSES
---------- -------------- ------------------- -----------
<S> <C> <C> <C> <C>
PROTECTION
1999 19,970 10,849 27,142 13,887
1998 157,993 1,552 129,523 15,675
1997 206,285 1,949 251,658 20,675
WEALTH MANAGEMENT
1999 2,651,247 116,686 2,678,825 219,333
1998 2,194,895 160,153 2,287,427 196,289
1997 2,204,693 200,970 2,327,446 180,145
CORPORATE
1999 -- 43,202 -- 6,069
1998 -- 25,110 -- 3,042
1997 -- 68,495 -- 5,244
</TABLE>
(1) Net investment income is allocated based on segmented assets by line of
business.
50
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
SCHEDULE VI
REINSURANCE
<TABLE>
<CAPTION>
% AMOUNT
ASSUMED
CEDED TO OTHER ASSUMED FROM TO NET
DIRECT COMPANIES OTHER COMPANIES NET AMOUNT AMOUNT
---------- -------------- --------------- ---------- --------
<S> <C> <C> <C> <C> <C>
LIFE INSURANCE IN-FORCE (IN
000'S)
December 31, 1999 $1,470,708 $1,030,096 $ 0 $ 440,612 0.0%
December 31, 1998 $1,359,883 $1,006,310 $ 0 $ 353,573 0.0%
December 31, 1997 $1,197,181 $5,690,525 $10,781,852 $6,288,508 171.5%
LIFE INSURANCE PREMIUMS (IN
000'S)
December 31, 1999 $ 22,050 $ 5,541 $ 0 16,509 0.0%
December 31, 1998 $ 18,750 $ 11,763 $ 159,787 $ 166,774 95.8%
December 31, 1997 $ 5,823 $ 13,180 $ 210,101 $ 202,744 103.6%
</TABLE>
51
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
Sun Life Assurance Company of Canada (U.S.)
Wellesley Hills, Massachusetts
We have audited the statutory statements of admitted assets, liabilities,
and capital stock and surplus of Sun Life Assurance Company of Canada (U.S.)
(wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) 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, and have issued our report thereon dated
February 10, 2000 (which report is included elsewhere in this Form 10-K). Our
audits also included the financial statement schedules listed in Item 14(a)2 in
this Form 10-K. These financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information therein set forth.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 10, 2000
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Sun Life Assurance Company of Canada
(U.S.), has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sun Life Assurance Company of
Canada (U.S.)
(Registrant)
By: /s/James McNulty, III
-----------------------------------
James McNulty, III
PRESIDENT
Date: March 21, 2000
-----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<C> <S> <C>
/s/ James McNulty, III President and Director (Principal
- -------------------------------------- Executive Officer)
James McNulty, III March 21, 2000
/s/ Davey S. Scoon Vice President, Finance and
- -------------------------------------- Treasurer (Principal
Davey S. Scoon Financial & Accounting Officer) March 21, 2000
/s/ Richard B. Bailey Director
- --------------------------------------
Richard B. Bailey March 21, 2000
/s/ Gregory W. Gee Director
- --------------------------------------
Gregory W. Gee March 21, 2000
/s/ David D. Horn Director
- --------------------------------------
David D. Horn March 21, 2000
/s/ Angus A. MacNaughton Director
- --------------------------------------
Angus A. MacNaughton March 21, 2000
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
/s/ C. James Prieur Vice Chairman and Director
- --------------------------------------
C. James Prieur March 21, 2000
/s/ S. Caesar Raboy Director
- --------------------------------------
S. Caesar Raboy March 21, 2000
/s/ Donald A. Stewart Chairman and Director
- --------------------------------------
Donald A. Stewart March 21, 2000
/s/ William W. Stinson Director
- --------------------------------------
William W. Stinson March 21, 2000
</TABLE>
<PAGE>
(a) 3 AND (c). EXHIBITS:
The following Exhibits are incorporated herein by reference unless otherwise
indicated:
<TABLE>
<CAPTION>
EXHIBIT NO.
---------------------
<C> <S> <C>
3 Certificate of Incorporation and by-laws (filed as Exhibit 6 to
the Registration Statement on Form N-4 (Registration
No. 333-37903), filed October 14, 1997)
4 (a) Form of Flexible Payment Combination Fixed/Variable Group
Annuity Contract (filed as Exhibit 4(a)(i) to Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-4
(Registration No. 333-82957), filed September 29, 1999).
(b) Form of Certificate to be used in connection with the
Contract filed as Exhibit 4(a) hereto (filed as
Exhibit 4(b)(i) to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-4 (Registration
No. 333-82957), filed September 29, 1999).
(c) Form of Flexible Payment Combination Fixed/Variable
Individual Annuity Contract (filed as Exhibit 4(c)(i) to
Pre-Effective Amendment No. 1 to the Registration Statement
on Form N-4 (Registration No. 333-82957), filed
September 29, 1999).
(d) Form of Flexible Premium Combination Fixed and Variable Life
Insurance Policy (filed as Exhibit 1.A(5) to Post-Effective
Amendment No. 1 to the Registration Statement on Form S-6
(Registration No. 333-68601), filed August 12, 1999).
21 Subsidiaries of the Company
Sun Life of Canada (U.S.) Distributors, Inc. (Delaware)
Sun Benefit Services Company, Inc. (Delaware)
Sun Life Insurance and Annuity Company of New York (New York)
Sun Capital Advisers, Inc. (Delaware)
Clarendon Insurance Agency, Inc. (Massachusetts)
Sun Life Financial Services Limited (Bermuda)
Sun Life Information Services Ireland Limited (Ireland)
Sun Life of Canada (U.S.) SPE 97-1, Inc. (Delaware)
Sun Life Finance Corporation (Delaware)
Massachusetts Casualty Insurance Company was sold on February 5,
1999.
New London Trust F.S.B. was sold on October 29, 1999.
27 Financial Data Schedule (filed herewith)
</TABLE>
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1999.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AND STATEMENT OF OPERATIONS FOUND IN PAGES 16 AND 17 OF THE
COMPANY'S FORM 10-K FOR THE YEAR-TO-DATE AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 1,221,970
<DEBT-MARKET-VALUE> 1,232,860
<EQUITIES> 75,283
<MORTGAGE> 528,911
<REAL-ESTATE> 94,823
<TOTAL-INVEST> 2,341,605
<CASH> 4,386
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 19,948,155
<POLICY-LOSSES> 1,156,824
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 978
<POLICY-HOLDER-FUNDS> 564,820
<NOTES-PAYABLE> 0
0
0
<COMMON> 5,900
<OTHER-SE> 880,442
<TOTAL-LIABILITY-AND-EQUITY> 19,948,155
2,671,218
<INVESTMENT-INCOME> 170,737
<INVESTMENT-GAINS> 20,108
<OTHER-INCOME> 198,032
<BENEFITS> 2,706,121
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 239,137
<INCOME-PRETAX> 114,837
<INCOME-TAX> 24,479
<INCOME-CONTINUING> 90,358
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90,358
<EPS-BASIC> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
