<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 Number
Ended June 30, 2000 33-01079,33-58482
and 333-09141
SUN LIFE INSURANCE AND ANNUITY COMPANY OF NEW YORK
(Exact name of registrant as specified in its charter)
New York 04-2845273
---------------------------------------- --------------------------------------
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
122 East 42nd Street, Suite 1900 New York, NY 10017
-------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(212) 922-9242
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(Registrant's telephone number, including area code)
NONE
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(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 / /
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H (1) (a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT PERMITTED BY INSTRUCTION H.
<PAGE>
SUN LIFE INSURANCE AND ANNUITY COMPANY OF NEW YORK
INDEX
PAGE
NUMBER
PART I: Financial Information
Item 1: Unaudited Financial Statements:
Statements of Income (Unaudited) -
Six Months Ended
June 30, 2000 and June 30, 1999 1
Statements of Income (Unaudited) -
Three Months Ended
June 30, 2000 and June 30, 1999 2
Balance Sheets -
June 30, 2000 (Unaudited) and December 31, 1999 (Audited) 3
Statements of Comprehensive Income (Unaudited) -
Six Months Ended
June 30, 2000 and June 30, 1999 4
Statements of Changes in Stockholder's Equity (Unaudited) -
Six Months Ended
June 30, 2000 and June 30, 1999 5
Statements of Cash Flows (Unaudited) -
Six Months Ended
June 30, 2000 and June 30,1999 6
Notes to Unaudited Financial Statements 7
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
PART II: Other Information
Item 6: Exhibits and Reports on Form 8-K 24
<PAGE>
SUN LIFE INSURANCE AND ANNUITY COMPANY OF NEW YORK
(A WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.))
STATEMENTS OF INCOME
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
2000 1999
---- ----
<S> <C> <C>
Revenues
Premiums and annuity considerations $ 8,948 $ 9,589
Net investment income 5,775 6,016
Net realized investment gains (losses) (244) 612
Fee and other income 4,985 4,036
------------ ------------
Total revenues 19,464 20,253
------------ ------------
Benefits and expenses
Policyowner benefits 9,811 10,883
Underwriting, acquisition and other operating expenses 4,172 4,304
Amortization of deferred policy acquisition costs 2,973 1,550
------------ ------------
Total benefits and expenses 16,956 16,737
------------ ------------
Income before income tax expense 2,508 3,516
Income tax expense 878 1,153
------------ ------------
Net income $ 1,630 $ 2,363
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL
STATEMENTS
1
<PAGE>
SUN LIFE INSURANCE AND ANNUITY COMPANY OF NEW YORK
(A WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.))
STATEMENTS OF INCOME
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
2000 1999
---- ----
<S> <C> <C>
Revenues
Premiums and annuity considerations $ 4,637 $ 5,108
Net investment income 2,953 2,935
Net realized investment gains (losses) (120) 80
Fee and other income 2,603 2,045
------------- ----------
Total revenues 10,073 10,168
------------- ----------
Benefits and expenses
Policyowner benefits 5,247 5,999
Underwriting, acquisition and other operating expenses 2,194 2,183
Amortization of deferred policy acquisition costs 2,500 560
------------- ----------
Total benefits and expenses 9,941 8,742
------------- ----------
Income before income tax expense 132 1,426
Income tax expense 47 309
------------- ----------
Net income $ 85 $ 1,117
============= ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL
STATEMENTS.
2
<PAGE>
SUN LIFE INSURANCE AND ANNUITY COMPANY OF NEW YORK
(A WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.))
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
ASSETS JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Investments
Fixed maturity securities available for sale at fair value (amortized
cost of $119,865 and $122,748 in 2000 and 1999, respectively) $ 116,469 $ 119,940
Short-term investments 3,458 7,295
Mortgage loans 26,731 26,244
Policy loans 516 538
------------- ------------
Total investments 147,174 154,017
Cash and cash equivalents 15,053 11,458
Accrued investment income 1,815 1,871
Deferred policy acquisition costs 26,186 27,893
Oustanding premiums 2,041 2,747
Other assets 4,163 4,263
Separate account assets 618,756 632,351
------------- ------------
TOTAL ASSETS $ 815,188 $ 834,600
============= ============
LIABILITIES
Future contract and policy benefits $ 35,856 $ 35,251
Contractholder deposit funds and other policy liabilities 103,457 108,277
Unearned revenue 31 24
Accrued expenses and taxes 865 431
Deferred federal income taxes 1,386 1,674
Other liabilities 1,690 144
Separate account liabilities 618,756 632,351
------------- ------------
Total liabilities 762,041 778,152
------------- ------------
STOCKHOLDER'S EQUITY
Common stock, $1,000 par value - 2,000 shares authorized;
2,000 shares issued and outstanding 2,000 2,000
Additional paid-in capital 29,500 29,500
Accumulated other comprehensive income (1,503) (1,272)
Retained earnings 23,150 26,220
------------- ------------
Total stockholder's equity 53,147 56,448
------------- ------------
Total liabilities and stockholder's equity $ 815,188 $ 834,600
============= ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL
3
<PAGE>
SUN LIFE INSURANCE AND ANNUITY COMPANY OF NEW YORK
(A WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.))
STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
2000 1999
---- ----
<S> <C> <C>
Net Income $ 1,630 $ 2,363
Other comprehensive income:
Net change in unrealized holding gains and losses on available for
sale securities, net of tax (232) (1,658)
Other 1 -
------------ -------------
Other comprehensive income:
(231) (1,658)
------------ -------------
Comprehensive income $ 1,399 $ 705
============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
<PAGE>
SUN LIFE INSURANCE AND ANNUITY COMPANY OF NEW YORK
(A WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.))
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDER'S
STOCK CAPITAL INCOME EARNINGS EQUITY
----------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 2,000 $ 29,500 $ 1,171 $ 28,265 $ 60,936
Comprehensive income:
Net income 2,363 2,363
Other comprehensive income (1,658) (1,658)
Dividends to stockholder (6,500) (6,500)
----------- ------------ -------------- ------------ --------------
Balance at June 30, 1999 $ 2,000 $ 29,500 $ (487) $ 24,128 $ 55,141
=========== ============ ============== ============ ==============
Balance at December 31, 1999 $ 2,000 $ 29,500 $ (1,272) $ 26,220 $ 56,448
Comprehensive income:
Net income 1,630 1,630
Other comprehensive income (231) (231)
Dividends to stockholder (4,700) (4,700)
----------- ------------ -------------- ------------ --------------
Balance at June 30, 2000 $ 2,000 $ 29,500 $ (1,503) $ 23,150 $ 53,147
=========== ============ ============== ============ ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
<PAGE>
SUN LIFE INSURANCE AND ANNUITY COMPANY OF NEW YORK
(A WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.))
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
2000 1999
---- -----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,630 $ 2,363
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of discount and premiums 83 82
Net realized (gains) losses on investments 244 (612)
Interest credited 2,902 3,037
Deferred federal income taxes (164) (223)
Changes in assets and liabilities:
Deferred acquisition costs 1,940 344
Outstanding premiums 706 (149)
Accrued investment income 56 111
Other assets 100 (51)
Future contract and policy benefits 713 1,818
Other, net 1,987 2,723
----------- ------------
Net cash provided by operating activities 10,197 9,443
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, maturities and repayments of:
Available-for-sale fixed maturities 23,351 54,709
Mortgage loans 1,913 3,574
Purchases of:
Available-for-sale fixed maturities (20,794) (40,092)
Mortgage loans (2,400) -
Real estate - 42
Net change in policy loans 22 16
Net change in short term investments 3,837 (392)
----------- ------------
Net cash provided by investing activities 5,929 17,857
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits to contractholder deposit funds 4,851 2,516
Withdrawals from contractholder deposit funds (12,682) (15,351)
Dividends paid to stockholder (4,700) (6,500)
----------- ------------
Net cash used in financing activities (12,531) (19,335)
----------- ------------
Net change in cash and cash equivalents 3,595 7,965
Cash and cash equivalents, beginning of period 11,458 9,384
Cash and cash equivalents, end of period $ 15,053 $ 17,349
=========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid net of refunds $ 701 $ 1,603
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED FINANCIAL
STATEMENTS.
6
<PAGE>
SUN LIFE INSURANCE AND ANNUITY COMPANY OF NEW YORK
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.))
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - Sun Life Insurance and Annuity Company of New York (the
"Company") is incorporated as a life insurance company and is currently
engaged in the sale of individual fixed and variable annuity contracts, as
well as group life and disability insurance contracts, in its state of
domicile, New York. The parent company, Sun Life Assurance Company of
Canada (U.S.) ("Sun Life of Canada (U.S.)"), is ultimately a wholly-owned
subsidiary of Sun Life Financial Services of Canada Inc. ("SLF"). SLF was
formed as a result of the demutualization on March 22, 2000 of Sun Life
Assurance Company of Canada ("SLOC"), which was the Company's ultimate
parent at December 31, 1999.
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 New York, which is a comprehensive basis of accounting other
than generally accepted accounting principles. The Company has changed its
basis of accounting for the period ended June 30, 2000 to GAAP and has
restated the financial statements for the prior year ended December 31,
1999 (Balance Sheet) and for the period ended June 30, 1999 (Statement of
Income, Statement of Comprehensive Income, Statement of Changes in
Stockholder's Equity, and Statement of Cash Flows) to conform with GAAP.
See Note 4 for a reconciliation of statutory surplus to GAAP equity and
statutory net income to GAAP net income.
USE OF ESTIMATES - The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting period. The
most significant estimates are those used in determining deferred policy
acquisition costs, investment allowances and the liabilities for future
policyholder benefits. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS - In the normal course of business, the Company
enters into transactions involving various types of financial instruments,
including cash and cash equivalents, investments such as fixed maturities,
mortgage loans and equity securities, off balance sheet financial
instruments, debt, loan commitments and financial guarantees. These
instruments involve credit risk and also may be subject to risk of due to
interest rate fluctuation. The Company evaluates and monitors each
financial instrument individually and, when appropriate, obtains
7
<PAGE>
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 or
available-for sale. In order for the security to be classified as
held-to-maturity, the Company must have positive intent and ability to hold
the securities to maturity. Securities held-to-maturity are stated at cost,
adjusted for amortization of premiums, and accretion of discounts.
Securities that do not meet this criterion are classified as
available-for-sale. Available-for-sale securities are carried at 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. The Company does not engage in trading
activities. All of the Company's fixed maturity securities are
available-for-sale. 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
include commercial first mortgage loans and are diversified by property
type and geographic area throughout the United States. Mortgage loans are
collateralized by the related properties and generally are no more than 75%
of the properties' value at the time that the original loan is made.
A loan is recognized as impaired when it is probable that the principal or
interest 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.
8
<PAGE>
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. There were no real estate holdings at
June 30, 2000 or December 31, 1999.
Policy loans are carried at the amount of outstanding principal balance not
in excess of net cash surrender values of the related insurance policies.
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, 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 quarterly
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.
9
<PAGE>
Deferred acquisition costs for each product are reviewed to determine if
they are recoverable from future income, including investment income. If
such costs are determined to 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 discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the
near term if any of the estimates discussed above are revised.
OTHER ASSETS- Property, equipment, and leasehold improvements 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 5% to 6%
for life insurance and 6% to 7% 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 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.
10
<PAGE>
Other policy liabilities include liabilities for policy and contract
claims. These amounts consist of the estimated amount payable for claims
reported but not yet settled and an estimate of claims incurred but not
reported. The amount reported is based upon historical experience, adjusted
for trends and current circumstances. Management believes that the recorded
liability is sufficient to provide for the associated claims adjustment
expenses. Revisions of these estimates are included in operations in the
year such refinements are made.
REVENUE AND EXPENSES -Premiums for traditional individual life and annuity
products are considered revenue when due. Premiums related to group life
and group disability insurance are recognized as revenue pro-rata over the
contract period. The unexpired portion of these premiums is recorded as
unearned premiums. Revenue from investment-related products includes
charges for cost of insurance (mortality), initiation and administration of
the policy and surrender charges. Revenue is recognized when the charges
are assessed except that any portion of an assessment that relates to
services to be provided in future years is deferred and recognized over the
period during which the services are provided.
Benefits and expenses, other than deferred policy acquisition costs,
related to traditional life, annuity, and disability contracts, including
group policies, are recognized when incurred in a manner designed to match
them with related premium revenue and spread income recognition over
expected policy lives. For investment-type contracts, benefits include
interest credited to policyholder's accounts and death benefits in excess
of account values, which are recognized as incurred.
INCOME TAXES - The Company files a consolidated federal income tax return
with Sun Life of Canada (U.S.) 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 ("SFAS") No. 109, Accounting for Income Taxes. These
differences result primarily from policy reserves, policy acquisition
expenses and unrealized gains or losses on investments.
11
<PAGE>
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 individual
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 financial
statements.
On January 1, 1999, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position ("SOP") 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." This statement provides guidance on when an insurance or
other enterprise should recognize a liability for guaranty fund and other
assessments and on how to measure such liability. The adoption of SOP 97-3
had no material impact on the financial position or results of operations
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.
(2) MANAGEMENT AND SERVICE CONTRACTS
The Company has agreements with Sun Life of Canada (U.S.) and SLOC, which
provide that Sun Life of Canada (U.S.) and SLOC will furnish to the Company,
as requested, personnel as well as certain investment and administrative
12
<PAGE>
services on a cost reimbursement basis. Expenses under these agreements
amounted to approximately $645,000 and $1,174,000 for the three and six month
periods in 2000 and $408,000 and $563,000 for the same periods in 1999.
(3) SEGMENT INFORMATION
The Company offers financial products and services such as fixed and variable
annuities, retirement plan services, 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 administers life insurance products sold to
individuals under conversions from group policies.
The Group Protection segment markets and administers group life and long-term
disability insurance to small and mid-size employers.
The Wealth Management segment markets and administers individual variable
annuity products and individual 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:
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000 JUNE 30, 2000
------------------------------ -------------
TOTAL TOTAL PRETAX NET TOTAL
REVENUES EXPENDITURES INCOME INCOME ASSETS
-------------- --------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Individual Protection $ 167 $ 300 $ (133) $ (87) $ 26
Group Protection 8,691 7,668 1,023 665 28,674
Wealth
Management 10,128 9,005 1,123 730 785,673
Corporate 478 (17) 495 322 815
-------------- --------------- ---------------- --------------- --------------
Total $ 19,464 $ 16,956 $ 2,508 $ 1,630 $ 815,188
============== =============== ================ =============== ==============
SIX MONTHS ENDED JUNE 30, 1999 DECEMBER 31, 1999
------------------------------ -----------------
Individual Protection $ 187 $ 164 $ 23 $ 14 $ 483
Group Protection 8,361 7,856 505 308 20,038
Wealth Management 10,880 8,502 2,378 1,646 791,283
Corporate 825 215 610 395 22,796
-------------- --------------- ---------------- --------------- --------------
Total $ 20,253 $ 16,737 $ 3,516 $ 2,363 $ 834,600
============== =============== ================ =============== ==============
</TABLE>
13
<PAGE>
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000 JUNE 30, 2000
-------------------------------- -------------
TOTAL TOTAL PRETAX NET TOTAL
REVENUES EXPENDITURES INCOME INCOME ASSETS
-------------- --------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Individual Protection $ 48 $ (1) $ 49 $ 31 $ 26
Group Protection 4,494 4,417 77 50 28,674
Wealth Management 5,277 5,548 (271) (176) 785,673
Corporate 254 (23) 277 180 815
-------------- --------------- ---------------- --------------- --------------
Total $ 10,073 $ 9,941 $ 132 $ 85 $ 815,188
============== =============== ================ =============== ==============
THREE MONTHS ENDED JUNE 30, 1999 DECEMBER 31, 1999
-------------------------------- -----------------
Individual Protection $ 83 $ 134 $ (51) $ (34) $ 483
Group Protection 4,169 4,288 (119) (98) 20,038
Wealth Management 5,741 4,171 1,570 1,132 791,283
Corporate 175 149 26 117 22,796
-------------- --------------- ---------------- --------------- --------------
Total $ 10,168 $ 8,742 $ 1,426 $ 1,117 $ 834,600
============== =============== ================ =============== ==============
</TABLE>
(4) 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 New York, which is a
comprehensive basis of accounting other than generally accepted accounting
principles. The Company has changed its basis of accounting for the six
months ended June 30, 2000 to generally accepted accounting principles
("GAAP") and has restated the financial statements for the prior year ended
December 31, 1999 (Balance Sheet) and for the period ended June 30, 1999
(Statement of Income, Statement of Comprehensive Income, Statement of Changes
in Stockholder's Equity, and Statement of Cash Flows) to conform with GAAP.
The Statutory Balance Sheet filed as part of the 1999 Annual Report on From
10-K is shown below:
14
<PAGE>
SUN LIFE INSURANCE AND ANNUITY COMPANY OF NEW YORK
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999
-------------------
<S> <C>
ADMITTED ASSETS
Bonds $ 59,215,128
Mortgage loans on real estate 8,659,610
Policy loans 537,976
Cash and short-term investments 6,261,102
Life insurance premiums and annuity considerations due and uncollected
Accident and health premiums due and unpaid 579,460
Receivable from parent and affiliates 621,625
Investment income due and accrued 795,075
Federal Income Tax Recoverable 520,467
Other assets 235,655
General account assets 79,594,233
Separate account assets
Unitized 632,350,720
Non-unitized 94,061,504
-------------------
TOTAL ADMITTED ASSETS $ 806,006,457
===================
LIABILITIES
Aggregate reserve for life policies and contracts $ 21,762,306
Aggregate reserve for accident and health policies 9,251,000
Policy and contract claims 2,182,472
Liability for premium and other deposit funds 18,048,656
Interest maintenance reserve 553,770
Commissions to agents due or accrued 449,213
General expenses due or accrued 580,432
Transfers from Separate Accounts due or accrued (17,043,885)
Taxes, licenses and fees due or accrued 100,000
Asset valuation reserve 1,210,107
Other liabilities 1,353,930
-------------------
General account liabilities 38,448,001
Separate account liabilities:
Unitized 632,150,968
Non-unitized 94,061,504
-------------------
TOTAL LIABILITIES 764,660,473
-------------------
CAPITAL STOCK AND SURPLUS
Common capital stock 2,000,000
-------------------
Gross paid in and contributed surplus 29,500,000
Group life contingency reserve fund 1,035,323
Unassigned funds 8,810,661
-------------------
Total surplus 39,345,984
Capital stock and surplus 41,345,984
-------------------
TOTAL LIABILITIES, CAPITAL STOCK AND SURPLUS $ 806,006,457
===================
</TABLE>
15
<PAGE>
The following reconciles statutory net income and statutory surplus with net
income and equity on a GAAP basis.
<TABLE>
<CAPTION>
(in thousands) SIX MONTHS ENDED JUNE 30,
2000 1999
---- ----
<S> <C> <C>
Statutory net income $ 3,172 $ 3,013
Adjustments to GAAP for life insurance companies:
Statutory interest maintenance reserve (107) (135)
Investment income and realized gains(losses) 42 2,062
Policyowner benefits 300 (2,411)
Deferred policy acquisition costs (1,951) (343)
Deferred income taxes 174 177
---------- -------
GAAP net income (loss) $ 1,630 $ 2,363
========== =======
</TABLE>
<TABLE>
<CAPTION>
(in thousands) THREE MONTHS ENDED JUNE 30,
2000 1999
---- ----
<S> <C> <C>
Statutory net income $ 1,344 $ 1,043
Adjustments to GAAP for life insurance companies:
Statutory interest maintenance reserve (52) (59)
Investment income and realized gains(losses) 136 1,429
Policyowner benefits 460 (1,472)
Deferred policy acquisition costs (2,014) 56
Deferred income taxes 204 118
Other,net 7 2
---------- -------
GAAP net income (loss) $ 85 $ 1,117
========== =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Adjustments to GAAP for life
Insurance companies: $ 39,900 $ 41,346
Valuation of investments (2,661) (2,185)
Deferred policy acquisition costs 26,186 27,893
Future policy benefits and
Contractholder deposit funds (11,788) (10,547)
Deferred income taxes (1,386) (1,674)
Statutory interest maintenance
Reserve 392 554
Statutory asset valuation reserve 1,128 1,210
Other, net 1,376 (149)
------------- -------------
GAAP equity $ 53,147 $ 56,448
============= =============
</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.
16
<PAGE>
(5) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in pending and threatened litigation in the normal
course of its business in which claims for monetary and punitive damages have
been asserted. Although there can be no assurances, at the present time the
Company does not anticipate that the ultimate liability arising from such
pending or threatened litigation, after consideration of provisions made for
potential losses and costs of defense, will have a material adverse effect on
the financial condition or operating results of the Company.
Under insurance guaranty fund laws in each state, the District of Columbia and
Puerto Rico, insurers licensed to do business can be assessed by state insurance
guaranty associations for certain obligations of insolvent insurance companies
to policyholders and claimants. Recent regulatory actions against certain large
life insurers encountering financial difficulty have prompted various state
insurance guaranty associations to begin assessing life insurance companies for
the deemed losses. Most of these laws do provide, however, that an assessment
may be excused or deferred if it would threaten an insurer's solvency and
further provide annual limits on such assessments. Part of the assessments paid
by the Company and its subsidiaries pursuant to these laws may be used as
credits for a portion of the associated premium taxes.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY STATEMENT
This Form 10-Q includes forward-looking statements by the Company under the
Private Securities Litigation Reform Act of 1995. These statements are not
matters of historical fact; they relate to such topics as future product sales,
Year 2000 compliance, volume growth, market share, market risk and financial
goals. It is important to understand that these forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those that the statements anticipate. These risks and
uncertainties may concern, among other things:
- - Heightened competition, particularly in terms of price, product
features, and distribution capability, which could constrain the Company's
growth and profitability.
- - Changes in interest rates and market conditions.
- - Regulatory and legislative developments.
- - Developments in consumer preferences and behavior patterns.
- - The Company's ability to identify and address any remaining Year 2000
issues successfully, in a timely manner, and at reasonable cost. They also
may concern the ability of the Company's vendors, suppliers, other service
providers, and customers to successfully address any of their own
remaining Year 2000 issues in a timely manner.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO 1999:
The Company had net income of $85,000 and $1,630,000 for the three and six month
periods ended June 30, 2000, respectively, as compared to $1,117,000 and
$2,363,000 for the same periods ended June 30, 1999. The $1,032,000 and $733,000
decrease in earnings for the three and six month periods, respectively, was
primarily due to the effect unfavorable market conditions had on the Wealth
Management segment results in the second quarter. The results by segment are
discussed in more detail below.
NET INCOME 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 (in thousands):
18
<PAGE>
<TABLE>
<CAPTION>
3 MONTHS ENDED 6 MONTHS ENDED $ CHANGE
2000 1999 2000 1999 3 MONTHS 6 MONTHS
---- ---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Wealth Management $ (176) $ 1,132 $ 730 $ 1,646 $(1,308) $ (916)
Individual Protection 31 (34) (87) (34) 65 (101)
Group Protection 50 (98) 665 308 148 357
Corporate 180 117 322 395 63 (73)
------- ------- ------- ------- ------- --------
$ 85 $ 1,117 $ 1,630 $ 2,363 $(1,032) $ (733)
======= ======= ======= ======= ======= ========
</TABLE>
WEALTH MANAGEMENT SEGMENT
The Wealth Management segment focuses on the savings and retirement needs of
individuals preparing for retirement or who have already retired. It primarily
markets to upscale consumers in New York, selling individual 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 Sun Life (U.S.).
Net income decreased by $1,308,000 and $916,000 for the three and six month
periods ended June 30, 2000 as compared to the same periods in 1999. The
decrease is primarily due to increased amortization of deferred acquisition
costs ("DAC") and a decrease in net realized investment gains. Decreased
separate account investment performance lowers the expected future gross profits
which in turn increases the current period amortization. The increase in DAC
amortization was $1,940,000 and $1,423,000 for the three and six month periods
ended June 30, 2000. Net realized investment gains decreased by $150,000 and
$683,000 for the three and six month periods ended June 30, 2000 over the same
periods in 1999.
Net deposits of annuity products decreased by $20.6 million compared with 1999.
The decrease in net deposits results primarily from increases in 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.
Total new deposits to fixed and variable annuities also decreased in the second
quarter of 2000 as compared to the same period in 1999. The
19
<PAGE>
Company recently introduced its Futurity line of products. The Company expects
that sales of the Futurity product will increase in the future, based on
management's beliefs that market demand is growing for multi-manager variable
annuity products, such as Futurity and that the marketplace will continue to
respond favorably to introductions of new Futurity products and product
enhancements.
INDIVIDUAL PROTECTION SEGMENT
The only individual products offered by the Company are from conversions from
the group life products. Net income from the Individual Protection segment
increased by $65,000 for the three months ended June 30, 2000 as compared to
the same period in 1999 but decreased by $101,000 for the six months ended
June 30, 2000 as compared to the same period in 1999. This is due to
significantly higher death benefits in the first quarter of 2000 as compared
to 1999. There were no death benefits in the second quarter of 2000.
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
programs. Net income from the Group Protection segment increased by $148,000
and $357,000 for the three and six months ended June 30, 2000 as compared to
the same period in 1999 primarily due to favorable claims experience.
CORPORATE SEGMENT
The Corporate segment includes the unallocated capital of the Company and items
not otherwise attributable to the other segments. For the three months ended
June 30, 2000, net income from operations for the Corporate segment increased by
$63,000 as compared to the same period in 1999. For the six months ended June
30, 2000, net income decreased by $73,000. The second quarter results reflect
the investment income earned by the Corporate segment of $43,000 versus the
investment losses of $137,000 experienced in the same period of 1999. Operating
expenses decreased for the quarter as compared to 1999 also contributing to the
favorable results. Year to date results reflect the net realized losses of
$52,000 incurred by the Corporate segment during 2000 as compared to net gains
of $55,000 realized in 1999.
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 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
20
<PAGE>
the general account.
General account assets decreased by 2.8% from December 31, 1999 to June 30, 2000
and variable separate account assets decreased by 2.1%. These decreases are due
to net withdrawals from the Company's fixed and variable annuity products.
CAPITAL RESOURCES
CAPITAL ADEQUACY
The National Association of Insurance Commissioners ("NAIC") adopted regulations
at the end of 1993 that established minimum capitalization requirements for
insurance companies, based on risk-based capital ("RBC") formulas as applied to
statutory surplus. These requirements are intended to identify undercapitalized
companies, so that specific regulatory actions can be taken on a timely basis.
The RBC formula for life insurance companies calculates capital requirements
related to asset, insurance, interest rate, and business risks. According to the
RBC calculation, the Company's capital was well in excess of its required
capital at year-end 1999 and at June 30, 2000.
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 sales 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, Sun Life Assurance
Company of Canada ("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 and have operated
accurately and will continue to operate accurately after January 1, 2000 with
respect to Year 2000 issues.
In mid-1997, the Company's Year 2000 project team contacted all key vendors to
obtain their representation that the products and services provided would not
have a Year 2000 issue. Where appropriate, vendor testing was conducted. In
addition, the project team worked with critical business partners, such as
third-party administrators, investment property managers, investment mortgage
correspondents, and others, with the goal of verifying that these partners would
continue to be able to support the Company's business during and after the Year
2000.
Non-IT applications, including building security, HVAC systems, and other such
systems, as well as IT applications, were tested. Compliant client server and
mainframe environments were used to allow for testing of critical dates such as
December 31, 1999, January 1, 2000, February 28, 2000, February 29, 2000 and
March 1, 2000 without impact to the Company's production environment.
The Company has completed an assessment of its systems, and has not identified
22
<PAGE>
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.
As of June 30, 2000, the Company has expended, cumulatively, approximately
$288,000 on its Year 2000 effort.
23
<PAGE>
PART II: OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are incorporated by reference unless otherwise
indicated:
EXHIBIT NO.
27 Financial Data Schedule (filed herewith)
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sun Life Insurance and Annuity Company of New York
(Registrant)
Date August 14, 2000 /s/ Davey S. Scoon
-------------------------------
Davey S. Scoon
Vice President Finance,
Controller and Treasurer
Date August 14, 2000 /s/ Michael K. Moran
--------------------------------
Michael K. Moran
Assistant Vice President Finance
25
