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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT 0F 1934
For the Quarterly Period Commission File Numbers:
Ended March 31, 2000 2-99959, 33-29851,
33-31711, 33-41858,
33-43008, 33-58853
and 333-11699
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Exact name of registrant as specified in its charter)
Delaware 04-2461439
- --------------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
One Sun Life Executive Park, Wellesley Hills, MA 02481
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (781) 237-6030
NONE
- -------------------------------------------------------------------------------
Former name, former address, and former fiscal year, if changed since last
report.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes |X| No |_|
(2) Yes |X| No |_|
Registrant has no voting stock outstanding held by non-affiliates.
Registrant has 5,900 shares of common stock outstanding on May 15, 2000,
all of which are owned by Sun Life of Canada (U.S.) Holdings, Inc.
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SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
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INDEX
PAGE
NUMBER
<S> <C>
PART I: Financial Information
Item 1: Unaudited Financial Statements:
Consolidated Statements of Income (unaudited) -
Three Months Ended
March 31, 2000 and March 31, 1999 1
Consolidated Balance Sheets (unaudited) -
March 31, 2000 and December 31, 1999 2
Consolidated Statements of Comprehensive Income (unaudited)-
Three Months Ended
March 31, 2000 and March 31, 1999 3
Consolidated Statements of Changes in Stockholder's
Equity (unaudited)-
Three Months Ended
March 31, 2000 and March 31, 1999 4
Consolidated Statements of Cash Flows (unaudited)-
Three Months Ended
March 31, 2000 and March 31,1999 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 23
PART II: Other Information
Item 4: Submission of Matters to a Vote of Security Holders 26
Item 6: Exhibits and Reports on Form 8-K 26
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SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
UNAUDITED UNAUDITED
2000 1999
---- ----
Revenues
<S> <C> <C>
Premiums and annuity considerations $ 14.6 $ 11.0
Net investment income 79.9 98.4
Net realized investment gains 0.2 4.5
Fee and other income 66.6 49.9
-------------------- ---------------------
Total revenues 161.3 163.8
-------------------- ---------------------
Benefits and expenses
Policyowner benefits 80.3 84.7
Underwriting, acquisition and other operating expenses 27.0 20.0
Amortization of deferred policy acquisition costs 0.6 24.4
-------------------- ---------------------
Total benefits and expenses 107.9 129.1
-------------------- ---------------------
Income from operations
53.4 34.7
Interest expense 10.8 10.8
-------------------- ---------------------
Income before income tax expense and discontinued operations
42.6 23.9
Income tax expense 14.9 3.3
-------------------- ---------------------
Net income from continuing operations
27.7 20.6
Net loss on disposal of subsidiary, after tax
- (25.6)
Net income from discontinued operations
- 0.8
-------------------- ---------------------
Net income (loss) $ 27.7 $ (4.2)
==================== =====================
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.
1
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<CAPTION>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
UNAUDITED UNAUDITED
ASSETS MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
Investments
Fixed maturities available-for-sale at fair value (amortized cost of
$2,843.5 and $2,685.4 in 2000 and 1999, respectively) $ 2,833.7 $ 2,677.3
Trading fixed maturities at fair value (amortized cost of $1.0 and
$1.0 in 2000 and 1999, respectively) 1.0 1.0
Short-term investments 85.5 177.2
Mortgage loans 898.1 931.4
Real estate 94.3 95.1
Policy loans 40.4 40.7
Other invested assets 68.3 67.9
---------------------- -----------------------
Total investments 4,021.3 3,990.6
Cash and cash equivalents 321.0 550.3
Accrued investment income 52.4 50.5
Deferred policy acquisition costs 728.1 686.3
Outstanding premiums 2.0 2.7
Other assets 62.2 81.2
Separate account assets 17,298.8 16,123.3
---------------------- ----------------------
TOTAL ASSETS $ 22,485.8 $ 21,484.9
====================== ======================
LIABILITIES
Future contract and policy benefits $ 727.4 $ 729.3
Contractholder deposit funds and other policy liabilities 2,945.3 3,144.8
Unearned revenue 7.5 7.1
Accrued expenses and taxes 93.4 98.8
Deferred federal income taxes 90.2 77.7
Long-term debt payable to affiliates 565.0 565.0
Other liabilities 58.7 67.7
Separate account liabilities 17,298.8 16,123.3
---------------------- ----------------------
Total liabilities 21,786.3 20,813.7
---------------------- ----------------------
STOCKHOLDER'S EQUITY
Common stock, $1,000 par value - 10,000 shares authorized;
5,900 shares issued and outstanding 5.9 5.9
Additional paid-in capital 199.4 199.4
Accumulated other comprehensive income 7.7 7.1
Retained earnings 486.5 458.8
---------------------- -----------------------
Total stockholder's equity 699.5 671.2
---------------------- ----------------------
Total liabilities and stockholder's equity $ 22,485.8 $ 21,484.9
====================== ======================
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.
2
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SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN MILLIONS)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
UNAUDITED UNAUDITED
2000 1999
---- ----
<S> <C> <C>
Net income (loss) $ 27.7 $ (4.2)
Other comprehensive income:
Net change in unrealized holding gains and losses on available-for-sale
securities, net of tax 0.7 10.7
Currency translation (0.1) -
-------------------- ---------------------
Other comprehensive income: 0.6 10.7
-------------------- ---------------------
Comprehensive income $ 28.3 $ 6.5
==================== =====================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.
3
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SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN MILLIONS)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDER'S
STOCK CAPITAL INCOME EARNINGS EQUITY
---------------- ---------------- --------------- --------------- -----------------
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Balance at December 31, 1999 $ 5.9 $ 199.4 $ 7.1 $ 458.8 $ 671.2
Comprehensive income:
Net income 27.7 27.7
Other comprehensive income 0.6 0.6
---------------- ---------------- --------------- --------------- -----------------
Balance at March 31, 2000
$ 5.9 $ 199.4 $ 7.7 $ 486.5 $ 699.5
================ ================ =============== =============== =================
Balance at December 31, 1998 $ 5.9 $ 199.4 $ 75.9 $ 496.4 $ 777.6
Comprehensive income:
Net income (4.2) (4.2)
Other comprehensive income 10.7 10.7
Dividends to stockholder (75.0) (75.0)
---------------- ---------------- --------------- --------------- -----------------
Balance at March 31, 1999 $ 5.9 $ 199.4 $ 86.6 $ 417.2 $ 709.1
================ ================ =============== =============== =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.
4
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<CAPTION>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
UNAUDITED UNAUDITED
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income from continuing operations $ 27.7 $ 20.6
Adjustments to reconcile net income from continuing operations to net cash
provided by operating activities:
Amortization of discount and premiums (0.3) 0.0
Depreciation and amortization 0.3 0.5
Net realized gains on investments (0.2) (4.5)
Tax benefit on disposal of subsidiary - 14.8
Interest credited to contractholder deposits 48.7 56.0
Deferred federal income taxes 12.1 (5.9)
Changes in assets and liabilities:
Deferred acquisition costs (39.0) (16.6)
Accrued investment income (1.9) 1.0
Other assets 13.1 (17.9)
Future contract and policy benefits (1.4) (4.1)
Other, net (10.1) 12.7
--------------- -------------
Net cash provided by operating activities 49.0 56.6
--------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, maturities and repayments of:
Available-for-sale fixed maturities 208.9 413.3
Subsidiary - 33.6
Mortgage loans 50.1 24.0
Real estate 3.0 -
Purchases of:
Available-for-sale fixed maturities (366.9) (143.8)
Other invested assets - (1.0)
Mortgage loans (17.6) (97.7)
Real estate (1.9) (0.1)
Changes in other investing activities, net 0.3 -
Net change in policy loans 0.3 (0.7)
Net change in short term investments 94.6 (91.3)
--------------- -------------
Net cash provided by (used in) investing activities (29.2) 136.4
--------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits and interest credited to contractholder deposit funds 317.0 341.3
Withdrawals from contractholder deposit funds (566.1) (471.8)
--------------- -------------
Net cash used in financing activities (249.1) (130.4)
--------------- -------------
Net change in cash and cash equivalents (229.3) 62.6
Cash and cash equivalents, beginning of period 550.3 264.7
Cash and cash equivalents, end of period $ 321.0 $ 327.3
=============== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid, net of refunds $ (19.5) $ 13.3
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.
5
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Sun Life Assurance Company of Canada (U.S.) (the "Company") was
incorporated in 1970 as a life insurance company domiciled in the state
of Delaware. The Company and its subsidiaries are licensed in 49 states
and certain other territories and are engaged in the sale of individual
variable life insurance, individual fixed and variable annuities, group
fixed and variable annuities, group pension contracts, group life and
disability insurance, and other asset management services.
The Company is a wholly owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc. ("Life Holdco"), which is an indirect wholly owned
subsidiary of Sun Life Assurance Company of Canada ("SLOC"), the
Company's ultimate parent as of December 31, 1999. SLOC is a life
insurance company domiciled in Canada which reorganized from a mutual
life insurance company to a stock life insurance company on March 22,
2000. As a result of the demutualization, a new holding company, Sun
Life Financial Services of Canada Inc. ("SLF"), is now the ultimate
parent of SLOC and the Company.
Basis of Presentation
For the year ended December 31, 1999, the Company filed its Annual
Report on Form 10-K using audited statutory financial statements. The
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of
Delaware, which is a comprehensive basis of accounting other than
generally accepted accounting principles. The Company has changed its
basis of accounting for the three months ended March 31, 2000 to
generally accepted accounting principles ("GAAP") and has restated the
financial statements for the prior year ended December 31, 1999
(Consolidated Balance Sheet) and for the period ended March 31, 1999
(Consolidated Statement of Income, Consolidated Statement of
Comprehensive Income, Consolidated Statement of Changes in
Stockholder's Equity, and Consolidated Statement of Cash Flows) to
conform with GAAP. See Note 5 for a reconciliation of statutory surplus
to GAAP equity and statutory net income to GAAP net income.
The Company owns all of the outstanding shares of Sun Life Insurance
and Annuity Company of New York ("Sun Life (N.Y.)"), Sun Life of
Canada (U.S.) Distributors, Inc. ("Sundisco"), Sun Life Financial
Services Limited ("SLFSL"), Sun Benefit Services Company, Inc.
("Sunbesco"), Sun Capital Advisers, Inc. ("Sun Capital"), Sun Life
Finance Corporation ("Sunfinco"), Sun Life of Canada (U.S.) SPE 97-1,
Inc. ("SPE 97-1"), Clarendon Insurance Agency, Inc. ("Clarendon"), and
Sun Life Information Services Ireland Limited ("SLIRL"). All
significant intercompany transactions have been eliminated in
consolidation.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable
annuity contracts and group life and disability insurance contracts in
its state of domicile, New York. Sundisco is a registered investment
adviser and broker-dealer. SLFSL serves as the marketing administrator
for the distribution of the offshore products of Sun Life Assurance
Company of Canada (Bermuda), an affiliate. Sun Capital is a registered
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investment adviser. SPE 97-1 was organized for the purpose of engaging
in activities incidental to securitizing mortgage loans. Clarendon is a
registered broker-dealer that acts as the general distributor of
certain annuity and life insurance contracts issued by the Company and
its affiliates. SLIRL provides information systems development services
to the Company and its affiliates. Sunbesco and Sunfinco are currently
inactive.
During 1999, the Company sold two of its subsidiaries, Massachusetts
Casualty Insurance Company ("MCIC") (sold February, 1999) and New
London Trust F.S.B. ("NLT")(sold October, 1999). MCIC is a life
insurance company which issues only individual disability income
policies. NLT is a federally chartered savings bank, which grants
commercial, residential real estate and installment loans. The results
of operations of these subsidiaries are reported as discontinued
operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues
and expenses during the reporting period. The most significant
estimates are those used in determining deferred policy acquisition
costs, investment allowances, and the liabilities for future
policyholder benefits. Actual results could differ from those
estimates.
Financial Instruments
In the normal course of business, the Company enters into transactions
involving various types of financial instruments, including cash and
cash equivalents, investments such as fixed maturities, mortgage loans
and equity securities, off balance sheet financial instruments, debt,
loan commitments and financial guarantees. These instruments involve
credit risk and also may be subject to risk of loss due to interest
rate fluctuation. The Company evaluates and monitors each financial
instrument individually and, when appropriate, obtains collateral or
other security to minimize losses.
Cash and Cash Equivalents
Cash and cash equivalents primarily include cash, commercial paper,
money market investments, and short term bank participations. All such
investments have maturities of three months or less and are considered
cash equivalents for purposes of reporting cash flows.
Investments
The Company accounts for its investments in accordance with Statement
of Financial Accounting Standards No. 115, Accounting for Certain
Investments of Debt and Equity Securities. At the time of purchase,
fixed maturity securities are classified based on intent, as
held-to-maturity, available-for-sale, or trading. In order for the
security to be classified as held-to-maturity, the Company must have
positive intent and ability to hold the securities to maturity.
Securities held-to-maturity are stated at cost, adjusted for
amortization of premiums, and accretion of discounts. Trading
securities are carried at estimated fair value with changes in
unrealized gains or losses reported as a component
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of net investment income. Securities that do not meet this criterion
are classified as available-for-sale. Available-for-sale securities are
carried at estimated fair value with changes in unrealized gains or
losses reported net of taxes in a separate component of stockholder's
equity. Fair values are obtained from external market quotations. All
securities transactions are recorded on a trade date basis.
Mortgage loans are stated at unpaid principle balances, net of
provisions for estimated losses. Mortgage loans acquired at a premium
or discount are carried at amortized values net of provisions for
estimated losses. Loans, which include primarily commercial first
mortgages, and real estate are diversified by property type and
geographic area throughout the United States. Mortgage loans are
collateralized by the related properties and generally are no more than
75% of the properties' value at the time that the original loan is
made.
A loan is recognized as impaired when it is probable that the principal
or interest is not collectible in accordance with the contractual terms
of the loan. Measurement of impairment is based on the present value of
expected future cash flows discounted at the loan's effective interest
rate, or at the loan's observable market price. A specific valuation
allowance is established if the fair value of the impaired loan is less
than the recorded amount. Loans are also charged against the allowance
when determined to be uncollectible. The allowance is based on a
continuing review of the loan portfolio, past loss experience and
current economic conditions, which may affect the borrower's ability to
pay. While management believes that it uses the best information
available to establish the allowance, future adjustments to the
allowance may become necessary if economic conditions differ from the
assumptions used in making the evaluation.
Real estate investments are held for the production of income or
held-for-sale. Real estate investments held for the production of
income are carried at the lower of cost adjusted for accumulated
depreciation or fair value. Real estate investments held-for-sale are
primarily acquired through foreclosure of mortgage loans. The cost of
real estate that has been acquired through foreclosure is the estimated
fair value at the time of foreclosure. Depreciation of buildings and
improvements is calculated using the straight-line method over the
estimated useful life of the property, generally 40 to 50 years.
Policy loans are carried at the amount of outstanding principal balance
not in excess of net cash surrender values of the related insurance
policies.
Other invested assets consist primarily of leveraged leases and tax
credit partnerships.
The Company uses derivative financial instruments including financial
futures contracts, equity options, interest rate swaps, foreign
currency swaps and forward spread lock contracts as a means of hedging
exposure to interest rate, currency and equity price risk. Hedge
accounting is used to account for certain derivatives. To qualify for
hedge accounting, the changes in fair value of the derivative must be
expected to substantially offset the changes in the value of the hedged
item. Hedges are monitored to ensure that there is a correlation
between the derivative instrument and the hedged investment. Derivative
instruments qualifying for hedge accounting treatment are marked to
market and the related changes in fair value are included in a separate
component of stockholder's equity. To the extent that the correlation
of the derivative instrument and hedged item is not established, the
derivative instrument is marked to market and the
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related change in fair value is recognized in the statement of
operations as a component of net investment income.
Investment income is recognized on an accrual basis. Realized gains and
losses on the sales of investments are recognized in operations at the
date of sale and are determined using the specific cost identification
method. When an impairment of a specific investment or a group of
investments is determined to be other than temporary, a realized
investment loss is recorded. Changes in the provision for estimated
losses on mortgage loans and real estate are included in net realized
investment gains and losses.
Interest income on loans is recorded on the accrual basis. Loans are
placed in a non-accrual status when management believes that the
borrower's financial condition, after giving consideration to economic
and business conditions and collection efforts, is such that collection
of principal and interest is doubtful. When a loan is placed in
non-accrual status, all interest previously accrued is reversed against
current period interest income. Interest accruals are resumed on such
loans only when they are brought fully current with respect to
principal and interest, have performed on a sustained basis for a
reasonable period of time, and when, in the judgment of management, the
loans are estimated to be fully collectible as to both principal and
interest.
Deferred Policy Acquisition Costs
Acquisition costs consist of commissions, underwriting and other costs
which vary with and are primarily related to the production of
revenues. Acquisition costs related to investment-type contracts,
primarily deferred annuity and guaranteed investment contracts, and
universal and variable life products are deferred and amortized with
interest in proportion to the present value of estimated gross profits
to be realized over the estimated lives of the contracts. Estimated
gross profits are composed of net investment income, net realized
investment gains and losses, life and variable annuity fees, surrender
charges and direct variable administrative expenses. This amortization
is reviewed annually and adjusted retrospectively by a cumulative
charge or credit to current operations when the Company revises its
estimate of current or future gross profits to be realized from this
group of products, including realized and unrealized gains and losses
from investments. Acquisition costs related to fixed annuities and
other life insurance products are deferred and amortized, generally in
proportion to the ratio of annual revenue to the estimated total
revenues over the contract periods based upon the same assumptions used
in estimating the liability for future policy benefits.
Deferred acquisition costs for each life product are reviewed to
determine if they are recoverable from future income, including
investment income. If such costs are determined to be unrecoverable,
they are expensed at the time of determination. Although realization of
deferred policy acquisition costs is not assured, the Company believes
it is more likely than not that all of these costs will be realized.
The amount of deferred policy acquisition costs considered realizable,
however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in
the near term if any of the estimates discussed above are revised.
9
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Other Assets
Property, equipment, leasehold improvements, and capitalized software
costs, which are included in other assets, are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided
using the straight-line or accelerated method over the estimated useful
lives of the related assets, which generally range from 3 to 30 years.
Amortization of leasehold improvements is provided using the
straight-line method over the lesser of the term of the leases or the
estimated useful life of the improvements. Reinsurance receivables from
reinsurance ceded are also included in other assets.
Policy Liabilities and Accruals
Future contract and policy benefits are liabilities for life, health
and annuity products. Such liabilities are established in amounts
adequate to meet the estimated future obligations of policies in force.
Future policy benefits for individual life insurance and annuity
policies are computed using interest rates ranging from 4.5% to 5.5%
for life insurance and 6% to 11.25% for annuities. The liabilities
associated with traditional life insurance, annuity and disability
insurance products are computed using the net level premium method
based on assumptions about future investment yields, mortality,
morbidity and persistency. The assumptions used are based upon both the
Company's and its affiliates' experience and industry standards.
Estimated liabilities are established for group life and health
policies that contain experience rating provisions.
Policyholder contract deposits consist of policy values that accrue to
the holders of universal life-type contracts and investment-related
products such as deferred annuities and guaranteed investment
contracts. The liabilities are determined using the retrospective
deposit method and consist of net deposits and investment earnings less
administrative charges. The liability is before the deduction of any
applicable surrender charges.
Other policy liabilities include liabilities for policy and contract
claims. These amounts consist of the estimated amount payable for
claims reported but not yet settled and an estimate of claims incurred
but not reported. The amount reported is based upon historical
experience, adjusted for trends and current circumstances. Management
believes that the recorded liability is sufficient to provide for the
associated claims adjustment expenses. Revisions to these estimates are
included in operations in the year such refinements are made.
Revenue and Expenses
Premiums for traditional individual life and annuity products are
considered revenue when due. Premiums related to group life and group
disability insurance are recognized as revenue pro-rata over the
contract period. The unexpired portion of these premiums is recorded as
unearned premiums. Revenue from universal life-type products and
investment-related products includes charges for cost of insurance
(mortality), initiation and administration of the policy and surrender
charges. Revenue is recognized when the charges are assessed except
that any portion of an assessment that relates to services to be
provided in future years is deferred and recognized over the period
during which the services are provided.
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Benefits and expenses, other than deferred policy acquisition costs,
related to traditional life, annuity, and disability contracts,
including group policies, are recognized when incurred in a manner
designed to match them with related premium revenue and spread income
recognition over expected policy lives. For universal life-type and
investment-type contracts, benefits include interest credited to
policyholders' accounts and death benefits in excess of account values,
which are recognized as incurred.
Income Taxes
The Company and its subsidiaries participate in a consolidated federal
income tax return with Sun Life Assurance Company of Canada - U.S.
Operations Holdings, Inc., direct wholly owned subsidiary of SLOC
and parent company of Life Holdco and other affiliates. Deferred
income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes,
and for other temporary taxable and deductible differences as defined
by Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. These differences result primarily from policy reserves,
policy acquisition expenses and unrealized gains or losses on
investments.
Separate Accounts
The Company has established separate accounts applicable to various
classes of contracts providing for variable benefits. Contracts for
which funds are invested in separate accounts include variable life
insurance and individual and group qualified and non-qualified variable
annuity contracts. Assets and liabilities of the separate accounts,
representing net deposits and accumulated net investment earnings less
fees, held primarily for the benefit of contract holders, are shown as
separate captions in the financial statements. Assets held in the
separate accounts are carried at market value and the investment risk
of such securities is retained by the policyholder.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS No. 133"),
which establishes accounting and reporting standards for derivative
instruments. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities at fair value in the
balance sheet and establishes special accounting for the following
three types of hedges: fair value hedges, cash flow hedges, and hedges
of foreign currency exposures of net investments in foreign operations.
In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137 ("SFAS No. 137"), "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB SFAS No. 133." SFAS No. 137 delays the effective date of SFAS
No. 133 for all fiscal quarters until fiscal years beginning after June
15, 2000. The Company is evaluating SFAS No. 133 and has not determined
its effect on the consolidated financial statements.
On January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." This statement provides guidance on when an insurance or
other enterprise should recognize a liability for guaranty fund and
other
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assessments and on how to measure such liability. The adoption of SOP
97-3 had no material impact on the financial position or results of
operations of the Company.
On January 1, 1999, the Company adopted AICPA SOP 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use."
This SOP provides guidance for determining whether costs of software
developed or obtained for internal use should be capitalized or
expensed as incurred. In the past, the Company has expensed such costs
as they were incurred. The adoption of SOP 98-1, had no material impact
on pre-tax income in either three month period.
(2) TRANSACTIONS WITH AFFILIATES
The Company has an agreement with SLOC which provides that SLOC will
furnish, as requested, personnel as well as certain services and
facilities on a cost-reimbursement basis. Expenses under this agreement
amounted to approximately $7,374,000 and $6,798,000 for the three month
period in 2000 and 1999.
The Company leases office space to SLOC under lease agreements with
terms expiring in September, 2004 and options to extend the terms for
each of twelve successive five-year terms at fair market rental not to
exceed 125% of the fixed rent for the term which is ending. Rent
received by the Company under the leases for the three month period
amounted to approximately $1,994,000 in 2000 and $1,762,000 in 1999.
During January 2000, the Company purchased $200 million of term notes
issued by an affiliate, Massachusetts Financial Services Company,
maturing in 2003 and 2004.
(3) SEGMENT INFORMATION
The Company offers financial products and services such as fixed and
variable annuities, retirement plan services, and life insurance on an
individual and group basis, as well as disability insurance on a group
basis. Within these areas, the Company conducts business principally in
three operating segments and maintains a corporate segment to provide
for the capital needs of the three operating segments and to engage in
other financing related activities.
The Individual Protection segment markets and administers a variety of
life insurance products sold to individuals and corporate owners of
individual life insurance. The products include whole life, universal
life and variable life products.
The Group Protection segment markets and administers group life and
long-term disability insurance to small and mid-size employers in the
State of New York.
The Wealth Management segment markets and administers individual and
group variable annuity products, individual and group fixed annuity
products which include market value adjusted annuities, and other
retirement benefit products.
Summarized unaudited financial information by segment is provided in
the tables below:
12
<PAGE>
<TABLE>
<CAPTION>
(IN MILLIONS) MARCH 31,
PERIOD ENDED MARCH 31, 2000 2000
--------------------------- -------------------
TOTAL TOTAL PRETAX NET TOTAL
REVENUES EXPENDITURES INCOME INCOME ASSETS
-------------- -------------------- ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C>
Individual
Protection $3.1 $3.2 ($.1) ($.1) $325.0
Group
Protection 4.2 3.3 .9 .6 27.8
Wealth
Management 146.9 99.3 47.6 32.6 21,903.1
Corporate 7.1 12.9 (5.8) ( 5.4) 229.8
============== ==================== ============ ============ ===================
Total $161.3 $118.7 $42.6 $27.7 $ 22,485.7
============== ==================== ============ ============ ===================
DECEMBER 31,
PERIOD ENDED MARCH 31, 1999 1999
--------------------------- -------------------
Individual
Protection $4.4 $4.4 $ - $ - $291.5
Group
Protection 4.2 3.6 .6 .4 20.0
Wealth
Management 146.3 120.5 25.8 18.1 20,534.2
Corporate 8.9 11.4 (2.5) 2.1 639.2
============== ==================== ============ ============ ===================
Total $163.8 $139.9 $23.9 $20.6 $ 21,484.9
============== ==================== ============ ============ ===================
</TABLE>
(4) DISCONTINUED OPERATIONS
In February 1999, the Company completed the sale of its wholly-owned
subsidiary, MCIC for approximately $34,000,000 million. The Company
realized a loss of $25,600,000 on the sale.
In October 1999, the Company completed the sale of its wholly-owned
subsidiary, NLT. A summary of the results of these discontinued
operations follows:
<TABLE>
(in millions) March 31, 1999
<S> <C>
Revenue $ 7.5
Expenses 6.2
Provision for income taxes .5
===================
Income from discontinued operations $ .8
===================
</TABLE>
(5) STATUTORY FINANCIAL INFORMATION
For the year ended December 31, 1999, the Company filed its Annual
Report on Form 10-K using audited statutory financial statements. The
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of
Delaware, which is a comprehensive basis of accounting other than
generally accepted accounting principles. The Company has changed
its basis of accounting for the three months ended March 31, 2000
to generally accepted
13
<PAGE>
accounting principles ("GAAP") and has restated the financial
statements for the prior year ended December 31, 1999 (Consolidated
Balance Sheet) and for the period ended March 31, 1999 (Consolidated
Statement of Income, Consolidated Statement of Comprehensive Income,
Consolidated Statement of Changes in Stockholder's Equity, and
Consolidated Statement of Cash Flows) to conform with GAAP. The
Statutory Balance Sheet filed as part of the 1999 10K is shown below:
<TABLE>
<CAPTION>
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
----------------------------
<S> <C>
ADMITTED ASSETS
Bonds $ 1,221,970
Common stocks 75,283
Mortgage loans on real estate 528,911
Properties acquired in satisfaction of debt 15,641
Investment real estate 79,182
Policy loans 40,095
Cash and short-term investments 316,971
Other invested assets 67,938
Investment income due and accrued 25,303
Other assets 5,807
----------------------------
General account assets 2,377,101
Separate account assets
Unitized 15,490,328
Non-unitized 2,080,726
TOTAL ADMITTED ASSETS $ 19,948,155
============================
LIABILITIES
Aggregate reserve for life policies and contracts $ 1,153,642
Supplementary contracts 3,182
Policy and contract claims 962
Liability for premium and other deposit funds 564,820
Surrender values on cancelled policies 16
Interest maintenance reserve 41,771
Commissions to agents due or accrued 3,253
General expenses due or accrued 14,055
Transfers from Separate Accounts due or accrued (467,619)
Taxes, licenses and fees due or accrued, excluding FIT 379
Federal income taxes due or accrued 89,031
Unearned investment income 22
Amounts withheld or retained by company as agent or trustee (442)
Remittances and items not allocated 1,078
Asset valuation reserve 44,071
Payable to parent, subsidiaries, and affiliates 26,284
Other liabilities 16,674
----------------------------
General account liabilities 1,491,179 Separate account liabilities:
Unitized 15,489,908
Non-unitized 2,080,726
----------------------------
TOTAL LIABILITIES 19,061,813
----------------------------
14
<PAGE>
<CAPTION>
CAPITAL STOCK AND SURPLUS
Common capital stock 5,900
----------------------------
Surplus notes 565,000
Gross paid in and contributed surplus 199,355
Unassigned funds 116,087
----------------------------
Surplus 880,442
Total common capital stock and surplus 886,342
----------------------------
TOTAL LIABILITIES, CAPITAL STOCK AND SURPLUS $ 19,948,155
============================
The following information reconciles statutory net income and statutory surplus
with net income and equity on a GAAP basis.
(in millions) THREE MONTHS ENDED MARCH 31,
2000 1999
<S> <C> <C>
Statutory net income $ 21.4 $ 37.7
Adjustments to GAAP for life insurance companies:
Statutory interest maintenance reserve (.8) (.9)
Investment income and realized gains(losses) 1.9 (14.5)
Policyowner benefits (24.4) (35.4)
Deferred policy acquisition costs 39.0 16.6
Deferred income taxes (11.1) (9.0)
Other,net 1.7 1.3
------------------- ------------------
GAAP net income (loss) $ 27.7 $ (4.2)
=================== ==================
MARCH 31, DECEMBER 31,
2000 1999
Statutory surplus $ 915.5 $ 886.3
Adjustments to GAAP for life insurance companies:
Valuation of investments 3.2 3.7
Deferred policy acquisition costs 728.1 686.3
Future policy benefits and
Contractholder deposit funds (386.4) (350.2)
Deferred income taxes ( 89.4) ( 86.1)
Statutory interest maintenance reserve 41.3 42.3
Statutory asset valuation reserve 42.4 45.3
Surplus notes (565.0) (565.0)
Other, net 9.8 8.6
--------------------- -------------------
GAAP equity $ 699.5 $ 671.2
===================== ===================
</TABLE>
The NAIC has codified statutory accounting practices, which are expected to
constitute the only source of prescribed statutory accounting practices and are
effective in 2001. Codification will change prescribed statutory accounting
practices and may result in changes to the accounting practices that insurance
enterprises use to prepare their statutory financial statements. The changes of
codification will not have a material impact on statutory surplus.
15
<PAGE>
(6) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in pending and threatened litigation in the
normal course of its business in which claims for monetary and punitive
damages have been asserted. Although there can be no assurances, at
the present time the Company does not anticipate that the ultimate
liability arising from such pending or threatened litigation, after
consideration of provisions made for potential losses and costs of
defense, will have a material adverse effect on the financial
condition of operating results of the Company.
Under insurance guaranty fund laws in each state, the District of
Columbia and Puerto Rico, insurers licensed to do business can be
assessed by state insurance guaranty associations for certain
obligations of insolvent insurance companies to policyholders and
claimants. Recent regulatory actions against certain large life
insurers encountering financial difficulty have prompted various
state insurance guaranty associations to begin assessing life
insurance companies for the deemed losses. Most of these laws do
provide, however, that an assessment may be excused or deferred it
would threaten an insurer's solvency and further provide annual
limits on such assessments. Part of the assessments paid by the
Company and its subsidiaries pursuant to these laws may be used as
credits for a portion of the associated premium taxes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Cautionary Statement
This Form 10-Q includes forward looking statements by the Company under the
Private Securities Litigation Reform Act of 1995. These statements are not
matters of historical fact; they relate to such topics as future product sales,
Year 2000 compliance, volume growth, market share, market risk and financial
goals. It is important to understand that these forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those that the statements anticipate. These risks and
uncertainties may concern, among other things:
- - Heightened competition, particularly in terms of price, product features,
and distribution capability, which could constrain the Company's growth and
profitability.
- - Changes in interest rates and market conditions.
- - Regulatory and legislative developments.
- - Developments in consumer preferences and behavior patterns.
- - The Company's ability to identify and address any remaining Year 2000 issues
successfully, in a timely manner, and at reasonable cost. They also may
concern the ability of the Company's vendors, suppliers, other service
providers, and customers to successfully address any of their own remaining
Year 2000 issues in a timely manner.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO 1999:
NET INCOME
Net income increased by $31.9 million to $27.7 million in 2000, reflecting an
increase of $7.1 million in income from continuing operations, a decrease of $.8
million in income from discontinued operations, and $25.6 million of after-tax
loss from the sale of Massachusetts Casualty Insurance Company which occurred in
1999.
INCOME FROM OPERATIONS BY SEGMENT
The Company's income from operations reflects the operations of its four
business segments: the Wealth Management segment, the Individual Protection
segment, the Group Protection segment and the Corporate segment.
The following table provides a summary of income from operations by segment,
which is discussed more fully below.
<TABLE>
<CAPTION>
2000 1999 $ CHANGE % CHANGE
---- ---- -------- --------
<S> <C> <C> <C> <C>
WEALTH MANAGEMENT $ 32.6 $ 18.1 $14.5 80.1%
INDIVIDUAL PROTECTION (.1) - (.1) -
GROUP PROTECTION .6 .4 .2 50.0%
CORPORATE (5.4) 2.1 (7.5) (357.1%)
=========== ============ =============== ==================
$ 27.7 $ 20.6 $ 7.1 34.5%
=========== ============ =============== ==================
</TABLE>
16
<PAGE>
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,
contractholders have the choice of allocating payments either to a fixed
account, which provides a guaranteed rate of return, or to variable accounts.
Withdrawals from the fixed account are subject to market value adjustment. In
the variable accounts, the contractholder can choose from a range of investment
options and styles. The return depends upon investment performance of the
options selected. Investment funds available under Regatta products are managed
by Massachusetts Financial Services Company ("MFS"), an affiliate of the
Company. Investment funds available under Futurity products are managed by
several investment managers, including MFS and Sun Capital Advisers, Inc., a
subsidiary of the Company.
The Company distributes its annuity products through a variety of channels. For
the Regatta products, about half are sold through securities brokers; a further
one-fourth through financial institutions, and the remainder through insurance
agents and financial planners. The Futurity products, introduced in February
1998, are primarily distributed through a dedicated wholesaler network,
including Sun Life of Canada (U.S.) Distributors, Inc., a subsidiary.
Although new pension products are not currently sold, 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.
Net income increased by $14.5 million to $32.6 million in 2000 primarily due to
the increased volume of inforce business. Following are the major factors
affecting the Wealth Management segment's results in 2000 as compared to the
same period in 1999.
- - Fee income increased primarily as a result of higher variable annuity
account balances. Fee income was higher by approximately $19 million in the
first three months of 2000 compared to the same period in 1999. Market
appreciation and net deposit activity have been key factors in the growth
in the account balances. This growth has generated corresponding increases
in fee income, since fees are determined based on the average assets held
in these accounts. Variable annuity assets have increased by almost $5
billion since January 1, 1999.
- - Net deposits of annuity products decreased by $99 million compared with the
first quarter of 1999. The decrease in net deposits results primarily from
increases in variable annuity surrenders in 2000. The surrenders are
primarily related to older products which are no longer actively marketed.
The Company expects that as the separate account block of business
continues to grow, from both net deposits and asset appreciation, and as an
increasing number of accounts are no longer subject to surrender charges,
surrenders will tend to increase. The Company is implementing a
conservation program with the aim of improving asset retention.
Total new deposits to fixed and variable annuities increased by $26 million
17
<PAGE>
to $669 million in 2000. Sales of the Futurity line of products represented
$155 million of total annuity deposits in 2000, an increase of $96 million
from the same three month period in 1999. The Company expects that sales of
the Futurity product will continue to increase in the future, based on
management's beliefs that market demand is growing for multi-manager
variable annuity products, such as Futurity; that the productivity of
Futurity's wholesale distribution network, established in 1998, will
continue to grow; and that the marketplace will continue to respond
favorably to introductions of new Futurity products and product
enhancements.
- - There has been a shift in demand to variable account products from general
account products. As a consequence, there has been a decline in average
general account invested assets and, in turn, net investment income has
declined. Net investment income reflects only income earned on invested
assets of the general account. Net investment income and realized gains for
the Wealth Management segment decreased by $20 million for the first three
months of 2000 as compared to the same period in 1999. This decline in
average general account assets primarily reflects the Company's decision in
1997 to no longer market group pension and GIC products and as a
consequence, a declining block of in-force business as GICs mature and are
surrendered.
- - Policyholder benefits (the major elements of which are interest credited to
contractholder deposits and annuity benefits) decreased by approximately
$5.4 million in the three months ended March 31, 2000 as compared to the
same period in 1999. This is less than the decrease in investment income as
the surrenders of maturing GIC contracts on which the Company earns a
positive spread are being partially replaced by sales of annuities under
the Company's Dollar Cost Averaging ("DCA") programs. Under these programs,
deposits are made into the fixed portion of the annuity contract and
receive a bonus rate of interest for the policy year. During the year, the
fixed deposit is systematically transferred to the variable portion of the
contract in equal periodic installments.
- - Underwriting, acquisition and other operating expenses increased by $4.0
million reflecting the increased volumes of both new business and inforce
business.
- - Amortization of deferred policy acquisition costs decreased by $21.6
million primarily reflecting the impact of the increased variable annuity
assets, due to significant appreciation during the latter part of 1999 and
through the first quarter of 2000, and the resulting increase in expected
future gross profits from increased fee income. Since future gross profits
are expected to be higher, the current amortization of deferred policy
acquisition costs is lower.
18
<PAGE>
INDIVIDUAL PROTECTION SEGMENT
The Company currently markets individual variable life insurance products. These
products include a variable universal life product marketed to the company-owned
life insurance ("COLI") market, which product was introduced in late 1997. In
September 1999, the Company introduced a new variable life product as part of
the Futurity product portfolio. The Company's management expects that the
Company's variable life business will grow and become more significant in the
future.
Net income from the Individual Protection segment decreased by $.1 million
from the same period in 1999.
GROUP PROTECTION SEGMENT
The Group Protection segment focuses on providing life and disability insurance
to small and medium size employers as part of those companies' employee benefit
plans. This segment operates only in the state of New York through a subsidiary.
Net income from the Group Protection segment increased by $.2 million from the
same period in 1999 primarily due to favorable claims experience.
CORPORATE SEGMENT
The Corporate segment includes the unallocated capital of the Company, its debt
financing, and items not otherwise attributable to the other segments.
In the first three months of 2000, income from operations for the Corporate
segment decreased by $7.5 million to a ($5.4) million net loss. This decrease
reflected lower net investment income, mainly from lower assets due to
dividend payments in 1999 of $75 million, increased operational expenses and
increased income taxes. Income taxes in 1999 reflected an income tax benefit
associated with tax operating losses with subsidiaries not allocated to the
operating segments.
FINANCIAL CONDITION & LIQUIDITY
ASSETS
- - The Company's total assets comprise those held in its general account and
those held in its separate accounts. General account assets support general
account liabilities. Separate accounts are investment vehicles for the
Company's variable life and annuity contracts. Policyholders may choose
from among various investment options offered under these contracts
according to their individual needs and preferences. Policyholders assume
the investment risks associated with these choices. Separate account assets
are not available to fund the liabilities of the general account.
The following table summarizes significant changes in asset balances during
the first three months of 2000. The changes are discussed below.
19
<PAGE>
<TABLE>
<CAPTION>
ASSETS
($ IN MILLIONS)
MARCH 31, 2000 DECEMBER 31, 1999 % CHANGE
2000/1999
<S> <C> <C> <C>
GENERAL ACCOUNT ASSETS $ 5,187.0 $ 5,361.6 (3.3)
SEPARATE ACCOUNT ASSETS 17,298.8 16,123.3 7.3
------------------------ ------------------------ ----------------
TOTAL ASSETS $22,485.8 $21,484.9 4.7
======================== ======================== ================
</TABLE>
General account assets decreased by 3.3% in 2000, but variable separate account
assets increased by 7.3%. This growth in variable separate accounts as compared
to the general account reflects two main factors: appreciation of the funds held
in the variable separate accounts has exceeded that of the funds held in the
general account; and annuity deposits into variable accounts, including
transfers under the DCA programs have increased, while annuity deposits into
fixed accounts have slowed. The Company believes this pattern has reflected a
shift in the preferences of policyholders, which is largely attributable to the
strong performance of equity markets in general and of the Company's variable
account funds in particular.
The assets of the general account are available to support general account
liabilities. For management purposes, it is the Company's practice to segment
its general account to facilitate the matching of assets and liabilities.
General account assets primarily comprise cash, invested assets, and deferred
policy acquisition costs, which represented essentially all of general account
assets at March 31, 2000. Major types of invested asset holdings included fixed
maturity securities, short-term investment mortgages, real estate and other
invested assets. The Company's fixed maturity securities comprised 70.5% of the
Company's portfolio at March 31, 2000, and included both public and private
issues. It is the Company's policy to acquire only investment-grade securities.
As a result, the overall quality of the fixed maturity portfolio is high. At
March 31, 2000, only 5.1% of the fixed maturity portfolio was rated
below-investment-grade. Short-term investments in fixed maturity securities
represented 2.1 % of the total portfolio. The Company's mortgage holdings
amounted to $898.1 million at March 31, 2000, representing 22.3% of the total
portfolio. All mortgage holdings at March 31, 2000 were in good standing. The
Company believes that the high quality of its mortgage portfolio is largely
attributable to its stringent underwriting standards. At March 31, 2000,
investment real estate amounted to $94.3 million, representing about 2.3% of the
total portfolio. The Company invests in real estate to enhance yields and,
because of the long-term nature of these investments, the Company uses them for
purposes of matching with products having long-term liability durations. Other
invested assets amounted to $68.3 million, representing about 1.7% of the
portfolio. These holdings comprised mainly leveraged lease investments.
LIABILITIES
As with assets, the proportion of variable separate account liabilities to total
liabilities has been increasing. Most of the Company's liabilities comprise
reserves for life insurance and for annuity contracts and deposit funds. The
Company expects the declining trend in general account liabilities to continue,
because it believes that net maturities will continue to exceed sales for the
fixed contracts associated with these liabilities. This trend stems mainly from
the Company's 1997 decision to discontinue selling group pension and GIC
contracts and to focus its marketing efforts on its combination
20
<PAGE>
fixed/variable annuity products.
CAPITAL MARKETS RISK MANAGEMENT
See Item 3, "Quantitative and Qualitative Disclosures About Market Risk", in
this Quarterly Report on Form 10-Q for a discussion of the Company's capital
markets risk management.
CAPITAL RESOURCES
CAPITAL ADEQUACY
The National Association of Insurance Commissioners ("NAIC") adopted regulations
at the end of 1993 that established minimum capitalization requirements for
insurance companies, based on risk-based capital ("RBC") formulas applied to
statutory surplus. These requirements are intended to identify undercapitalized
companies, so that specific regulatory actions can be taken on a timely basis.
The RBC formula for life insurance companies calculates capital requirements
related to asset, insurance, interest rate, and business risks. According to the
RBC calculation, the Company's capital was well in excess of its required
capital at March 31, 2000 and at year-end 1999.
LIQUIDITY
The Company's liquidity requirements are generally met by funds from operations.
The Company's main uses of funds are to pay out death benefits and other
maturing insurance and annuity contract obligations; to make pay-outs on
contract terminations; to purchase new investments; to fund new business
ventures; and to pay normal operating expenditures and taxes. The Company's main
sources of funds are premiums and deposits on insurance and annuity products;
proceeds from the sale of investments; income from investments; and repayments
of investment principal.
In managing its general account assets in relation to its liabilities, the
Company has segmented these assets by product or by groups of products. The
Company manages each segment's assets based on an investment policy that it has
established for that segment. Among other matters, this investment policy
considers liquidity requirements and provides cash flow estimates. The Company
reviews these policies quarterly.
The Company's liquidity targets are intended to enable it to meet its
day-to-day cash requirements. On a quarterly basis, the Company compares its
total "liquifiable" assets to its total demand liabilities. Liquifiable
assets comprise cash and assets that could quickly be converted to cash
should the need arise. These assets include short-term investments and other
current assets and investment-grade bonds. The Company's policy is to
maintain a liquidity ratio in excess of 100%. Based on its ongoing liquidity
analyses, the Company believes that its available liquidity is more than
sufficient to meet its liquidity needs.
21
<PAGE>
OTHER MATTERS
DEMUTUALIZATION
The Company's ultimate parent as of December 31, 1999, SLOC, completed its
demutualization on March 22, 2000. As a result of the demutualization, a new
holding company, Sun Life Financial Services of Canada Inc. ("SLF"), is now
the ultimate parent of SLOC and the Company. SLF, a corporation organized in
Canada, is a reporting company under the Securities Exchange Act of 1934, as
amended, with common shares listed on the Toronto, New York, London, and
Manila stock exchanges.
YEAR 2000 COMPLIANCE
The statements in this section include "Year 2000 Readiness Disclosures" within
the meaning of the Year 2000 Information and Readiness Disclosure Act.
During the fourth quarter of 1996, the Company, SLOC and affiliates began
a comprehensive analysis of 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 have passed tests that indicate they have
operated accurately and will continue to operate accurately after January 1,
2000 with respect to Year 2000 issues.
In mid-1997, the Company's Year 2000 project team contacted all key vendors to
obtain their representation that the products and services provided would not
have a Year 2000 issue. Where appropriate, vendor testing was conducted. In
addition, the project team worked with critical business partners, such as
third-party administrators, investment property managers, investment mortgage
correspondents, and others, with the goal of verifying that these partners would
continue to be able to support the Company's business during and after the Year
2000.
Non-IT applications, including building security, HVAC systems, and other such
systems, as well as IT applications, were tested. Compliant client server and
mainframe environments were used to allow for testing of critical dates such as
December 31, 1999, January 1, 2000, February 28, 2000, February 29, 2000 and
March 1, 2000 without impact to the Company's production environment.
22
<PAGE>
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, 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 March 31, 2000, the Company had expended, cumulatively, approximately $5.5
million on its Year 2000 effort. The Company has budgeted $200,000 in 2000 for
post-project tasks such as document retention.
SALE OF SUBSIDIARIES
On 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 million and the Company realized a
post-tax loss of $25.6 million.
On October 29, 1999, the Company sold New London Trust F.S.B. ("NLT"), to an
unaffiliated party for approximately $30 million. The net income of NLT for
the period ended March 31, 1999 is reflected in net income from discontinued
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This discussion covers market risks associated with investment portfolios that
support the Company's general account liabilities. This discussion does not
cover market risks associated with those investment portfolios that support
23
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separate account products. For these products, the policyholder, rather than the
Company, assumes these market risks.
GENERAL
The assets of the general account are available to support general account
liabilities. For purposes of managing these assets in relation to these
liabilities, the Company notionally segments these assets by product or by
groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. The policy covers
the segment's liability characteristics and liquidity requirements, provides
cash flow estimates, and sets targets for asset mix, duration, and quality. Each
quarter, investment and business unit managers review these policies to ensure
that the policies remain appropriate, taking into account each segment's
liability characteristics.
TYPES OF MARKET RISKS
The Company's management believes that stringent underwriting standards and
practices have resulted in high-quality portfolios and have the effect of
limiting credit risk. It is the Company's policy, for example, not to purchase
below-investment-grade securities. Also, as a matter of investment policy, the
Company assumes no foreign currency or commodity risk, nor does it assume equity
price risk except to the extent that it holds real estate in its portfolios. (At
March 31, 2000, investment real estate holdings represented approximately 2.3%
of the Company's 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
leveraged transactions and it does not invest in the more speculative forms of
these instruments such as the interest-only, principal-only, inverse floater, or
residual tranches.
Changes in the level of domestic interest rates affect the market value of fixed
interest assets and liabilities. Segments whose liabilities mainly arise from
the sale of products containing interest rate guarantees for certain terms are
sensitive to changes in interest rates. In these segments, the Company uses
"immunization" strategies, which are specifically designed to minimize the loss
from wide fluctuations in interest rates. The Company supports these strategies
using analytical and modeling software acquired from outside vendors.
Significant features of the Company's immunization models include:
- - an economic or market value basis for both assets and liabilities;
24
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- - an option pricing methodology;
- - the use of effective duration and convexity to measure interest rate
sensitivity; and
- - the use of key rate durations to estimate interest rate exposure at
different parts of the yield curve and to estimate the exposure to
non-parallel shifts in the yield curve.
The Company's Interest Rate Risk Committee meets monthly. After reviewing
duration analyses, market conditions and forecasts, the Committee develops
specific asset management strategies for the interest-sensitive portfolios.
These strategies may involve managing to achieve small intentional mismatches,
either in terms of total effective duration or for certain key rate durations,
between the liabilities and related assets of particular segments.
The Company manages these mismatches to a tolerance range of plus or minus 0.5.
Asset strategies may include the use of Treasury futures or interest rate swaps
to adjust the duration profiles for particular portfolios. All derivative
transactions are conducted under written operating guidelines and are marked to
market. Total positions and exposures are reported to the Board of Directors on
a monthly basis. The counterparties to hedging transactions are major highly
rated financial institutions, with respect to which the risk of the Company's
incurring losses related to credit exposures is considered remote.
Liabilities categorized as financial instruments and held in the Company's
general account at March 31, 2000 had a fair value of $2,913.1 million. Fixed
income investments supporting those liabilities had a fair value of $4,065.8
million at that date. The Company performed a sensitivity analysis on these
interest-sensitive liabilities and assets on March 31, 2000. The analysis showed
that if there were an immediate increase of 100 basis points in interest rates,
the fair value of the liabilities would show a net decrease of $66.7 million and
the corresponding assets would show a net decrease of $117.2 million.
By comparison, liabilities categorized as financial instruments and held in
the Company's general account at December 31, 1999 had a fair value of
$3,105.2 million. Fixed income investments supporting those liabilities had a
fair value of $4,308.6 million at that date. The Company performed a
sensitivity analysis on these interest-sensitive liabilities and assets at
December 31, 1999. The analysis showed that if there were an immediate
increase of 100 basis points in interest rates, the fair value of the
liabilities would show a net decrease of $63.8 million and the corresponding
assets would show a net decrease of $118.0 million.
The Company produced these estimates using computer models. Since these models
reflect assumptions about the future, they contain an element of uncertainty.
For example, the models contain assumptions about future policyholder behavior
and asset cash flows. Actual policyholder behavior and asset cash flows could
differ from what the models show. As a result, the models' estimates of duration
and market values may not reflect what actually will occur. The models are
further limited by the fact that they do not provide for the possibility that
management action could be taken to mitigate adverse results. The Company
believes that this limitation is one of conservatism; that is, it will tend to
cause the models to produce estimates that are generally worse than one might
actually expect, all other things being equal.
Based on its processes for analyzing and managing interest rate risk, the
Company's management believes its exposure to interest rate changes will not
materially affect its near-term financial position, results of operations, or
25
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cash flows.
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A written consent in lieu of a meeting of the shareholders of the Company
was executed on February 10, 2000.
(b) The following directors of the Company were re-elected by unanimous written
consent:
Richard B. Bailey
David D. Horn
Angus A. MacNaughton
C. James Prieur
S. Caesar Raboy
Donald A. Stewart
The following directors of the Company were elected by unanimous written
consent:
Gregory W. Gee
James A. McNulty, III
William W. Stinson
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are incorporated by reference unless otherwise
indicated:
EXHIBIT NO.
- -----------
(3)(i) Articles of incorporation (filed as Exhibit 6 to the Registration
Statement on Form N-4 (Registration No. 333-37903), filed
October 14, 1997)
(3)(ii) By-laws, amended effective as of January 1, 2000 (filed herewith)
27 FINANCIAL DATA SCHEDULE (filed herewith)
(b) On April 7, 2000, the Company filed a report on Form 8-K describing in
Item 5 (Other Events) the demutualization of SLOC.
26
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sun Life Assurance Company of Canada (U.S.)
(Registrant)
Date May 15, 2000 /s/ Davey S. Scoon
-------------------------------
Davey S. Scoon
Vice President,
Finance and Treasurer
Date May 15, 2000 /s/ Michael K. Moran
--------------------------------
Michael K. Moran
Assistant Vice President Finance
27
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SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
BY-LAWS
ARTICLE 1
OFFICES
Section 1.01. REGISTERED OFFICE. The registered office of
the corporation shall be in the city of Wilmington, County of New Castle, State
of Delaware.
Section 1.02. OTHER OFFICES. The corporation may also have
offices at such other places both within and without the State of Delaware as
the board of directors may from time to time determine or the business of the
corporation may require.
ARTICLE 2
MEETINGS OF STOCKHOLDERS
Section 2.01. PLACE OF MEETINGS. All meetings of the
stockholders shall be held at such place, either within or without the State of
Delaware, as shall be designated from time to time by the board of directors and
stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
Section 2.02. ANNUAL MEETING. Annual meetings of
stockholders shall be held in each year on such date and at such time as shall
be determined from time to time by the board of directors and stated in the
notice of the meeting or in a duly executed waiver of notice thereof. At each
annual meeting the stockholders shall elect by a plurality vote a board of
directors, and transact such other business as may properly be brought before
the meeting.
Section 2.03. NOTICE OF ANNUAL MEETING. Written notice of
the annual meeting stating the place, date and hour of the meeting shall be
given to each stockholder entitled to vote at such meeting not less than ten nor
more than fifty days before the date of the meeting.
Section 2.04. STOCKHOLDERS' LIST. The officer who has charge
of the stock ledger of the corporation shall prepare and make, at least ten days
before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held.
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2
The list shall also be produced and kept at the time and place of
the meeting during the whole time therof, and may be inspected by any
stockholder who is present.
Section 2.05. SPECIAL MEETINGS. Special meetings of the
stockholders, for any purpose or purposes, unless otherwise prescribed by
statute or by the certificate of incorporation, may be called by the president
and shall be called by the president or secretary at the request in writing of a
majority of the board of directors or at the request in writing of the holders
of a majority of the outstanding stock.
Section 2.06. NOTICE OF SPECIAL MEETINGS. Written notice of
a special meeting stating the place, date and hour of the meeting and the
purpose or purposes for which the meeting is called, shall be given not less
than ten nor more than fifty days before the date of the meeting, to each
stockholder entitled to vote at such meeting.
Section 2.07. LIMITATION ON BUSINESS AT SPECIAL MEETING.
Business transacted at any special meeting of stockholders shall be limited to
the purposes stated in the notice.
Section 2.08 QUORUM. The holders of a majority of the stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by
statute or by the certificate of incorporation. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented any business may be transacted which might have been transacted at
the meeting as originally notified. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
Section 2.09. VOTE REQUIRED FOR ACTION. When a quorum is
present at any meeting, the vote of the holders of a majority of the stock
having voting power present in person or represented by proxy shall decide any
question brought before such meeting, unless the question is one upon which by
express provision of the statutes or of the certificate of incorporation, a
different vote is required in which case such express provision shall govern and
control the decision of such question.
Section 2.10. VOTING - PROXY. Unless otherwise provided in
the certificate of incorporation each stockholder shall at every meeting of the
stockholders be entitled to one vote in person or by proxy for each share of the
capital stock having voting power held by such stockholder, but no proxy shall
be voted on after three years from its date, unless the proxy provides for a
longer period.
<PAGE>
3
Section 2.11. WRITTEN CONSENT IN LIEU OF VOTE. Any action
required to be taken at any annual or special meeting of stockholders of the
corporation, or any action which may be taken at any annual or special meeting
of such stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of all shares of outstanding stock entitled to
vote thereon at a meeting.
ARTICLE 3
DIRECTORS
Section 3.01. NUMBER AND QUALIFICATIONS OF DIRECTORS. The
number of directors which shall constitute the whole board shall not be less
than three. The first board shall consist of five directors. Thereafter, within
the limits above specified, the number of directors shall be determined by
resolution of the board of directors or by the stockholders at the annual
meeting. The directors shall be elected at the annual meeting of the
stockholders, except as provided in Section 3.02 of this Article, and each
director elected shall hold office until his or her successor is elected and
qualified. Subject to such transition rules as may be adopted by the board of
directors, except for any person who is an employee of the corporation or its
affiliates, no person shall be eligible to stand for election or re-election as
a director of the corporation if that person has reached the age of 70 years at
the time of the election or re-election. Directors need not be stockholders.
Section 3.02. VACANCIES AND NEWLY CREATED DIRECTORSHIHPS.
Vacancies and newly created directorships resulting from any increase in the
authorized number of directors may be filled by a majority of the directors then
in office, though less than a quorum, or by a sole remaining director, and the
directors so chosen shall hold office until the next annual election and until
their successors are duly elected and shall qualify, unless sooner displaced.
Section 3.03. POWERS OF DIRECTORS. The business and affairs
of the corporation shall be managed by its board of directors which may exercise
all such powers of the corporation and do all such lawful acts and things as are
not by statute or by the certificate of incorporation or by these by-laws
directed or required to be exercised or done by the stockholders, including,
without limitation, the creation of one or more separate accounts and adoption
of rules and regulations providing for the operation and management of any such
separate account by a board, committee or other body selected as authorized by
such rules and regulations and the provisions of the certificate of
incorporation.
Section 3.04. PLACE OF MEETING. The board of directors of
the corporation may hold meetings, both regular and special, either within or
without the State of Delaware.
<PAGE>
4
Section 3.05. REGULAR MEETINGS. Regular meetings of the
board of directors may be held without notice at such time and at such place as
shall from time to time be determined by the board.
Section 3.06. SPECIAL MEETINGS. Special meetings of the
board may be called by the president on three days' notice to each director,
either personally or by mail, telegram or telephone; special meetings shall be
called by the president or secretary in like manner and on like notice on the
written request of two directors.
Section 3.07. QUORUM. At all meetings of the board one-third
of the whole number of directors as last fixed prior to such meeting, but in any
event not less than two, shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the board of directors, except as
may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum shall not be present at any meeting of the board of
directors the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 3.08. WRITTEN CONSENT IN LIEU OF MEETING. Unless
otherwise restricted by the certificate of incorporation or these by-laws, any
action required or permitted to be taken at any meeting of the board of
directors or of any committee thereof may be taken without a meeting, if all
members of the board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the board or committee.
Section 3.09. COMMITTEES. The board of directors may, by
resolution passed by a majority of the whole board, designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. Any such committee, to the extent provided in the
resolution of the board of directors, shall have and may exercise all the powers
and authority of the board of directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amending the certificate of incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
by-laws of the corporation; and, unless the resolution or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the board of directors.
<PAGE>
5
Section 3.10. COMMITTEE MINUTES AND REPORTS. Each committee
shall keep regular minutes of its meetings and report the same to the board of
directors when required.
Section 3.11. COMPENSATION. The compensation of the members
of the board of directors shall be authorized by the holders of a majority of
the outstanding stock. The directors may be paid their expenses, if any, of
attendance at each meeting of the board of directors and may be paid a fixed sum
for attendance at each meeting of the board of directors or a stated salary as
director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
ARTICLE 4
NOTICES
Section 4.01. MANNER OF GIVING NOTICE. Whenever, under the
provisions of the statutes or of the certificate of incorporation or of these
by-laws, notice is required to be given to any director or stockholder, it shall
not be construed to mean personal notice, but such notice may be given in
writing, by mail, addressed to such director or stockholder, at his address as
it appears on the records of the corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the mail. Notice to directors may also be given by telegram or
telephone.
Section 4.02. WAIVER OF NOTICE. Whenever any notice is
required to be given under the provisions of the statutes or of the certificate
of incorporation or of these by-laws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
ARTICLE 5
OFFICERS
Section 5.01. PRINCIPAL AND OTHER OFFICERS. The officers of
the corporation shall include a president, a secretary and a treasurer. The
board of directors may also appoint a chairman, one or more vice-presidents, and
such other officers as are from time to time desired. Any number of offices may
be held by the same person, unless the certificate of incorporation or these
by-laws otherwise provide.
` Section 5.02. TIME AND MANNER OF SELECTION. The board of
directors at its first meeting after each annual meeting of stockholders shall
choose a president, a secretary, a treasurer and such other officers as it shall
deem necessary.
<PAGE>
6
Section 5.03. COMPENSATION. The remuneration of all officers
of the corporation shall be fixed by the board of directors.
Section 5.04. TERM OF OFFICE - VACANCIES. The officers of
the corporation shall hold office until their successors are chosen and
qualified or until their earlier resignation or removal. Any officer elected or
appointed by the board of directors may be removed at any time by the
affirmative vote of a majority of the whole board of directors. Any vacancy
occurring in any office of the corporation shall be filled by the board of
directors.
Section 5.05. THE CHAIRMAN. The chairman, if one be
appointed, shall preside at all meetings of the stockholders and of the board of
directors, and shall perform such other duties and have such other powers as the
board of directors may from time to time prescribe.
Section 5.06. THE PRESIDENT. The president shall be the
chief executive officer of the corporation, and if there is no chairman, or in
the absence of the chairman, or at the chairman's request, the president shall
preside at all meetings of the stockholders and of the board of directors, shall
have general management of the business of the corporation and shall see that
all orders and resolutions of the board of directors are carried into effect.
Section 5.07. THE VICE-PRESIDENTS. In the absence of the
president or in the event of his inability or refusal to act, the vice-president
(or in the event there be more than one vice-president, the vice-presidents in
the order designated, or in the order of their election) shall perform the
duties of the president, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the president. The vice-presidents shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
Section 5.08. THE SECRETARY. The secretary shall attend all
meetings of the board of directors and all meetings of the stockholders and
record all the proceedings of the meetings of the corporation and of the board
of directors in a book to be kept for that purpose and shall perform like duties
for the standing committees when required. He shall give, or cause to be given,
notice of all meetings of the stockholders and special meetings of the board of
directors, and shall perform such other duties as may be prescribed by the board
of directors or president, under whose supervision he shall be. He shall have
custody of the corporate seal of the corporation and he shall have authority to
affix the same to any instrument requiring it and when so affixed, it may be
attested by his signature. The board of directors may give general authority to
any other officer to affix the seal of the corporation and to attest the
affixing by his signature.
Section 5.09. TREASURER. The treasurer shall keep full and
accurate books of account in which shall be recorded all receipts and
disbursements of the
<PAGE>
7
corporation, and shall pursuant to the direction of the board of directors or of
the president, under whose supervision he shall be, control the deposit of
moneys, the safekeeping of securities and the disbursement of the funds of the
corporation; he shall render to the president, or the board of directors at the
regular meetings thereof, or whenever required of him, an account of all his
transactions as treasurer and of the financial condition of the corporation; and
he shall perform such other duties as may from time to time be prescribed by the
board of directors or the president.
Section 5.10. OTHER OFFICERS. Officers other than the
president, secretary and treasurer, shall perform such duties as may be assigned
to them by the board of directors.
ARTICLE 6
STOCK
Section 6.01. STOCK CERTIFICATES. Every holder of stock in
the corporation shall be entitled to have a certificate, signed by, or in the
name of the corporation by, the president or a vice-president and the treasurer
or the secretary of the corporation, certifying the number of shares owned by
him in the corporation.
Section 6.02. FACSIMILE SIGNATURE. Where a certificate is
countersigned (1) by a transfer agent other than the corporation or its
employee, or (2) by a registrar other than the corporation or its employee, any
other signature on the certificate may be facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
Section 6.03. LOST CERTIFICATES. The board of directors may
direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the corporation alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates, the
board of directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require and/or give the corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
Section 6.04 TRANSFER OF STOCK. Upon surrender to the
corporation or the transfer agent of the corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it
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8
shall be the duty of the corporation to issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon its
books.
Section 6.05. FIXING RECORD DATE. In order that the
corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, to express consent to
corporate action in writing without a meeting, to receive payment of any
dividend or other distribution or allotment of any rights, to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the board of directors may fix, in advance,
a record date, which shall not be more than sixty nor less than ten days before
the date of a stockholders' meeting, nor more than sixty days prior to the
distribution of such rights, the exercise of such rights or the taking of any
other lawful action. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the board of directors may fix a new
record date for the adjourned meeting.
Section 6.06. REGISTERED STOCKHOLDERS. The corporation shall
be entitled to treat the record holder of any shares of the corporation as the
owner thereof for all purposes, including all rights deriving from such shares,
and shall not be bound to recognize any equitable or other claim to, or interest
in, such shares or rights deriving from such shares, on the part of any other
person, whether or not the corporation shall have either actual or constructive
notice thereof.
ARTICLE 7
GENERAL PROVISIONS
Section 7.01. DIVIDENDS. Dividends upon the capital stock of
the corporation may be declared by the board of directors at any regular or
special meeting out of any funds legally available therefor. Cash dividends may
be paid out of that part of the corporation's available and accumulated surplus
funds which was derived from realized net operating profits of its business and
realized capital gains. A cash dividend otherwise lawful may be paid out of such
earned surplus even though total surplus is at the time less than previously
contributed or paid in surplus. Stock dividends may be paid out of any available
surplus funds.
Section 7.02. EXECUTION OF INSTRUMENTS. Except as otherwise
provided in these by-laws, all deeds, mortgages, bonds, contracts, policies,
reports and other instruments may be executed on behalf of the company by the
president or any vice-president or by any other officer authorized to act in
such manner, whether by law, the certificate of incorporation, these by-laws, or
any general or special authorization of the board of directors. The corporate
seal may be affixed and attested by the secretary or any other officer
authorized by the board of directors.
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9
Section 7.03. FACSIMILE SIGNATURES. Any policy, insurance
contract, annuity contract, contract of deposit, premium receipt, dividend
notice or endorsement or amendment of any such instrument may be signed by means
of an engraved, lithographed or otherwise mechanically produced facsimile of the
signature of the president, secretary or other person or persons as may be
designated for this purpose by resolution of the board of directors, and the
execution by the corporation of any such instrument so signed shall be as valid
and binding upon the corporation as though manual signatures of the authorized
officers had been used in the signing thereof. If any officer whose facsimile
signature has been used as above provided has ceased to hold office prior to the
delivery of the instrument, the instrument may nevertheless be issued and
delivered by the corporation and shall be valid and binding on the corporation.
Section 7.04. DISBURSEMENT OF FUNDS. All checks, drafts or
demands for money and notes of the corporation shall be signed by such officer
or officers or such other person or persons as the board of directors may from
time to time designate.
Section 7.05. VOTING STOCK IN OTHER CORPORATIONS. Unless
otherwise ordered by the board of directors, the chairman, the president, or any
vice-president shall have full power and authority to attend and act and vote at
any meeting of stockholders of any corporation in which this corporation may
hold stock, and the chairman, the president, or any vice-president of the
corporation may execute proxies authorizing designated persons to vote shares of
stock of other corporations standing in the name of this corporation.
Section 7.06. FISCAL YEAR. The fiscal year of the
corporation shall be the calendar year unless otherwise fixed by resolution of
the board of directors.
Section 7.07. SEAL. The corporate seal shall have inscribed
thereon the name of the corporation, the year of its organization and the words
"Corporate Seal, Delaware." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE 8
INDEMNIFICATION
Section 8.01(a). Every person who is or was a director,
officer or employee of this corporation or of any other corporation which he
served at the request of this corporation and in which this corporation owns
or owned shares of capital stock or of which it is or was a creditor shall
have a right to be indemnified by this corporation against all liability and
reasonable expenses incurred by him in connection with or resulting from any
claim, action, suit or proceeding in which he may become involved as a party
or otherwise by reason of his being or having been a director, officer or
employee of this corporation or such other corporation, provided (1) said
claim, action, suit or
<PAGE>
10
proceeding shall be prosecuted to a final determination and he shall be
vindicated on the merits, or (2) in the absence of such a final determination
vindicating him on the merits, the board of directors shall determine that he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful; said determination to be made by the board of directors acting
through a quorum of disinterested directors, or in its absence on the opinion of
counsel.
(b) For purposes of the preceding subsection: (1) "liability
and reasonable expenses" shall include but not be limited to reasonable counsel
fees and disbursements, amounts of any judgment, fine or penalty, and reasonable
amounts paid in settlement; (2) "claim, action, suit or proceeding" shall
include every such claim, action, suit or proceeding, whether civil or criminal,
derivative or otherwise, administrative, judicial or legislative, any appeal
relating thereto, and shall include any reasonable apprehension or threat of
such a claim, action, suit or proceeding; (3) a settlement, plea of nolo
contendere, consent judgment, adverse civil judgment, or conviction shall not of
itself create a presumption that the conduct of the person seeking
indemnification did not meet the standard of conduct set forth in subsection (a)
(2) hereof.
(c) Notwithstanding the foregoing, the following limitations
shall apply with respect to any action by or in the right of the corporation:
(1) no indemnification shall be made in respect of any claim, issue or matter as
to which the person seeking indemnification shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
corporation unless and only to the extent that the Court of Chancery of the
State of Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper; and (2) indemnification shall extend only to
reasonable expenses, including reasonable counsel's fees and disbursements.
(d) The right of indemnification shall extend to any person
otherwise entitled to it under this by-law whether or not that person continues
to be a director, officer or employee of this corporation or such other
corporation at the time such liability or expense shall be incurred. The right
of indemnification shall extend to the legal representative and heirs of any
person otherwise entitled to indemnification. If a person meets the requirements
of this by-law with respect to some matters in a claim, action, suit, or
proceeding, but not with respect to others, he shall be entitled to
indemnification as the former. Advances against liability and expenses may be
made by the corporation on terms fixed by the board of directors subject to an
obligation to repay if indemnification proves unwarranted.
(e) This by-law shall not exclude any other rights of
indemnification or other rights to which any director, officer or employee may
be entitled to by contract, vote of the stockholders or as a matter of law. If
any clause, provision or
<PAGE>
11
application of this section shall be determined to be invalid, the other
clauses, provisions or applications of this section shall not be affected but
shall remain in full force and effect. The provisions of this by-law shall be
applicable to claims, actions, suits, or proceedings made or commenced after the
adoption hereof, whether arising from acts or omissions to act occurring before
or after the adoption hereof.
(f) Nothing contained in this by-law shall be construed to
protect any director or officer of the corporation against any liability to the
corporation or its security holders to which he would otherwise be subject by
reason of wilful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office.
ARTICLE 9
AMENDMENTS
Section 9.01. These by-laws may be altered, amended or
repealed or new by-laws be adopted by the stockholders at any meeting of the
stockholders.
Adopted January 23, 1970
Amended April 12, 1985 (Sec. 3.01)
Amended October 28, 1999, Effective January 1, 2000 (Sec. 3.01)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENT OF INCOME AND CONSOLIDATED BALANCE SHEET FOUND ON PAGES 1 AND 2 OF THE
COMPANY'S FORM 10-Q FOR THE YEAR TO DATE (IN MILLIONS) AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> SUN LIFE ASSURANCE COMPANY OF CANADA (U.S)
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