-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MoTNU/UsisUgSSGQ+DSfggYjy/BGmJ6OnbAFzqI2kySij3RW4Y+oV2ZuvQalhXDS V0etGK10p/f3EL+chXqirw== 0001047469-99-016154.txt : 19990426 0001047469-99-016154.hdr.sgml : 19990426 ACCESSION NUMBER: 0001047469-99-016154 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19990423 EFFECTIVENESS DATE: 19990423 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUN LIFE OF CANADA U S VARIABLE ACCOUNT F CENTRAL INDEX KEY: 0000853285 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 042461439 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-41628 FILM NUMBER: 99600279 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-05846 FILM NUMBER: 99600280 BUSINESS ADDRESS: STREET 1: 500 BOYLSTON ST STREET 2: 15TH FL CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 6179545244 MAIL ADDRESS: STREET 1: 500 BOYLSTON ST STREET 2: 15TH FL CITY: BOSTON STATE: MA ZIP: 02116 485BPOS 1 485BPOS As Filed with the Securities and Exchange Commission on April 23, 1999 REGISTRATION NO. 33-41628 811-05846 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM N-4 POST-EFFECTIVE AMENDMENT NO. 13 TO REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/ AND AMENDMENT NO. 20 TO REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/ SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F (Exact Name of Registrant) SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Name of Depositor) ONE SUN LIFE EXECUTIVE PARK WELLESLEY HILLS, MASSACHUSETTS 02181 (Address of Depositor's Principal Executive Offices) DEPOSITOR'S TELEPHONE NUMBER: (781) 237-6030 EDWARD M. SHEA, ASSISTANT VICE PRESIDENT AND SENIOR COUNSEL SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) ONE COPLEY PLACE BOSTON, MASSACHUSETTS 02116 (Name and Address of Agent for Service) COPIES OF COMMUNICATIONS TO: RUTH EPSTEIN, ESQ. COVINGTON & BURLING 1201 PENNSYLVANIA AVENUE, N.W. WASHINGTON, D.C. 20044-7566 - -------------------------------------------------------------------------------- /X/ IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE ON APRIL 26, 1999 PURSUANT TO PARAGRAPH (b) OF RULE 485. /X/ THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR A PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT. PART A INFORMATION REQUIRED IN A PROSPECTUS Attached hereto and made a part hereof is the Prospectus dated May 1, 1999 for each of the following: MFS Regatta Platinum MFS Regatta Gold Futurity II SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) MAY 1, 1999 PROFILE MFS REGATTA PLATINUM VARIABLE AND FIXED ANNUITY THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU SHOULD KNOW AND CONSIDER BEFORE PURCHASING THE CONTRACT. THE CONTRACT IS MORE FULLY DESCRIBED IN THE FULL PROSPECTUS WHICH ACCOMPANIES THIS PROFILE. PLEASE READ THE PROSPECTUS CAREFULLY. 1. THE MFS REGATTA PLATINUM ANNUITY The MFS Regatta Platinum Annuity is a flexible payment deferred annuity contract ("Contract") designed for use in connection with retirement and deferred compensation plans, some of which may qualify for favorable federal income tax treatment. The Contract is intended to help you achieve your retirement savings or other long-term investment goals. The Contract has two phases: an Accumulation Phase and an Income Phase. During the Accumulation Phase you make payments into the Contract; any investment earnings under your Contract accumulate on a tax-deferred basis and are taxed as income only when withdrawn. During the Income Phase, we make annuity payments in amounts determined in part by the amount of money you have accumulated under your Contract during the Accumulation Phase. You choose when the Income Phase begins. You may choose among 25 variable investment options and a range of fixed interest options. For a variable investment return you choose one or more Sub-Accounts in our Variable Account, each of which invests in shares of a corresponding series of the MFS/Sun Life Series Trust (collectively, the "Series") listed in Section 4. The value of any portion of your Contract allocated to the Sub-Accounts will fluctuate up or down depending on the performance of the Series you select, and you may experience losses. For a fixed interest rate, you may choose one or more Guarantee Periods offered in our Fixed Account, each of which earns its own Guaranteed Interest Rate if you keep your money in that Guarantee Period for the specified length of time. The Contract is designed to meet your need for investment flexibility. At any time you may have amounts allocated among up to 18 of the available variable and fixed options. Until we begin making annuity payments under your Contract, you can, subject to certain limitations, transfer money between options up to 12 times each year without a transfer charge or adverse tax consequences. 2. ANNUITY PAYMENTS (THE INCOME PHASE) Just as you can elect to have your Contract value accumulate on either a variable or fixed basis, or a combination of both, you can elect to receive annuity payments on either a variable or fixed basis or both. If you choose to have any part of your annuity payments come from the Sub-Accounts, the dollar amount of your annuity payments may fluctuate. The Contract offers a variety of annuity options. You can select from among the following methods of receiving either variable or fixed annuity payments under your Contract: (1) monthly payments continuing for your lifetime (assuming you are the annuitant); (2) monthly payments for your lifetime, but with payments continuing to your chosen beneficiary for 5, 10, 15 or 20 years if you die before the end of the period you have selected; (3) monthly payments for your lifetime and the life of another person (usually your spouse) you have chosen; and (4) monthly payments for a specified number of years (between 5 and 30), with a cash-out option for variable payments. We may also agree to other annuity options in our discretion. Once the Income Phase begins, you cannot change your choice of annuity payment method. 3. PURCHASING A CONTRACT You may purchase a Contract for $10,000 or more, under most circumstances. You may increase the value of your investment by adding $1,000 or more at any time during the Accumulation Phase. We will not accept a Purchase Payment if your Account Value is over $1 million, or if the Purchase Payment would cause your Account Value to exceed $1 million, unless we have approved the Payment in advance. 4. ALLOCATION OPTIONS You can allocate your money among Sub-Accounts investing in the following Series of the MFS/ Sun Life Series Trust: Bond Series Managed Sectors Series Capital Appreciation Series Massachusetts Investors Growth Stock Series Capital Opportunities Series Massachusetts Investors Trust Series Emerging Growth Series MFS/Foreign & Colonial Emerging Markets Equity Series Equity Income Series Money Market Series Global Asset Allocation Series New Discovery Series Global Governments Series Research Series Global Growth Series Research Growth and Income Series Global Total Return Series Research International Series Government Securities Series Strategic Income Series High Yield Series Total Return Series International Growth Series Utilities Series International Growth and Income Series
Market conditions will determine the value of an investment in any Series. Each series is described in the Prospectus of the MFS/Sun Life Series Trust. In addition to these variable options, you may also allocate your money to one or more of the Guarantee Periods we make available. For each Guarantee Period, we offer a Guaranteed Interest Rate for the specified length of time. 5. EXPENSES The charges under the Contracts are as follows: During the first 5 years of a Contract, we impose an annual Account Fee equal to the lesser of $35 or 2% of the value of your Contract. After the fifth year, we may change this fee annually, but it will never exceed the lesser of $50 or 2% of the value of your Contract. During the Income Phase, the annual Account Fee is $35. We also deduct insurance charges (which include an administrative expense charge) equal to 1.40% per year of the average daily value of the Contract allocated among the Sub-Accounts. There are no sales charges when you purchase your MFS Regatta Platinum Annuity. However, if you withdraw money from your Contract, we will, with certain exceptions, impose a withdrawal charge. Your Contract allows a "free withdrawal amount," which you may withdraw before you incur the withdrawal charge. The rest of your withdrawal is subject to a withdrawal charge equal to a percentage of each purchase payment you withdraw and is determined in accordance with the table below. The percentage varies according to the number of Contract years the purchase payment has been held in your account, including the year in which you made the payment, but not the year in which you withdraw it.
NUMBER OF YEARS IN ACCOUNT WITHDRAWAL CHARGE - ----------------- ----------------------- 0-1 6% 2-3 5% 4-5 4% 6 3% 7 or more 0%
If you withdraw, transfer, or annuitize money allocated to a Guarantee Period more than 30 days before the expiration date of the Guarantee Period, the amount will be subject to a Market Value 2 Adjustment. This adjustment reflects the relationship between our current Guaranteed Interest Rates and the Guaranteed Interest Rate applicable to the amount being withdrawn. Generally, if your Guaranteed Interest Rate is lower than the relevant current rate, then the adjustment will decrease your Contract value. Conversely, if your Guaranteed Interest Rate is higher than the relevant current rate, the adjustment will increase your Contract value. The Market Value Adjustment will not apply to the withdrawal of interest credited during the current year, or to transfers as part of our dollar cost averaging program. In addition to the charges we impose under the Contracts, there are charges (which include management fees and operating expenses) imposed by each Series, which range from 0.56% to 1.55% of the average net assets of the Series, depending upon which Series you have selected. The investment adviser has agreed to waive or reimburse a portion of expenses for some of the Series; without this agreement, Series expenses could be higher. Some of these arrangements may be terminated after one year, or earlier if the Series Fund's Board of Trustees agrees. The following chart is designed to help you understand the expenses you will incur under your Contract, if you invest in one or more of the Sub-Accounts. The column "Total Annual Expenses" shows the sum of the "Total Annual Insurance Charges," as defined just above the chart, and the total expenses for each Series. The next two columns show two examples of the expenses, in dollars, you would pay under a Contract. The examples assume that you invested $1,000 in a Contract which earns 5% annually and that you withdraw your money (1) at the end of one year or (2) at the end of 10 years. For the first year, the Total Annual Expenses are deducted, as well as withdrawal charges. For year 10, the example shows the aggregate of all of the annual expenses deducted for the 10 years, but there is no withdrawal charge. "Total Annual Insurance Charges" include the insurance charges of 1.40%, plus an additional 0.10%, which is used to represent the $35 annual Account Fee based on an assumed Contract value of $35,000. The actual impact of the Account Fee may be greater or less than 0.10%, depending upon the value of your Contract.
EXAMPLES: TOTAL EXPENSES TOTAL ANNUAL TOTAL ANNUAL TOTAL AT END INSURANCE SERIES ANNUAL 1 SUB-ACCOUNT CHARGES EXPENSES EXPENSES YEAR 10 YEARS - ---------------------------------------- --------------- --------------- --------- ---- -------- Bond Series 1.50% 1.03% 2.53% $81 $287 (1.40% + 0.10%) Capital Appreciation Series 1.50% 0.77% 2.27% $79 $261 (1.40% + 0.10%) Capital Opportunities Series 1.50% 0.86% 2.36% $79 $270 (1.40% + 0.10%) Emerging Growth Series 1.50% 0.78% 2.28% $79 $262 (1.40% + 0.10%) Equity Income Series 1.50% 1.03% 2.53% $81 $287 (1.40% + 0.10%) Global Asset Allocation Series 1.50% 0.90% 2.40% $80 $274 (1.40% + 0.10%) Global Governments Series 1.50% 0.88% 2.38% $80 $272 (1.40% + 0.10%) Global Growth Series 1.50% 1.01% 2.51% $81 $285 (1.40% + 0.10%) Global Total Return Series 1.50% 0.93% 2.43% $80 $277 (1.40% + 0.10%) Government Securities Series 1.50% 0.62% 2.12% $77 $245 (1.40% + 0.10%) High Yield Series 1.50% 0.82% 2.32% $79 $266 (1.40% + 0.10%) International Growth Series 1.50% 1.32% 2.82% $84 $315 (1.40% + 0.10%) International Growth and Income Series 1.50% 1.16% 2.66% $82 $299 (1.40% + 0.10%) Managed Sectors Series 1.50% 0.80% 2.30% $79 $264 (1.40% + 0.10%)
3
EXAMPLES: TOTAL EXPENSES TOTAL ANNUAL TOTAL ANNUAL TOTAL AT END INSURANCE SERIES ANNUAL 1 SUB-ACCOUNT CHARGES EXPENSES EXPENSES YEAR 10 YEARS - ---------------------------------------- --------------- --------------- --------- ---- -------- Massachusetts Investors Growth Stock 1.50% 0.97% 2.47% $81 $281 Series (1.40% + 0.10%) Massachusetts Investors Trust Series 1.50% 0.59% 2.09% $77 $242 (1.40% + 0.10%) MFS/Foreign & Colonial Emerging Markets 1.50% 1.50% 3.00% $86 $332 Equity Series (1.40% + 0.10%) Money Market Series 1.50% 0.56% 2.06% $77 $239 (1.40% + 0.10%) New Discovery Series 1.50% 1.28% 2.78% $83 $311 (1.40% + 0.10%) Research Series 1.50% 0.76% 2.26% $79 $260 (1.40% + 0.10%) Research Growth and Income Series 1.50% 0.95% 2.45% $80 $279 (1.40% + 0.10%) Research International Series 1.50% 1.55% 2.05% $86 $336 (1.40% + 0.10%) Strategic Income Series 1.50% 1.29% 2.79% $84 $312 (1.40% + 0.10%) Total Return Series 1.50% 0.70% 2.20% $78 $253 (1.40% + 0.10%) Utilities Series 1.50% 0.86% 2.36% $79 $270 (1.40% + 0.10%)
For more detailed information about Contract fees and expenses, please refer to the fee table and discussion of Contract charges contained in the full Prospectus which accompanies this Profile. 6. TAXES Your earnings are not taxed until you take them out of your Contract. If you take money out, earnings come out first and are taxed as income. If your Contract is funded with pre-tax or tax deductible dollars (such as with a pension or IRA contribution) -- we call this a Qualified Contract -- your entire withdrawal will be taxable. If you are younger than 59 1/2 when you take money out, you may be charged a 10% federal penalty tax on the earnings. Annuity payments during the Income Phase are considered in part a return of your original investment. That portion of each payment is not taxable, except under a Qualified Contract, in which case the entire payment will be taxable. In all cases, you should consult with your tax adviser for specific tax information. 7. ACCESS TO YOUR MONEY You can withdraw money from your Contract at any time during the Accumulation Phase. You may withdraw a portion of the value of your Contract in each year without the imposition of the withdrawal charge -- 10% of all payments you have made in the last 7 years, plus any payment we have held for at least 7 years. All other purchase payments you withdraw will be subject to a withdrawal charge ranging from 6% to 0%. You may also be required to pay income tax and possible tax penalties on any money you withdraw. We do not assess a withdrawal charge upon annuitization or transfers. In certain circumstances, we will waive the withdrawal charges for a full withdrawal when you are confined to an eligible nursing home. In addition, there may be other circumstances under which we may waive the withdrawal charge. In addition to the withdrawal charge, amounts you withdraw, transfer or annuitize from the Fixed Account before your Guarantee Period has ended may be subject to a Market Value Adjustment. 8. PERFORMANCE If you invest in one or more Sub-Accounts, the value of your Contract will increase or decrease depending upon the investment performance of the Series you choose. 4 The following chart shows total returns for investment in the Sub-Accounts where the corresponding Series has at least one full calendar year of operations. The returns reflect all charges and deductions of the Series and Sub-Accounts and deduction of the Annual Account Fee. They do not reflect deduction of any withdrawal charges or premium taxes. These charges, if included, would reduce the performance numbers shown. Past performance is not a guarantee of future results.
CALENDAR YEAR --------------------------------------------------------------------------------- SUB-ACCOUNT 1998 1997 1996 1995 1994 1993 1992 ---------------------------------------- --------- --------- --------- --------- --------- --------- --------- Bond Series -- -- -- -- -- -- -- Capital Appreciation Series 26.86% 21.33% 19.70% 32.51% (5.03)% 16.28% 11.53% Capital Opportunities Series 25.13% 25.73% -- -- -- -- -- Emerging Growth Series 31.94% 20.16% 15.38% -- -- -- -- Equity Income Series -- -- -- -- -- -- -- Global Asset Allocation Series 5.00% 9.24% 14.28% 19.85% -- -- -- Global Governments Series 13.80% (2.24)% 3.11% 14.00% (5.91)% 17.16% (1.01)% Global Growth Series 12.89% 13.63% 11.42% 14.29% 1.40% -- -- Global Total Return Series 16.64% 11.98% 12.58% 16.19% -- -- -- Government Securities Series 7.16% 7.15% 0.11% 15.92% (3.61)% 7.07% 5.14% High Yield Series (0.86)% 11.55% 10.46% 15.32% (3.68)% 16.01% 13.34% International Growth Series 0.43% (3.09)% -- -- -- -- -- International Growth and Income Series 19.86% 4.95% 3.33% -- -- -- -- Managed Sectors Series 10.70% 23.80% 15.86% 30.34% (3.38)% 2.52% 4.91% Massachusetts Investors Growth Stock Series -- -- -- -- -- -- -- Massachusetts Investors Trust Series 22.05% 30.04% 23.57% 35.44% (2.57)% 6.82% 4.05% MFS/Foreign & Colonial Emerging Markets Equity Series (31.00)% 8.75% -- -- -- -- -- Money Market Series 3.50% 3.52% 3.37% 3.90% 2.17% 1.11% 1.81% New Discovery Series -- -- -- -- -- -- -- Research Series 21.85% 19.06% 22.00% 35.44% -- -- -- Research Growth and Income Series 20.41% -- -- -- -- -- -- Research International Series -- -- -- -- -- -- -- Strategic Income Series -- -- -- -- -- -- -- Total Return Series 10.13% 20.18% 12.38% 24.93% (3.71)% 11.72% 6.77% Utilities Series 15.89% 30.80% 18.57% 30.48% (6.36)% -- -- SUB-ACCOUNT 1991 1990 1989 ---------------------------------------- --------- --------- --------- Bond Series -- -- -- Capital Appreciation Series 38.89% (11.02)% 45.06% Capital Opportunities Series -- -- -- Emerging Growth Series -- -- -- Equity Income Series -- -- -- Global Asset Allocation Series -- -- -- Global Governments Series 13.10% 11.67% 8.31% Global Growth Series -- -- -- Global Total Return Series -- -- -- Government Securities Series 14.17% 7.26% 11.19% High Yield Series 45.49% (15.65)% 2.41% International Growth Series -- -- -- International Growth and Income Series -- -- -- Managed Sectors Series 59.67% (11.80)% 43.27% Massachusetts Investors Growth Stock Series -- -- -- Massachusetts Investors Trust Series 34.87% (4.86)% 33.89% MFS/Foreign & Colonial Emerging Markets Equity Series -- -- -- Money Market Series 4.23% 6.26% 7.31% New Discovery Series -- -- -- Research Series -- -- -- Research Growth and Income Series -- -- -- Research International Series -- -- -- Strategic Income Series -- -- -- Total Return Series 19.87% 1.15% 15.80% Utilities Series -- -- --
9. DEATH BENEFIT If you die before the Contract reaches the Income Phase, the beneficiary will receive a death benefit. To calculate the death benefit, we use a "Death Benefit Date", which is the earliest date we have both due proof of death and a written request specifying the manner of payment. If you were 85 or younger when we issued your Contract, the death benefit is the greatest of: (1) the value of the Contract on the Death Benefit Date; (2) the amount we would pay in the event of a full surrender of the Contract on the Death Benefit Date; (3) the value of the Contract on the most recent 7 year anniversary of the Contract, plus any purchase payments made and adjusted for any partial withdrawals and charges made after that anniversary; (4) your highest Contract Value on any Account Anniversary before your 81st birthday, adjusted for subsequent purchase payments and partial withdrawals and charges made between that Account Anniversary and the Death Benefit Date; and (5) your total Purchase Payments, plus interest on Purchase Payments allocated to and transfers to the Variable Account -- while they remain in the Variable Account -- at 5% per year until the first day of the month following your 80th birthday, or until the Purchase Payment 5 or amount transferred has doubled in amount, whichever is earlier; this amount is adjusted for partial withdrawals. If you were 86 or older when we issued your Contract, the death benefit is equal to the amount set forth in (2) above, in this Section 9. 10. OTHER INFORMATION FREE LOOK. Depending upon applicable state law, if you cancel your Contract within 10 days after receiving it we will send you the value of your Contract as of the day we received your cancellation request (this may be more or less than the original purchase payment) and we will not deduct a withdrawal charge. However, if applicable state or federal law requires, we will refund the full amount of any purchase payment(s) we receive and the "free look" period may be greater than 10 days. NO PROBATE. In most cases, when you die, the beneficiary will receive the death benefit without going through probate. However, avoiding probate does not mean that the beneficiary will not have tax liability as a result of receiving the death benefit. WHO SHOULD PURCHASE A CONTRACT? The Contract is designed for those seeking long-term tax deferred accumulation of assets and annuity features, generally for retirement or other long-term purposes. The tax-deferred feature is most attractive to purchasers in high federal and state income tax brackets. You should note that qualified retirement investments automatically provide tax deferral regardless of whether the underlying contract is an annuity. You should not buy a Contract if you are looking for a short-term investment or if you cannot risk a decrease in the value of your investment. CONFIRMATIONS AND QUARTERLY STATEMENTS. You will receive a confirmation of each transaction within your Contract. On a quarterly basis, you will receive a complete statement of your transactions over the past quarter and a summary of your account values during that period. ADDITIONAL FEATURES. The MFS Regatta Platinum Annuity offers the following additional convenient features, which you may choose at no extra charge. Dollar Cost Averaging -- This program lets you invest gradually in up to 12 Sub-Accounts. Asset Allocation -- One or more asset allocation programs may be available in connection with the Contract. Systematic Withdrawal and Interest Out Program -- These programs allow you to receive quarterly, semi-annual or annual payments during the Accumulation Phase. Portfolio Rebalancing Programs -- Under this program, we automatically reallocate your investments in the Sub-Accounts to maintain the proportions you select. You can elect rebalancing on a quarterly, semi-annual or annual basis. Secured Future Program -- This program guarantees the return of your Purchase Payment, and also allows you to allocate a portion of your investment to one or more variable investment options. 11. INQUIRIES If you would like more information about buying a Contract, please contact your broker or registered representative. If you have any other questions, please contact us at: SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) ANNUITY SERVICE MAILING ADDRESS C/O RETIREMENT PRODUCTS AND SERVICES P.O. BOX 1024 BOSTON, MASSACHUSETTS 02103 TEL: TOLL FREE (800) 752-7215 IN MASSACHUSETTS (617) 348-9600 6 PROSPECTUS MAY 1, 1999 MFS REGATTA PLATINUM Sun Life Assurance Company of Canada (U.S.) and Sun Life of Canada (U.S.) Variable Account F offer the flexible payment deferred annuity contracts and certificates described in this Prospectus to groups and individuals. You may choose among 25 variable investment options and a range of fixed options. The variable options are Sub-Accounts in the Variable Account. Each Sub-Account invests in one of the following series of the MFS/Sun Life Series Trust (the "Series Fund"), a mutual fund advised by our affiliate, Massachusetts Financial Services Company: Bond Series Managed Sectors Series Capital Appreciation Series Massachusetts Investors Growth Stock Series Capital Opportunities Series Massachusetts Investors Trust Series Emerging Growth Series MFS/Foreign & Colonial Emerging Markets Equity Series Equity Income Series Money Market Series Global Asset Allocation Series New Discovery Series Global Government Series Research Series Global Growth Series Research Growth and Income Series Global Total Return Series Research International Series Government Securities Series Strategic Income Series High Yield Series Total Return Series International Growth Series Utilities Series International Growth and Income Series
The fixed account options are available for specified time periods, called Guarantee Periods, and pay interest at a guaranteed rate for each period. THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE SERIES FUND. PLEASE READ THIS PROSPECTUS AND THE SERIES FUND PROSPECTUS CAREFULLY BEFORE INVESTING AND KEEP THEM FOR FUTURE REFERENCE. THEY CONTAIN IMPORTANT INFORMATION ABOUT THE MFS REGATTA PLATINUM ANNUITY AND THE SERIES FUND. We have filed a Statement of Additional Information dated May 1, 1999 (the "SAI") with the Securities and Exchange Commission (the "SEC"), which is incorporated by reference in this Prospectus. The table of contents for the SAI is on page 75 of this Prospectus. You may obtain a copy without charge by writing to our Annuity Service Mailing Address or by telephoning (800) 752-7215 or (617) 348-9600. In addition, the SEC maintains a website (http://www.sec.gov) that contains the SAI, material incorporated by reference, and other information regarding companies that file with the SEC. THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY US MEANS RECEIPT AT THE FOLLOWING ADDRESS: ANNUITY SERVICE MAILING ADDRESS, C/O SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) RETIREMENT PRODUCTS AND SERVICES, P.O. BOX 1024, BOSTON, MASSACHUSETTS 02103 1 TABLE OF CONTENTS
PAGE Special Terms Expense Summary Summary of Contract Expenses Series Fund Annual Expenses Examples Condensed Financial Information The MFS Regatta Platinum Annuity Communicating To Us About Your Contract Sun Life Assurance Company of Canada (U.S.) The Variable Account Variable Account Options: The MFS/Sun Life Series Trust The Fixed Account The Fixed Account Options: The Guarantee Periods The Accumulation Phase Issuing Your Contract Amount and Frequency of Purchase Payments Allocation of Net Purchase Payments Your Account Your Account Value Variable Account Value Fixed Account Value Transfer Privilege Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest Rates Optional Programs Withdrawals, Withdrawal Charge and Market Value Adjustment Cash Withdrawals Withdrawal Charge Market Value Adjustment Contract Charges Account Fee Administrative Expense Charge Mortality and Expense Risk Charge Premium Taxes Series Fund Expenses Modification in the Case of Group Contracts Death Benefit Amount of Death Benefit Method of Paying Death Benefit Non-Qualified Contracts Selection and Change of Beneficiary Payment of Death Benefit Due Proof of Death The Income Phase -- Annuity Provisions Selection of the Annuitant or Co-Annuitant Selection of the Annuity Commencement Date Annuity Options Selection of Annuity Option Amount of Annuity Payments Exchange of Variable Annuity Units Account Fee Annuity Payment Rates Annuity Options as Method of Payment for Death Benefit
2 Other Contract Provisions Exercise of Contract Rights Change of Ownership Voting of Series Fund Shares Periodic Reports Substitution of Securities Change in Operation of Variable Account Splitting Units Modification Discontinuance of New Participants Reservation of Rights Right to Return Federal Tax Status Introduction Deductibility of Purchase Payments Pre-Distribution Taxation of Contracts Distributions and Withdrawals from Non-Qualified Contracts Distribution and Withdrawals from Qualified Contracts Withholding Purchase of Immediate Annuity Contract and Deferred Annuity Contract Investment Diversification and Control Tax Treatment of the Company and the Variable Account Qualified Retirement Plans Pension and Profit-Sharing Plans Tax-Sheltered Annuities Individual Retirement Accounts Roth IRAs Administration of the Contracts Distribution of the Contracts Performance Information Available Information Incorporation of Certain Documents by Reference Additional Information About the Company Business of the Company Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Capital Resources Demutualization Year 2000 Compliance Sale of Subsidiary Quantitative and Qualitative Disclosures About Market Risk Reinsurance Reserves Investments Competition Employees Properties State Regulation Legal Proceedings Accountants Financial Statements Table of Contents of Statement of Additional Information Appendix A -- Glossary Appendix B -- Condensed Financial Information-- Accumulation Unit Values Appendix C -- Withdrawals, Withdrawal Charges and the Market Value Adjustment
3 SPECIAL TERMS Your Contract is a legal document that uses a number of specially defined terms. We explain most of the terms that we use in this Prospectus in the context where they arise, and some are self-explanatory. In addition, for convenient reference, we have compiled a list of these terms in the Glossary included at the back of this Prospectus as Appendix A. If, while you are reading this Prospectus, you come across a term that you do not understand, please refer to the Glossary for an explanation. EXPENSE SUMMARY The purpose of the following table is to help you understand the costs and expenses that you will bear directly and indirectly under a Contract WHEN YOU ALLOCATE MONEY TO THE VARIABLE ACCOUNT. The table reflects expenses of the Variable Account as well as of each Series of the Series Fund. The table should be considered together with the narrative provided under the heading "Contract Fees" in this Prospectus, and with the Series Fund's prospectus. In addition to the expenses listed below, we may deduct premium taxes. SUMMARY OF CONTRACT EXPENSES TRANSACTION EXPENSES Sales Load Imposed on Purchase Payments............................................ $ 0 Deferred Sales Load (as a percentage of Purchase Payments withdrawn) (1) Number of Account Years Purchase Payment in Account 0-1............................................................................ 6% 2-3............................................................................ 5% 4-5............................................................................ 4% 6.............................................................................. 3% 7 or more...................................................................... 0% Transfer Fee (2)................................................................... $ 0 ANNUAL ACCOUNT FEE per Contract or Certificate (3) $ 35 VARIABLE ACCOUNT ANNUAL EXPENSES (as a percentage of average Variable Account assets) Mortality and Expense Risk Charge................................................ 1.25% Administrative Expense Charge.................................................... 0.15% Other Fees and Expenses of the Variable Account.................................. 0.00% ----- Total Variable Account Annual Expenses............................................. 1.40%
- ------------------------ (1) A portion of your Account may be withdrawn each year without imposition of any withdrawal charge, and after a Purchase Payment has been in your Account for 7 Account Years it may be withdrawn free of the withdrawal charge. (2) A Market Value Adjustment may be imposed on amounts transferred from or within the Fixed Account. (3) The Annual Account Fee is the lesser of $35 and 2% of your Account Value in Account Years 1 through 5; thereafter, the fee may be changed annually, but it may not exceed the lesser of $50 and 2% of your Account Value. 4 SERIES FUND ANNUAL EXPENSES (1) (AS A PERCENTAGE OF SERIES FUND NET ASSETS)
OTHER TOTAL FUND MANAGEMENT EXPENSES(2) EXPENSES FEES (AFTER REIMBURSEMENT) (AFTER REIMBURSEMENT) --------------- ------------------------ ------------------------ Bond Series....................................... 0.60% 0.43% 1.03%(3) Capital Appreciation Series....................... 0.73% 0.04% 0.77% Capital Opportunities Series...................... 0.75% 0.11% 0.86% Emerging Growth Series............................ 0.72% 0.06% 0.78% Equity Income Series.............................. 0.75% 0.28% 1.03%(3) Global Asset Allocation Series.................... 0.75% 0.15% 0.90% Global Governments Series......................... 0.75% 0.13% 0.88% Global Growth Series.............................. 0.90% 0.11% 1.01% Global Total Return Series........................ 0.75% 0.18% 0.93% Government Securities Series...................... 0.55% 0.07% 0.62% High Yield Series................................. 0.75% 0.07% 0.82% International Growth Series....................... 0.98% 0.34% 1.32% International Growth and Income Series............ 0.98% 0.18% 1.16% Managed Sectors Series............................ 0.74% 0.06% 0.80% Massachusetts Investors Growth Stock Series....... 0.75% 0.22% 0.97% Massachusetts Investors Trust Series.............. 0.55% 0.04% 0.59% MFS/Foreign & Colonial Emerging Markets Equity Series........................................... 1.25% 0.25% 1.50% Money Market Series............................... 0.50% 0.06% 0.56% New Discovery Series.............................. 0.90% 0.38% 1.28%(3) Research Series................................... 0.70% 0.06% 0.76% Research Growth and Income Series................. 0.75% 0.20% 0.95% Research International Series..................... 1.00% 2.55% 1.55%(3) Strategic Income Series........................... 0.75% 0.54% 1.29%(3) Total Return Series............................... 0.65% 0.05% 0.70% Utilities Series.................................. 0.75% 0.11% 0.86%
- -------------------------- (1) The information relating to Series Fund expenses was provided by the Series Fund and we have not independently verified it. You should consult the Series Fund prospectus for more information about Series Fund expenses (2) Each Series has an expense offset arrangement which reduces the Series' custodian fee based upon the amount of cash maintained by the Series with its custodian and dividend disbursing agent, and may enter into such other arrangements and directed brokerage arrangements (which would also have the effect of reducing the series' expenses). Any such fee reductions are not reflected under "Other Expenses." (3) "Other Expenses" and "Total Fund Expenses" are based on actual expenses for the fiscal year ended December 31, 1998, net of any expense reimbursement and/or fee waiver. MFS has agreed to bear the expenses of certain of the Series (excluding management fees, taxes, extraordinary expenses and brokerage and transaction costs) in excess of the following annual percentage of such Series' average daily net assets: Bond Series..................................................... 0.40% Equity Income Series............................................ 0.25% New Discovery Series............................................ 0.35% Research International Series................................... 0.50% Strategic Income Series......................................... 0.50%
Without taking into account the fee waiver and/or expense reimbursement, expenses for these Series would have been as follows: Bond Series -- Other Expenses 0.47% and Total Fund Expenses 1.07%; Equity Income Series -- Other Expenses 0.76% and Total Fund Expenses 1.51%; New Discovery Series -- Other Expenses 0.70% and Total Fund Expenses 1.60%; Research International Series -- Other Expenses 2.86% and Total Fund Expenses 3.86%; and Strategic Income Series -- Other Expenses 0.67% and Total Fund Expenses 1.42%. These arrangements will remain in effect until at least May 1, 2000, absent an earlier modification by the Series' Board of Trustees. 5 EXAMPLES If you surrender your Contract at the end of the applicable time period, you would pay the following expenses on a $1,000 investment, assuming a 5% annual return:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------- ----------- ----------- ----------- Bond Series............................................................... $ 81 $ 118 $ 160 $ 287 Capital Appreciation Series............................................... $ 79 $ 110 $ 147 $ 261 Capital Opportunities Series.............................................. $ 79 $ 113 $ 152 $ 270 Emerging Growth Series.................................................... $ 79 $ 110 $ 148 $ 262 Equity Income Series...................................................... $ 81 $ 118 $ 160 $ 287 Global Asset Allocation Series............................................ $ 80 $ 114 $ 154 $ 274 Global Governments Series................................................. $ 80 $ 113 $ 153 $ 272 Global Growth Series...................................................... $ 81 $ 117 $ 159 $ 285 Global Total Return Series................................................ $ 80 $ 115 $ 155 $ 277 Government Securities Series.............................................. $ 77 $ 106 $ 140 $ 245 High Yield Series......................................................... $ 79 $ 112 $ 150 $ 266 International Growth Series............................................... $ 84 $ 126 $ 173 $ 315 International Growth and Income Series.................................... $ 82 $ 121 $ 166 $ 299 Managed Sectors Series.................................................... $ 79 $ 111 $ 149 $ 264 Massachusetts Investors Growth Stock Series............................... $ 81 $ 116 $ 157 $ 281 Massachusetts Investors Trust Series...................................... $ 77 $ 105 $ 139 $ 242 MFS/Foreign & Colonial Emerging Markets Equity Series..................... $ 86 $ 131 $ 182 $ 332 Money Market Series....................................................... $ 77 $ 104 $ 137 $ 239 New Discovery Series...................................................... $ 83 $ 125 $ 172 $ 311 Research Series........................................................... $ 79 $ 110 $ 147 $ 260 Research Growth and Income Series......................................... $ 80 $ 115 $ 156 $ 279 Research International Series............................................. $ 86 $ 132 $ 184 $ 336 Strategic Income Series................................................... $ 84 $ 125 $ 172 $ 312 Total Return Series....................................................... $ 78 $ 108 $ 144 $ 253 Utilities Series.......................................................... $ 79 $ 113 $ 152 $ 270
If you do NOT surrender your Contract, or if you annuitize at the end of the applicable time period, you would pay the following expenses on a $1,000 investment, assuming a 5% annual return:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------- ----------- ----------- ----------- Bond Series............................................................... $ 26 $ 79 $ 135 $ 287 Capital Appreciation Series............................................... $ 23 $ 71 $ 122 $ 261 Capital Opportunities Series.............................................. $ 24 $ 74 $ 126 $ 270 Emerging Growth Series.................................................... $ 23 $ 71 $ 122 $ 262 Equity Income Series...................................................... $ 26 $ 79 $ 135 $ 287 Global Asset Allocation Series............................................ $ 24 $ 75 $ 128 $ 274 Global Governments Series................................................. $ 24 $ 74 $ 127 $ 272 Global Growth Series...................................................... $ 25 $ 78 $ 134 $ 285 Global Total Return Series................................................ $ 25 $ 76 $ 130 $ 277 Government Securities Series.............................................. $ 22 $ 66 $ 114 $ 245 High Yield Series......................................................... $ 24 $ 72 $ 124 $ 266 International Growth Series............................................... $ 29 $ 87 $ 149 $ 315 International Growth and Income Series.................................... $ 27 $ 83 $ 141 $ 299 Managed Sectors Series.................................................... $ 23 $ 72 $ 123 $ 264 Massachusetts Investors Growth Stock Series............................... $ 25 $ 77 $ 132 $ 281 Massachusetts Investors Trust Series...................................... $ 21 $ 65 $ 112 $ 242 MFS/Foreign & Colonial Emerging Markets Equity Series..................... $ 30 $ 93 $ 158 $ 332 Money Market Series....................................................... $ 21 $ 65 $ 111 $ 239 New Discovery Series...................................................... $ 28 $ 86 $ 147 $ 311 Research Series........................................................... $ 23 $ 71 $ 121 $ 260 Research Growth and Income Series......................................... $ 25 $ 76 $ 131 $ 279 Research International Series............................................. $ 31 $ 94 $ 160 $ 336 Strategic Income Series................................................... $ 28 $ 87 $ 147 $ 312 Total Return Series....................................................... $ 22 $ 69 $ 118 $ 253 Utilities Series.......................................................... $ 24 $ 74 $ 126 $ 270
THE EXAMPLES SHOULD NOT BE CONSIDERED TO BE REPRESENTATIONS OF PAST OR FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN. 6 CONDENSED FINANCIAL INFORMATION Historical information about the value of the units we use to measure the variable portion of your Contract ("Variable Accumulation Units") is included in the back of this Prospectus as Appendix B. THE MFS REGATTA PLATINUM ANNUITY Sun Life Assurance Company of Canada (U.S.) (the "Company", "we" or "us") and Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") offer the MFS Regatta Platinum Annuity to groups and individuals for use in connection with their retirement plans. The Contracts are available on a group basis and, in certain states, may be available on an individual basis. We issue an Individual Contract directly to the individual owner of the Contract. We issue a Group Contract to the Owner covering all individuals participating under the Group Contract. Each individual receives a Certificate that evidences his or her participation under the Group Contract. In this Prospectus, unless we state otherwise, we refer to both the owners of Individual Contracts and participating individuals under Group Contracts as "Participants" and we address all those Participants as "you"; we use the term "Contracts" to include Individual Contracts, Group Contracts and Certificates issued under Group Contracts. For the purpose of determining benefits under both Individual Contracts and Group Contracts, we establish an Account for each Participant, which we will refer to as "your" Account or a "Participant Account." The Contract provides a number of important benefits for your retirement planning. It has an Accumulation Phase, during which you make payments under the Contract and allocate them to one or more Variable Account or Fixed Account options, and an Income Phase, during which we make payments based on the amount you have accumulated. The Contract provides tax deferral, so that you do not pay taxes on your earnings under the Contract until you withdraw them. It provides a death benefit if you die during the Accumulation Phase. Finally, if you so elect, during the Income Phase we will make payments to you or someone else for life or for another period that you choose. You choose these benefits on a variable or fixed basis or a combination of both. When you choose variable investment options or a Variable Annuity option, your benefits will be responsive to changes in the economic environment, including inflationary forces and changes in rates of return available from different types of investments. With these options, you assume all investment risk under the Contract. When you choose a Guarantee Period in our Fixed Account or a Fixed Annuity option, we assume the investment risk, except in the case of early withdrawals, where you bear the risk of unfavorable interest rate changes. You also bear the risk that the interest rates we will offer in the future and the rates we will use in determining your Fixed Annuity may not exceed our minimum guaranteed rate, which is 3% per year, compounded annually. The Contracts are designed for use in connection with retirement and deferred compensation plans, some of which qualify for favorable federal income tax treatment under Sections 401, 403, 408 or 408A of the Internal Revenue Code. The Contracts are also designed so that they may be used in connection with certain non-tax-qualified retirement plans, such as payroll savings plans and such other groups (trusteed or nontrusteed) as may be eligible under applicable law. We refer to Contracts used with plans that receive favorable tax treatment as "Qualified Contracts," and all others as "Non-Qualified Contracts." COMMUNICATING TO US ABOUT YOUR CONTRACT All materials sent to us, including Purchase Payments, must be sent to our Annuity Service Mailing Address set forth on the first page of this Prospectus. For all telephone communications, you must call (800) 752-7215 or (617) 348-9600. Unless this Prospectus states differently, we will consider all materials sent to us and all telephone communications to be received on the date we actually receive them at the Annuity Service Mailing Address. However, we will consider Purchase Payments, withdrawal requests and transfer 7 instructions to be received on the next Business Day if we receive them (1) on a day that is not a Business Day or (2) after 4:00 p.m., Eastern Time. When we specify that notice to us must be in writing, we reserve the right, in our sole discretion, to accept notice in another form. SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) We are a stock life insurance company incorporated under the laws of Delaware on January 12, 1970. We do business in 48 states, the District of Columbia, and Puerto Rico, and we have an insurance company subsidiary that does business in New York. Our Executive Office mailing address is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. We are an indirect wholly-owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life (Canada)"). Sun Life (Canada) is a mutual life insurance company incorporated pursuant to Act of Parliament of Canada in 1865 and currently transacts business in all of the Canadian provinces and territories, all U.S. states (except New York), the District of Columbia, Puerto Rico, the Virgin Islands, Great Britain, Ireland, Hong Kong, Bermuda and the Philippines. THE VARIABLE ACCOUNT We established the Variable Account as a separate account on July 13, 1989, pursuant to a resolution of our Board of Directors. Under Delaware insurance law and the Contract, the income, gains or losses of the Variable Account are credited to or charged against the assets of the Variable Account without regard to the other income, gains, or losses of the Company. These assets are held in relation to the Contracts described in this Prospectus and other variable annuity contracts that provide benefits that vary in accordance with the investment performance of the Variable Account. Although the assets maintained in the Variable Account will not be charged with any liabilities arising out of any other business we conduct, all obligations arising under the Contracts, including the promise to make annuity payments, are general corporate obligations of the Company. The assets of the Variable Account are divided into Sub-Accounts. Each Sub-Account invests exclusively in shares of a specific Series of the MFS/Sun Life Series Trust (the "Series Fund"). All amounts allocated to the Variable Account will be used to purchase Series Fund shares as designated by you at their net asset value. Any and all distributions made by the Series Fund with respect to the shares held by the Variable Account will be reinvested to purchase additional shares at their net asset value. Deductions from the Variable Account for cash withdrawals, annuity payments, death benefits, Account Fees, contract charges against the assets of the Variable Account for the assumption of mortality and expense risks, administrative expenses and any applicable taxes will, in effect, be made by redeeming the number of Series Fund shares at their net asset value equal in total value to the amount to be deducted. The Variable Account will be fully invested in Series Fund shares at all times. VARIABLE ACCOUNT OPTIONS: THE MFS/SUN LIFE SERIES TRUST The MFS/Sun Life Series Trust (the "Series Fund") is an open-end management investment company registered under the Investment Company Act of 1940. Our affiliate, Massachusetts Financial Services Company ("MFS"), serves as the investment adviser to the Series Fund. The Series Fund is composed of 26 independent portfolios of securities, each of which has separate investment objectives and policies. Shares of the Series Fund are issued in 26 Series, each corresponding to one of the portfolios. The Contracts provide for investment by the Sub-Accounts in shares of the 25 Series of the Series Fund described below. Additional portfolios may be added to the Series Fund which may or may not be available for investment by the Variable Account. BOND SERIES will primarily seek as high a level of current income as is believed to be consistent with prudent investment risk; its secondary objective is to seek to protect shareholders' capital. 8 CAPITAL APPRECIATION SERIES will seek to maximize capital appreciation by investing in securities of all types, with major emphasis on common stocks. CAPITAL OPPORTUNITIES SERIES will seek capital appreciation. EMERGING GROWTH SERIES will seek long-term growth of capital. EQUITY INCOME SERIES will primarily seek reasonable income by investing mainly in income producing securities; its secondary objective is to seek capital appreciation. GLOBAL ASSET ALLOCATION SERIES (FORMERLY, THE WORLD ASSET ALLOCATION SERIES) will seek total return over the long term through investments in equity and fixed income securities and will also seek to have low volatility of share price (I.E., net asset value per share) and reduced risk (compared to an aggressive equity/fixed income portfolio). GLOBAL GOVERNMENTS SERIES (FORMERLY, THE WORLD GLOBAL GOVERNMENTS SERIES) will seek to provide moderate current income, preservation of capital and growth of capital by investing in debt obligations that are issued or guaranteed as to principal and interest by either (i) the U.S. Government, its agencies, authorities, or instrumentalities, or (ii) the governments of foreign countries (to the extent that the Series' adviser believes that the higher yields available from foreign government securities are sufficient to justify the risks of investing in these securities). GLOBAL GROWTH SERIES (FORMERLY, THE WORLD GROWTH SERIES) will seek capital appreciation by investing in securities of companies worldwide growing at rates expected to be well above the growth rate of the overall U.S. economy. GLOBAL TOTAL RETURN SERIES (FORMERLY, THE WORLD TOTAL RETURN SERIES) will seek total return by investing in securities which will provide above average current income (compared to a portfolio invested entirely in equity securities) and opportunities for long-term growth of capital and income. GOVERNMENT SECURITIES SERIES will seek current income and preservation of capital by investing in U.S. Government and U.S. Government-related securities. HIGH YIELD SERIES will seek high current income and capital appreciation by investing primarily in certain lower rated or unrated securities (possibly with equity features) of U.S. and foreign issuers (also known as "junk bonds"). INTERNATIONAL GROWTH SERIES will seek capital appreciation. INTERNATIONAL GROWTH AND INCOME SERIES will seek capital appreciation and current income. MANAGED SECTORS SERIES will seek capital appreciation by varying the weighting of its portfolio among 13 industry sectors. MASSACHUSETTS INVESTORS GROWTH STOCK SERIES will seek to provide long-term growth of capital and future income rather than current income. MASSACHUSETTS INVESTORS TRUST SERIES (FORMERLY, THE CONSERVATIVE GROWTH SERIES) will seek long-term growth of capital and future income while providing more current dividend income than is normally obtainable from a portfolio of only growth stocks. MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES will seek capital appreciation. MONEY MARKET SERIES will seek maximum current income to the extent consistent with stability of principal by investing exclusively in money market instruments maturing in less than 13 months. NEW DISCOVERY SERIES will seek capital appreciation. RESEARCH SERIES will seek to provide long-term growth of capital and future income. 9 RESEARCH GROWTH AND INCOME SERIES will seek to provide long-term growth of capital, current income and growth of income. RESEARCH INTERNATIONAL SERIES will seek capital appreciation. STRATEGIC INCOME SERIES will seek to provide high current income by investing in fixed income securities and will seek to take advantage of opportunities to realize significant capital appreciation while maintaining a high level of current income. TOTAL RETURN SERIES will seek primarily to obtain above-average income (compared to a portfolio entirely invested in equity securities) consistent with prudent employment of capital; its secondary objective is to take advantage of opportunities for growth of capital and income since many securities offering a better than average yield may also possess growth potential. UTILITIES SERIES will seek capital growth and current income (income above that available from a portfolio invested entirely in equity securities) by investing, under normal market conditions, at least 65% of its assets in equity and debt securities of both domestic and foreign companies in the utilities industry. The Series Fund pays fees to MFS for its services pursuant to investment advisory agreements. MFS also serves as investment adviser to each of the funds in the MFS Family of Funds, and to certain other investment companies established by MFS and/or us. MFS Institutional Advisers, Inc., a wholly-owned subsidiary of MFS, provides investment advice to substantial private clients. MFS and its predecessor organizations have a history of money management dating from 1924. MFS operates as an autonomous organization and the obligation of performance with respect to the investment advisory and underwriting agreements (including supervision of the sub-advisers noted below) is solely that of MFS. We undertake no obligation in this regard. MFS has retained Foreign & Colonial Management Limited ("FCM") and its subsidiary, Foreign & Colonial Emerging Markets Limited ("FCEM"), as sub-advisers to manage the MFS/Foreign & Colonial Emerging Markets Series and to manage the assets of the Global Growth Series. MFS may serve as the investment adviser to other mutual funds which have similar investment goals and principal investment policies and risks as the Series, and which may be managed by a Series' portfolio managers(s). While a Series may have many similarities to these other funds, its investment performance will differ from their investment performance. This is due to a number of differences between a Series and these similar products, including differences in sales charges, expense ratios and cash flows. The Series Fund also offers its shares to other separate accounts established by the Company and our New York subsidiary in connection with variable annuity and variable life insurance contracts. Although we do not anticipate any disadvantages to this arrangement, there is a possibility that a material conflict may arise between the interests of the Variable Account and one or more of the other separate accounts investing in the Series Fund. A conflict may occur due to differences in tax laws affecting the operations of variable life and variable annuity separate accounts, or some other reason. We and the Series Fund's Board of Trustees will monitor events for such conflicts, and, in the event of a conflict, we will take steps necessary to remedy the conflict, including withdrawal of the Variable Account from participation in the Series which is involved in the conflict or substitution of shares of other Series or other mutual funds. MORE COMPREHENSIVE INFORMATION ABOUT THE SERIES FUND, AND THE MANAGEMENT, INVESTMENT OBJECTIVES, POLICIES, RESTRICTIONS, EXPENSES AND POTENTIAL RISKS OF EACH SERIES MAY BE FOUND IN THE ACCOMPANYING CURRENT PROSPECTUS OF THE SERIES FUND. YOU SHOULD READ THE SERIES FUND PROSPECTUS CAREFULLY BEFORE INVESTING. THE SERIES FUND'S STATEMENT OF ADDITIONAL INFORMATION IS AVAILABLE BY CALLING 1-800-752-7215. 10 THE FIXED ACCOUNT The Fixed Account is made up of all the general assets of the Company other than those allocated to any separate account. Amounts you allocate to Guarantee Periods become part of the Fixed Account, and are available to fund the claims of all classes of our customers, including claims for benefits under the Contracts. We will invest the assets of the Fixed Account in those assets we choose that are allowed by applicable state insurance laws. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks, real estate mortgages, real estate and certain other investments. We intend to invest primarily in investment-grade fixed income securities (i.e. rated by a nationally recognized rating service within the four highest grades) or instruments we believe are of comparable quality. We are not obligated to invest amounts allocated to the Fixed Account according to any particular strategy, except as may be required by applicable state insurance laws. You will not have a direct or indirect interest in the Fixed Account investments. THE FIXED ACCOUNT OPTIONS: THE GUARANTEE PERIODS You may elect one or more Guarantee Period(s) from those we make available from time to time. We publish Guaranteed Interest Rates for each Guarantee Period offered. We may change the Guaranteed Interest Rates we offer from time to time, but no Guaranteed Interest Rate will ever be less than 3% per year, compounded annually. Also, once we have accepted your allocation to a particular Guarantee Period, we promise that the Guaranteed Interest Rate applicable to that allocation will not change for the duration of the Guarantee Period. We determine Guaranteed Interest Rates in our discretion. We do not have a specific formula for establishing the rates for different Guarantee Periods. Our determination will be influenced by the interest rates on fixed income investments in which we may invest with amounts allocated to the Guarantee Periods. We will also consider other factors in determining these rates, including regulatory and tax requirements, sales commissions and administrative expenses borne by us, general economic trends and competitive factors. We cannot predict the level of future interest rates. We may from time to time in our discretion offer interest rate specials for new Purchase Payments that are higher than the rates we are then offering for renewals on transfers. Early withdrawals from your allocation to a Guarantee Period, including cash withdrawals, transfers, and commencement of an annuity, may be subject to a Market Value Adjustment, which could decrease or increase the value of your Account. See "Cash Withdrawals, Withdrawal Charge, and Market Value Adjustment." THE ACCUMULATION PHASE During the Accumulation Phase of your Contract, you make payments into your Account, and your earnings accumulate on a tax-deferred basis. The Accumulation Phase begins with our acceptance of your first Purchase Payment and ends the Business Day before your Annuity Commencement Date. The Accumulation Phase will end sooner if you surrender your Contract or die before the Annuity Commencement Date. ISSUING YOUR CONTRACT When you purchase a Contract, a completed Application and the initial Purchase Payment are sent to us for acceptance. When we accept an Individual Contract, we issue the Contract to you. When we accept a Group Contract, we issue the Contract to the Owner; we issue a Certificate to you as a Participant when we accept your Application. We will credit your initial Purchase Payment to your Account within two business days of receiving your completed Application. If your Application is not complete, we will notify you. If we do not 11 have the necessary information to complete the Application within 5 business days, we will send your money back to you or ask your permission to retain your Purchase Payment until the Application is made complete. Then we will apply the Purchase Payment within 2 business days of when the Application is complete. AMOUNT AND FREQUENCY OF PURCHASE PAYMENTS The amount of Purchase Payments may vary; however, we will not accept an initial Purchase Payment of less than $10,000, and each additional Purchase Payment must be at least $1,000, unless we waive these limits. In addition, we will not accept a Purchase Payment if your Account Value is over $1 million, or if the Purchase Payment would cause your Account Value to exceed $1 million, unless we have approved the Payment in advance. Within these limits, you may make Purchase Payments at any time during the Accumulation Phase. ALLOCATION OF NET PURCHASE PAYMENTS You may allocate your Purchase Payments among the different Sub-Accounts and Guarantee Periods we offer. At any time, you may have amounts allocated among up to 18 of the available options. In your Application, you may specify the percentage of each Purchase Payment to be allocated to each Sub-Account or Guarantee Period. These percentages are called your allocation factors. You may change the allocation factors for future Payments by sending us written notice of the change, on our required form. We will use your new allocation factors for the first Purchase Payment we receive with or after we have received notice of the change, and for all future Purchase Payments, until we receive another change notice. Although it is currently not our practice, we may deduct applicable premium or similar taxes from your Purchase Payments. See "Contract Charges -- Premium Taxes." In that case, we will credit your Net Purchase Payment, which is the Purchase Payment minus the amount of those taxes. YOUR ACCOUNT When we accept your first Purchase Payment, we establish an Account for you, which we maintain throughout the Accumulation Phase of your Contract. YOUR ACCOUNT VALUE Your Account Value is the sum of the value of the two components of your Contract: the Variable Account portion of your Contract ("Variable Account Value") and the Fixed Account portion of your Contract ("Fixed Account Value"). These two components are calculated separately, as described below. VARIABLE ACCOUNT VALUE VARIABLE ACCUMULATION UNITS In order to calculate your Variable Account Value, we use a measure called a Variable Accumulation Unit for each Sub-Account. Your Variable Account Value is the sum of your Account Value in each Sub-Account, which is the number of your Variable Accumulation Units for that Sub-Account times the value of each Unit. VARIABLE ACCUMULATION UNIT VALUE The value of each Variable Accumulation Unit in a Sub-Account reflects the net investment performance of that Sub-Account. We determine that value once on each day that the New York Stock Exchange is open for trading (a "Business Day"), at the close of trading, which is currently 4:00 p.m., 12 Eastern Time. The period that begins at the time Variable Accumulation Units are valued on a Business Day and ends at that time on the next Business Day is called a Valuation Period. On days other than Business Days, the value of a Variable Accumulation Unit does not change. To measure these values, we use a factor -- which we call the Net Investment Factor-- which represents the net return on the Sub-Account's assets. At the end of any Valuation Period, the value of a Variable Accumulation Unit for a Sub-Account is equal to the value of that Sub-Account's Variable Accumulation Units at the end of the previous Valuation Period, multiplied by the Net Investment Factor. We calculate the Net Investment Factor by dividing (1) the net asset value of a Series share held in the Sub-Account at the end of that Valuation Period, plus the per share amount of any dividend or capital gains distribution made by that Series during the Valuation Period, by (2) the net asset value per share of the Series share at the end of the previous Valuation Period; we then deduct a factor representing the mortality and expense risk charge and administrative expense charge. See "Contract Charges." For a hypothetical example of how we calculate the value of a Variable Accumulation Unit, see the Statement of Additional Information. CREDITING AND CANCELING VARIABLE ACCUMULATION UNITS When we receive an allocation to a Sub-Account, either from a Net Purchase Payment or a transfer of Account Value, we credit that amount to your Account in Variable Accumulation Units. Similarly, we cancel Variable Accumulation Units when you transfer or withdraw amounts from a Sub-Account, or when we deduct certain charges under the Contract. We determine the number of Units credited or canceled by dividing the dollar amount by the Variable Accumulation Unit value for that Sub-Account at the end of the Valuation Period during which the transaction or charge is effective. FIXED ACCOUNT VALUE Your Fixed Account value is the sum of all amounts allocated to Guarantee Periods, either from Net Purchase Payments, transfers or renewals, plus interest credited on those amounts, and minus withdrawals, transfers out of Guarantee Periods, and any deductions for charges under the Contract taken from your Fixed Account Value. CREDITING INTEREST We credit interest on amounts allocated to a Guarantee Period at the applicable Guaranteed Interest Rate for the duration of the Guarantee Period. The Guarantee Period begins the day we apply your allocation and ends when the number of calendar years (or months if the Guarantee Period is less than one year) in the Guarantee Period (measured from the end of the calendar month in which the amount was allocated to the Guarantee Period) have elapsed. The last day of the Guarantee Period is its Expiration Date. During the Guarantee Period, we credit interest daily at a rate that yields the Guaranteed Interest Rate on an annual effective basis. GUARANTEE AMOUNTS Each separate allocation you make to a Guarantee Period, together with interest credited thereon, is called a Guarantee Amount. Each Guarantee Amount is treated separately for purposes of determining the Market Value Adjustment. RENEWALS We will notify you in writing between 45 and 75 days before the Expiration Date for any Guarantee Amount. A new Guarantee Period of the same duration will begin automatically for that Guarantee Amount on the first day following the Expiration Date, unless before the Expiration Date we receive (1) written notice from you electing a different Guarantee Period from among those we then offer or (2) instructions to transfer all or some of the Guarantee Amount to one or more Sub- 13 Accounts, in accordance with the transfer privilege provisions of the Contract. Each new allocation to a Guarantee Period must be at least $1,000. EARLY WITHDRAWALS If you withdraw, transfer, or annuitize an allocation to a Guarantee Period before the Expiration Date, we will apply a Market Value Adjustment to the transaction. This could result in an increase or decrease of your Account Value, depending on interest rates at the time. You bear the risk that you will receive less than your principal if the Market Value Adjustment applies. TRANSFER PRIVILEGE PERMITTED TRANSFERS During the Accumulation Phase, you may transfer all or part of your Account Value to one or more Sub-Accounts or Guarantee Periods then available, subject to the following restrictions: - you may not make more than 12 transfers in any Account Year; - the amount transferred from a Sub-Account must be at least $1,000 unless you are transferring your entire balance in that Sub-Account; - your Account Value remaining in a Sub-Account must be at least $1,000; - the amount transferred from a Guarantee Period must be the entire Guarantee Amount, except for transfers of interest credited during the current Account Year; - at least 30 days must elapse between transfers to or from Guarantee Periods; - transfers to or from Sub-Accounts are subject to terms and conditions that may be imposed by the Series Fund; and - we impose additional restrictions on market timers, which are further described below. These restrictions do not apply to transfers made under an approved dollar cost averaging program. There is usually no charge imposed on transfers; however, we reserve the right to impose a transfer charge of $15 for each transfer. Transfers out of a Guarantee Period more than 30 days before expiration of the period will be subject to the Market Value Adjustment described below. Under current law there is no tax liability for transfers. REQUESTS FOR TRANSFERS You may request transfers in writing or by telephone. The telephone transfer privilege is available automatically, and does not require your written election. We will require personal identifying information to process a request for transfer made by telephone. We will not be liable for following instructions communicated by telephone that we reasonably believe are genuine. If we receive your transfer request before 4:00 p.m. Eastern Time on a Business Day, it will be effective that day. Otherwise, it will be effective the next Business Day. MARKET TIMERS The Contracts are not designed for professional market timing organizations or other entities using programmed and frequent transfers. If you wish to employ such strategies, you should not purchase a Contract. Accordingly, transfers may be subject to restrictions if exercised by a market timing firm or any other third party authorized to initiate transfer transactions on behalf of multiple Participants. In imposing such restrictions, we may, among other things, not accept (1) the transfer instructions of any agent acting under a power of attorney on behalf of more than one Participant, or (2) the transfer instructions of individual Participants who have executed preauthorized transfer forms that are submitted at the same time by market timing firms or other third parties on behalf of more than one Participant. We will not impose these restrictions unless our actions are reasonably intended to prevent 14 the use of such transfers in a manner that will disadvantage or potentially impair the Contract rights of other Participants. In addition, the Series Fund has reserved the right to temporarily or permanently refuse exchange requests from the Variable Account if, in MFS' judgment, a Series would be unable to invest effectively in accordance with its investment objective and policies, or would otherwise potentially be adversely affected. In particular, a pattern of exchanges that coincide with a market timing strategy may be disruptive to a Series and therefore may be refused. Accordingly, the Variable Account may not be in a position to effectuate transfers and may refuse transfer requests without prior notice. We also reserve the right, for similar reasons, to refuse or delay exchange requests involving transfers to or from the Fixed Account. WAIVERS; REDUCED CHARGES; CREDITS; BONUS GUARANTEED INTEREST RATES We may reduce or waive the withdrawal charge or Account Fee, credit additional amounts, or grant bonus Guaranteed Interest Rates in certain situations. These situations may include sales of Contracts (1) where selling and/or maintenance costs associated with the Contracts are reduced, such as the sale of several Contracts to the same Participant, sales of large Contracts, and certain group sales, and (2) to officers, directors and employees of the Company or its affiliates, registered representatives and employees of broker-dealers with a current selling agreement with the Company and affiliates of such representatives and broker-dealers, employees of affiliated asset management firms, and persons who have retired from such positions ("Eligible Employees") and immediate family members of Eligible Employees. Eligible Employees and their immediate family members may also purchase a Contract without regard to minimum Purchase Payment requirements. For other situations in which withdrawal charges may be waived, see "Withdrawals, Withdrawal Charge and Market Value Adjustment." OPTIONAL PROGRAMS DOLLAR COST AVERAGING Dollar cost averaging allows you to invest gradually, over time, in up to 12 Sub-Accounts. You may select a dollar cost averaging program at no extra charge by allocating a minimum of $1,000 to a designated Sub-Account or to a Guarantee Period we make available in connection with the program. Amounts allocated to the Fixed Account under the program will earn interest at a rate declared by the Company for the Guarantee Period you select. Each month or quarter, as you select, we will transfer the same amount automatically to one or more Sub-Accounts that you choose, up to a maximum of 12 Sub-Accounts. The program continues until your Account Value allocated to the program is depleted or you elect to stop the program. The final amount transferred from the Fixed Account will include all interest earned. Only Purchase Payments may be allocated to a dollar cost averaging program. Previously applied amounts may not be transferred to a dollar cost averaging program. No Market Value Adjustment (either positive or negative) will apply to amounts automatically transferred from the Fixed Account under the dollar cost averaging program, except that if you discontinue or alter the program prior to completion, amounts remaining in the Fixed Account will be transferred to the Money Market Series Sub-Account, unless you instruct us otherwise, and the Market Value Adjustment will be applied. Any new allocation of a Purchase Payment to the program will be treated as commencing a new dollar cost averaging program and is subject to the $1,000 minimum. The main objective of a dollar cost averaging program is to minimize the impact of short-term price fluctuations on Account Value. Since you transfer the same dollar amount to the variable investment options at set intervals, dollar cost averaging allows you to purchase more Variable Accumulation Units (and, indirectly, more Series Fund shares) when prices are low and fewer Variable Accumulation Units (and, indirectly, fewer Series Fund shares) when prices are high. Therefore, you may achieve a lower average cost per Variable Accumulation Unit over the long term. A dollar cost averaging program allows you to take advantage of market fluctuations. However, it is important to understand that a dollar cost averaging program does not assure a profit or protect against loss in a declining market. 15 ASSET ALLOCATION One or more asset allocation programs may be available in connection with the Contracts, at no extra charge. Asset allocation is the process of investing in different asset classes -- such as equity funds, fixed income funds, and money market funds -- depending on your personal investment goals, tolerance for risk, and investment time horizon. By spreading your money among a variety of asset classes, you may be able to reduce the risk and volatility of investing, although there are no guarantees, and asset allocation does not insure a profit or protect against loss in declining market. Currently, you may select one of three asset allocation models, each of which represents a combination of Sub-Accounts with a different level of risk. The available models are the conservative asset allocation model, the moderate asset allocation model, and the aggressive asset allocation model. Each model allocates a different percentage of Account Value to Sub-Accounts investing in the various asset classes, with the conservative model allocating the lowest percentage to Sub-Accounts investing in the equity asset class and the aggressive model allocating the highest percentage to the stock asset class. These models, as well as the terms and conditions of the asset allocation program, are fully described in a separate brochure. Additional programs may be available in the future. If you elect an asset allocation program, we will automatically allocate your Purchase Payments among the Sub-Accounts represented in the model you choose. By your election of an asset allocation program, you thereby authorize us to automatically reallocate your Account Value on a quarterly basis to reflect the current composition of the model you have selected, without further instruction, until we receive notification that you wish to terminate the program, or choose a different model. SYSTEMATIC WITHDRAWAL AND INTEREST OUT PROGRAMS If you have an Account Value of $10,000 or more, you may select our Systematic Withdrawal or Interest Out Program. Under the Systematic Withdrawal Program, you determine the amount and frequency of regular withdrawals you would like to receive from your Fixed and/or Variable Account Value and we will effect them automatically. Under the Interest Out Program, we will automatically pay to you or reinvest interest credited for all Guarantee Periods you have chosen. You may change or stop either program at any time, by written notice to us. Withdrawals may be included in income and subject to a 10% federal tax penalty, as well as all charges and any Market Value Adjustment applicable upon withdrawal. You should consult your adviser before choosing these options. PORTFOLIO REBALANCING PROGRAM Under the Portfolio Rebalancing Program, we transfer funds among the Sub-Accounts to maintain the percentage allocation you have selected among these Sub-Accounts. At your election, we will make these transfers on a quarterly, semi-annual or annual basis. Portfolio Rebalancing does not permit transfers to or from any Guarantee Period. SECURED FUTURE PROGRAM Under this program, we divide your Purchase Payment between the Fixed Account and the Variable Account. For the Fixed Account portion, you choose a Guarantee Period from among those we offer, and we allocate to that Guarantee Period the portion of your Purchase Payment necessary so that at the end of the Guarantee Period, your Fixed Account allocation, including interest, will equal the entire amount of your original Purchase Payment. The remainder of the original Purchase Payment will be invested in Sub-Accounts of your choice. At the end of the Guarantee Period, you will be guaranteed the amount of your Purchase Payment (assuming no withdrawals), plus you will have the benefit, if any, of the investment performance of the Sub-Accounts you have chosen. 16 WITHDRAWALS, WITHDRAWAL CHARGE AND MARKET VALUE ADJUSTMENT CASH WITHDRAWALS REQUESTING A WITHDRAWAL At any time during the Accumulation Phase you may withdraw in cash all or any portion of your Account Value. To make a withdrawal, you must send us a written request at our Annuity Service Mailing Address. Your request must specify whether you want to withdraw the entire amount of your Account or, if less, the amount you wish to withdraw. All withdrawals may be subject to a withdrawal charge (see "Withdrawal Charge" below) and withdrawals from your Fixed Account Value also may be subject to a Market Value Adjustment (see "Market Value Adjustment" below). Upon request we will notify you of the amount we would pay in the event of a full or partial withdrawal. Withdrawals also may have adverse federal income tax consequences, including a 10% penalty tax. See "Federal Tax Status." You should carefully consider these tax consequences before requesting a cash withdrawal. FULL WITHDRAWALS If you request a full withdrawal, we calculate the amount we will pay you as follows. We start with the total value of your Account at the end of the Valuation Period during which we receive your withdrawal request; we deduct the Account Fee for the Account Year in which the withdrawal is made; we add or subtract the amount of any Market Value Adjustment applicable to your Fixed Account Value; and finally, we deduct any applicable withdrawal charge. A full withdrawal results in the surrender of your Contract, and cancellation of all rights and privileges under your Contract. PARTIAL WITHDRAWALS If you request a partial withdrawal we will pay you the actual amount specified in your request and then reduce the value of your Account by deducting the amount paid, adding or deducting any Market Value Adjustment applicable to amounts withdrawn from the Fixed Account, and deducting any applicable withdrawal charge. You may specify the amount you want withdrawn from each Sub-Account and/or Guarantee Amount to which your Account is allocated. If you do not so specify, we will deduct the total amount you request pro rata, based on your allocations at the end of the Valuation Period during which we receive your request. If you request a partial withdrawal that would result in your Account Value being reduced to an amount less than the Account Fee for the Account Year in which you make the withdrawal, we will treat it as a request for a full withdrawal. TIME OF PAYMENT We will pay you the applicable amount of any full or partial withdrawal within 7 days after we receive your withdrawal request, except in cases where we are permitted to defer payment under the Investment Company Act of 1940 and applicable state insurance law. Currently, we may defer payment of amounts you withdraw from the Variable Account only for following periods: - when the New York Stock Exchange is closed except weekends and holidays or when trading on the New York Stock Exchange is restricted; - when it is not reasonably practical to dispose of securities held by the Series Fund or to determine the value of the net assets of the Series Fund, because an emergency exists; or - when an SEC order permits us to defer payment for the protection of Participants. We also may defer payment of amounts you withdraw from the Fixed Account for up to 6 months from the date we receive your withdrawal request. We do not pay interest on the amount of any payments we defer. 17 WITHDRAWAL RESTRICTIONS FOR QUALIFIED PLANS If yours is a Qualified Contract, you should carefully check the terms of the plan for limitations and restrictions on cash withdrawals. Special restrictions apply to withdrawals from Contracts used for Section 403(b) annuities. See "Federal Tax Status -- Tax-Sheltered Annuities." WITHDRAWAL CHARGE We do not deduct any sales charge from your Purchase Payments when they are made. However, we may impose a withdrawal charge (known as a "contingent deferred sales charge") on certain amounts you withdraw. We impose this charge to defray some of our expenses related to the sale of the Contracts, such as commissions we pay to agents, the cost of sales literature, and other promotional costs and transaction expenses. FREE WITHDRAWAL AMOUNT In each Account Year you may withdraw a portion of your Account Value -- which we call the "free withdrawal amount" -- before incurring the withdrawal charge. For any year, the free withdrawal amount is equal to (1) 10% of the amount of all Purchase Payments you have made during the last 7 Account Years, including the current Account Year (the "Annual Withdrawal Allowance"), plus (2) the amount of all Purchase Payments made before the last 7 Account Years that you have not previously withdrawn. Any portion of the Annual Withdrawal Allowance that you do not use in an Account Year is cumulative; that is, it is carried forward and available for use in future years. For convenience, we refer to Purchase Payments made during the last 7 Account Years (including the current Account Year) as "New Payments," and all Purchase Payments made before the last 7 Account Years as "Old Payments." For example, assume you wish to make a withdrawal from your Contract in Account Year 10. You made an initial Purchase Payment of $10,000 in Account Year 1, you made one additional Purchase Payment of $8,000 in Account Year 8, and you have made no previous withdrawals. Your Account Value in Account Year 10 is $35,000. The free withdrawal amount for Account Year 10 is $19,400, calculated as follows: - $800, which is the Annual Withdrawal Allowance for Account Year 10 (10% of the $8,000 Purchase Payment made in Account Year 8, the only New Payment); plus - $8,600, which is the total of the unused Annual Withdrawal Allowances of $1,000 for each of Account Years 1 through 7 and $800 for each of Account Years 8 and 9 that are carried forward and available for use in Account Year 10; plus - $10,000, which is the amount of all Old Payments that you have not previously withdrawn. WITHDRAWAL CHARGE ON PURCHASE PAYMENTS If you withdraw more than the free withdrawal amount in any Account Year, we consider the excess amount to be withdrawn first from New Payments that you have not previously withdrawn. We impose the withdrawal charge on the amount of these New Payments. Thus, the maximum amount on which we will impose the withdrawal charge in any year will never be more than the total of all New Payments that you have not previously withdrawn. The amount of your withdrawal, if any, that exceeds the total of the free withdrawal amount plus the aggregate amount of all New Payments not previously withdrawn, is not subject to the withdrawal charge. ORDER OF WITHDRAWAL New Payments are withdrawn on a first-in first-out basis until all New Payments have been withdrawn. For example, assume the same facts as in the example above. In Account Year 10 you wish to withdraw $25,000. We attribute the withdrawal first to the free withdrawal amount of $19,400, which 18 is not subject to the withdrawal charge. The remaining $5,600 is withdrawn from the Purchase Payment made in Account Year 8 (the only New Payment) and is subject to the withdrawal charge. The $2,400 balance of the Account Year 8 Purchase Payment will remain in your Account. If you make a subsequent $5,000 withdrawal in Account Year 10, $2,400 of that amount will be withdrawn from the remainder of the Account Year 8 Purchase Payment and will be subject to the withdrawal charge. The other $2,600 of your withdrawal (which exceeds the amount of all New Payments not previously withdrawn) will not be subject to the withdrawal charge. CALCULATION OF WITHDRAWAL CHARGE We calculate the amount of the withdrawal charge by multiplying the Purchase Payments you withdraw by a percentage. The percentage varies according to the number of Account Years the Purchase Payment has been held in your Account, including the year in which you made the Payment, but not the year in which you withdraw it. The applicable percentages are as follows:
NUMBER OF ACCOUNT YEARS PERCENTAGE - -------------- --------------- 0-1 6% 2-3 5% 4-5 4% 6 3% 7 or more 0%
For example, again using the same facts as in the example above, the percentage applicable to the withdrawals in Account Year 10 of Purchase Payments made in Account Year 8 would be 5%, because the number of Account Years the Purchase Payments have been held in your Account would be two. The withdrawal charge will never be greater than 6% of the aggregate amount of Purchase Payments you make under the Contract. For a Group Contract, we may modify the withdrawal charges and limits, upon notice to the Owner of the Group Contract. However, any modification will only apply to Accounts established after the date of the modification. For additional examples of how we calculate withdrawal charges, please see Appendix C. TYPES OF WITHDRAWALS NOT SUBJECT TO WITHDRAWAL CHARGE We do not impose a withdrawal charge on withdrawals from the Accounts of (a) our employees, (b) employees of our affiliates, or (c) licensed insurance agents who sell the Contracts. We also may waive withdrawal charges with respect to Purchase Payments derived from the surrender of other annuity contracts we issue. If approved in your state, we will waive the withdrawal charge for a full withdrawal if (a) at least one year has passed since we issued your Contract and (b) you are confined to an eligible nursing home and have been confined there for at least the preceding 180 days, or any shorter period required by your state. An "eligible nursing home" means a licensed hospital or licensed skilled or intermediate care nursing facility at which medical treatment is available on a daily basis and daily medical records are kept for each patient. You must provide us evidence of confinement in the form we determine. For each Qualified Contract, the free withdrawal amount in any Account Year will be the greater of the free withdrawal amount described above and any amounts required to be withdrawn to comply with the minimum distribution requirement of the Internal Revenue Code. This applies only to the portion of the required minimum distribution attributable to that Qualified Contract. We do not impose the withdrawal charge on amounts you apply to provide an annuity, amounts we pay as a death benefit, or amounts you transfer among the Sub-Accounts, between the Sub-Accounts and the Fixed Account, or within the Fixed Account. 19 MARKET VALUE ADJUSTMENT We will apply a market value adjustment if you withdraw or transfer amounts from your Fixed Account Value more than 30 days before the end of the applicable Guarantee Period. For this purpose, using Fixed Account Value to provide an annuity is considered a withdrawal, and the Market Value Adjustment will apply. However, we will not apply the Market Value Adjustment to automatic transfers to a Sub-Account from a Guarantee Period as part of our dollar cost averaging program. We apply the Market Value Adjustment separately to each Guarantee Amount in the Fixed Account, that is to each separate allocation you have made to a Guarantee Period together with interest credited on that allocation. However, we do not apply the adjustment to the amount of interest credited during your current Account Year. Any withdrawal from a Guarantee Amount is attributed first to such interest. A Market Value Adjustment may decrease, increase or have no effect on your Account Value. This will depend on changes in interest rates since you made your allocation to the Guarantee Period and the length of time remaining in the Guarantee Period. In general, if the Guaranteed Interest Rate we currently declare for Guarantee Periods equal to the balance of your Guarantee Period (or your entire Guarantee Period for Guarantee Periods of less than one year) is higher than your Guaranteed Interest Rate, the Market Value Adjustment is likely to decrease your Account Value. If our current Guaranteed Interest Rate is lower, the Market Value Adjustment is likely to increase your Account Value. We determine the amount of the Market Value Adjustment by multiplying the amount that is subject to the adjustment by the following formula: N/12 1 + I ( -------- ) -1 1 + J + b
where: I is the Guaranteed Interest Rate applicable to the Guarantee Amount from which you withdraw, transfer or annuitize; J is the Guaranteed Interest Rate we declare at the time of your withdrawal, transfer or annuitization for Guarantee Periods equal to the length of time remaining in the Guarantee Period applicable to your Guarantee Amount, rounded to the next higher number of complete years, for Guarantee Periods of one year or more. For any Guarantee Periods of less than one year, J is the Guaranteed Interest Rate we declare at the time of your withdrawal, transfer or annuitization for a Guarantee Period of the same length as your Guarantee Period. If, at that time, we do not offer the applicable Guarantee Period we will use an interest rate determined by straight-line interpolation of the Guaranteed Interest Rates for the Guarantee Periods we do offer; N is the number of complete months remaining in your Guarantee Period; and b is a factor that currently is 0% but that in the future we may increase to up to 0.25%. Any increase would be applicable only to Participants who purchase their Contracts after the date of that increase. We will apply the Market Value Adjustment to the amount being withdrawn after deduction of any Account Fee, if applicable, but before we impose any withdrawal charge on the amount withdrawn. For examples of how we calculate the Market Value Adjustment, see Appendix C. No Market Value Adjustment will apply to Contracts issued in the states of Maryland, Texas and Washington, or to one year Guarantee Periods under Contracts issued in Oregon. 20 CONTRACT CHARGES ACCOUNT FEE Each year during the Accumulation Phase of your Contract we will deduct from your Account an Account Fee to help cover the administrative expenses we incur related to the issuance of Contracts and the maintenance of Accounts. We deduct the Account Fee on each Account Anniversary, which is the anniversary of the first day of the month after we issue your Contract. In Account Years 1 through 5, the Account Fee is equal to the lesser of (a) $35 and (b) 2% of your Account Value. After Account Year 5, we may change the Account Fee each year, but the Account Fee will never exceed the lesser of (a) $50 and (b) 2% of your Account Value. We deduct the Account Fee pro rata from each Sub-Account and each Guarantee Amount, based on the allocation of your Account Value on your Account Anniversary. We will not charge you the Account Fee if: (1) your Account has been allocated only to the Fixed Account during the applicable Account Year; or (2) your Account Value is more than $75,000 on your Account Anniversary. If you make a full withdrawal of your Account, we will deduct the full amount of the Account Fee at the time of the withdrawal. In addition, on the Annuity Commencement Date we will deduct a pro rata portion of the Account Fee to reflect the time elapsed between the last Account Anniversary and the day before the Annuity Commencement Date. After the Annuity Commencement Date, we will deduct an annual Account Fee of $35 in the aggregate in equal amounts from each Variable Annuity payment we make during the year. We do not deduct any fee from Fixed Annuity payments. ADMINISTRATIVE EXPENSE CHARGE We deduct an administrative expense charge from the assets of the Variable Account at an annual effective rate equal to 0.15% during both the Accumulation Phase and the Income Phase. This charge is designed to reimburse expenses we incur in administering the Contracts, the Accounts and the Variable Account that are not covered by the Account Fee. MORTALITY AND EXPENSE RISK CHARGE We deduct a mortality and expense charge from the assets of the Variable Account at an effective annual rate equal to 1.25% during both the Accumulation Phase and the Income Phase. The mortality risk we assume arises from our contractual obligation to continue to make annuity payments to each Annuitant, regardless of how long the Annuitant lives and regardless of how long all Annuitants as a group live. This obligation assures each Annuitant that neither the longevity of fellow Annuitants nor an improvement in life expectancy generally will have an adverse effect on the amount of any annuity payment received under the contract. The expense risk we assume is the risk that the Account Fee and administrative expense charge we assess under the Contracts may be insufficient to cover the actual total administrative expenses we incur. If the amount of the charge is insufficient to cover the mortality and expense risks, we will bear the loss. If the amount of the charge is more than sufficient to cover the risks, we will make a profit on the charge. We may use this profit for any proper corporate purpose, including the payment of marketing and distribution expenses for the Contracts. PREMIUM TAXES Some states and local jurisdictions impose a premium tax on us that is equal to a specified percentage of the Purchase Payments you make. In many states there is no premium tax. We believe that the amounts of applicable premium taxes currently range from 0% to 3.5%. You should consult a tax adviser to find out if your state imposes a premium tax and the amount of any tax. 21 In order to reimburse us for the premium tax we may pay on Purchase Payments, our policy is to deduct the amount of such taxes from the amount you apply to provide an annuity at the time of annuitization. However, we reserve the right to deduct the amount of any applicable tax from your Account at any time, including at the time you make a Purchase Payment or make a full or partial withdrawal. We do not make any profit on the deductions we make to reimburse premium taxes. SERIES FUND EXPENSES There are fees and charges deducted from each Series of the Series Fund. These fees and expenses are described in the Series Fund's Prospectus and Statement of Additional Information. MODIFICATION IN THE CASE OF GROUP CONTRACTS For Group Contracts, we may modify the Account Fee, the administrative expense charge and the mortality and expense risk charge upon notice to Owners. However, such modification will apply only with respect to Participant Accounts established after the effective date of the modification. DEATH BENEFIT If you die during the Accumulation Phase, we will pay a death benefit to your Beneficiary, using the payment method elected (a single cash payment or one of our Annuity Options). If the Beneficiary is not living on the date of death, we will pay the death benefit in one sum to your estate. We do not pay a death benefit if you die during the Income Phase. However, the Beneficiary will receive any payments provided under an Annuity Option that is in effect. If your spouse is your Beneficiary, upon your death your spouse may elect to continue the Contract as the Participant, rather than receive the death benefit. In that case, the amount of your death benefit, calculated as described below, will become the Contract's Account Value on the Death Benefit Date. All other provisions, including any withdrawal charges, will continue as if your spouse had purchased the Contract on the original date of coverage. AMOUNT OF DEATH BENEFIT To calculate the amount of your death benefit, we use a "Death Benefit Date." The Death Benefit Date is the date we receive proof of your death in an acceptable form ("Due Proof of Death") if you have elected a death benefit payment method before your death and it remains effective. Otherwise, the Death Benefit Date is the later of the date we receive Due Proof of Death or the date we receive the Beneficiary's election of either payment method or, if the Beneficiary is your spouse, Contract continuation. If we do not receive the Beneficiary's election within 60 days after we receive Due Proof of Death, the Death Benefit Date will be the last day of the 60 day period. The amount of the death benefit is determined as of the Death Benefit Date. If you were 85 or younger on your Contract Date (the date we accepted your first Purchase Payment), the death benefit will be the greatest of the following amounts: 1. Your Account Value for the Valuation Period during which the Death Benefit Date occurs; 2. The amount we would pay if you had surrendered your entire Account on the Death Benefit Date; 3. Your Account Value on the Seven-Year Anniversary immediately before the Death Benefit Date, adjusted for subsequent Purchase Payments and partial withdrawals and charges made between the Seven-Year Anniversary and the Death Benefit Date; 4. Your highest Account Value on any Account Anniversary before your 81st birthday, adjusted for subsequent Purchase Payments and partial withdrawals and charges made between that Account Anniversary and the Death Benefit Date; and 5. Your total Purchase Payments plus the following interest accruals, adjusted for partial withdrawals; interest will accrue on Purchase Payments allocated to and transfers to the Variable 22 Account while they remain in the Variable Account at 5% per year until the first day of the month following your 80th birthday, or until the Purchase Payment or amount transferred has doubled in amount, whichever is earlier. If you were 86 or older on your Contract Date, the death benefit is equal to amount (2) above; because this amount will reflect any applicable withdrawal charges and market value adjustment, it may be less than your Account Value. In calculating the death benefit amount payable under (3), (4), and (5), any partial withdrawals will reduce the amount by the ratio of the Account Value immediately following the withdrawal to the Account Value immediately before the withdrawal. If the death benefit is amount (2), (3), (4), or (5), your Account Value will be increased by the excess, if any, of that amount over amount (1). Any such increase will be allocated to the Sub-Accounts in proportion to your Account Value in those Sub-Accounts on the Death Benefit Date. Also, any portion of this new Account Value attributed to the Fixed Account will be transferred to the Money Market Series Sub-Account (without the application of a Market Value Adjustment). The Beneficiary may then transfer to the Fixed Account and begin a new Guarantee Period. METHOD OF PAYING DEATH BENEFIT The death benefit may be paid in a single cash payment or as an annuity (either fixed, variable or a combination), under one or more of our Annuity Options. We describe the Annuity Options in this Prospectus under "Income Phase - -- Annuity Provisions." During the Accumulation Phase, you may elect the method of payment for the death benefit. If no such election is in effect on the date of your death, the Beneficiary may elect either a single cash payment or an annuity. With respect to a Non-Qualified Contract, if the Beneficiary is the Owner's spouse, the Beneficiary may elect to continue the Non-Qualified Contract. These elections are made by sending us a completed election form, which we will provide. If we do not receive the Beneficiary's election within 60 days after we receive Due Proof of Death, we will pay the death benefit in a single cash payment. If we pay the death benefit in the form of an Annuity Option, the Beneficiary becomes the Annuitant under the terms of that Annuity Option. NON-QUALIFIED CONTRACTS If your Contract is a Non-Qualified Contract, special distribution rules apply to the payment of the death benefit. The amount of the death benefit must be distributed either (1) as a lump sum within 5 years after your death or (2) if in the form of an annuity, over a period not greater than the life or expected life of the "designated beneficiary" within the meaning of Section 72(s) of the Internal Revenue Code, with payments beginning no later than one year after your death. The person you have named a Beneficiary under your Contract, if any, will be the "designated beneficiary." If the named Beneficiary is not living, the Annuitant automatically becomes the designated beneficiary. If the designated beneficiary is your surviving spouse, your spouse may continue the Contract in his or her own name as Participant. To make this election, your spouse must give us written notification within 60 days after we receive Due Proof of Death. In that case, we will not pay a death benefit, and the Account Value will be increased to reflect the death benefit calculation. The special distribution rules will then apply on the death of your spouse. During the Income Phase, if the Annuitant dies, the remaining value of the Annuity Option in place must be distributed at least as rapidly as the method of distribution under that option. If the Participant is not a natural person, these distribution rules apply on a change in, or the death of, any Annuitant or Co-Annuitant. 23 Payments made in contravention of these special rules would adversely affect the treatment of the Contracts as annuity contracts under the Internal Revenue Code. Neither you nor the Beneficiary may exercise rights that would have that effect. SELECTION AND CHANGE OF BENEFICIARY You select your Beneficiary in your Application. You may change your Beneficiary at any time by sending us written notice on our required form, unless you previously made an irrevocable Beneficiary designation. A new Beneficiary designation is not effective until we record the change. PAYMENT OF DEATH BENEFIT Payment of the death benefit in cash will be made within 7 days of the Death Benefit Date, except if we are permitted to defer payment in accordance with the Investment Company Act of 1940. If an Annuity Option is elected, the Annuity Commencement Date will be the first day of the second calendar month following the Death Benefit Date, and your Account will remain in effect until the Annuity Commencement Date. DUE PROOF OF DEATH We accept the following as proof of any person's death: - an original certified copy of an official death certificate; - an original certified copy of a decree of a court of competent jurisdiction as to the finding of death; or - any other proof we find satisfactory. THE INCOME PHASE -- ANNUITY PROVISIONS During the Income Phase, we make regular monthly payments to your Annuitant. The Income Phase of your Contract begins with the Annuity Commencement Date. On that date, we apply your Account Value, adjusted as described below, under the Annuity Option or Options you have selected, and we make the first payment. Once the Income Phase begins, no lump sum settlement option or cash withdrawals are permitted, except pursuant to Annuity Option D, Monthly Payments for a Specified Period Certain, as described below under the heading "Annuity Options," and you cannot change the Annuity Option selected. You may request a full withdrawal before the Annuity Commencement Date, which will be subject to all charges applicable on withdrawals. See "Cash Withdrawals, Withdrawal Charge and Market Value Adjustment." SELECTION OF THE ANNUITANT OR CO-ANNUITANT You select the Annuitant in your Application. The Annuitant is the person who receives payments during the Income Phase and on whose life these payments are based. In your Contract, the Annuity Options refer to the Annuitant as the "Payee." If you name someone other than yourself as Annuitant and the Annuitant dies before the Income Phase, you become the Annuitant. In a Non-Qualified Contract, if you name someone other than yourself as Annuitant, you may also select a Co-Annuitant, who will become the new Annuitant if the original Annuitant dies before the Income Phase (if both the Annuitant and Co-Annuitant die before the Income Phase, you become the Annuitant). If you have named both an Annuitant and a Co-Annuitant, you may designate one of them to become the sole Annuitant as of the Annuity Commencement Date, if both are living at that time. If you have not made that designation on the 30th day before the Annuity Commencement Date, and both the Annuitant and the Co-Annuitant are still living, the Co-Annuitant will become the Annuitant. 24 When an Annuity Option has been selected as the method of paying the death benefit, the Beneficiary is the Annuitant. SELECTION OF THE ANNUITY COMMENCEMENT DATE You select the Annuity Commencement Date in your Application. The following restrictions apply to the date you may select: - The earliest possible Annuity Commencement date is the first day of the second month following your Contract Date. - The latest possible Annuity Commencement Date is the first day of the month following the Annuitant's 95th birthday or, if there is a Co-Annuitant, the 95th birthday of the younger of the Annuitant and Co-Annuitant. - The Annuity Commencement Date must always be the first day of a month. You may change the Annuity Commencement Date from time to time by sending us written notice, with the following additional limitations: - We must receive your notice at least 30 days before the current Annuity Commencement Date. - The new Annuity Commencement Date must be at least 30 days after we receive the notice. There may be other restrictions on your selection of the Annuity Commencement Date imposed by your retirement plan or applicable law. In most situations, current law requires that for a Qualified Contract, certain minimum distributions must commence no later than April 1 following the year you reach age 70 1/2 (or, for Qualified Contracts other than IRAs, no later than April 1 following the year the Annuitant retires, if later than the year the Annuitant reaches age 70 1/2). ANNUITY OPTIONS We offer the following Annuity Options for payments during the Income Phase. Each Annuity Option may be selected for either a Variable Annuity, a Fixed Annuity, or a combination of both. We may also agree to other settlement options, in our discretion. ANNUITY OPTION A -- LIFE ANNUITY We provide monthly payments during the lifetime of the Annuitant. Annuity payments stop when the Annuitant dies. There is no provision for continuation of any payments to a Beneficiary. ANNUITY OPTION B -- LIFE ANNUITY WITH 60, 120, 180 OR 240 MONTHLY PAYMENTS CERTAIN We make monthly payments during the lifetime of the Annuitant. In addition, we guarantee that the Beneficiary will receive monthly payments for the remainder of the period certain, if the Annuitant dies during that period. The election of a longer period results in smaller monthly payments. If no Beneficiary is designated, we pay the discounted value of the remaining payments in one sum to the Annuitant's estate. The Beneficiary may also elect to receive the discounted value of the remaining payments in one sum. The discount rate for this purpose will be the assumed interest rate in effect; the discount rate for a Fixed Annuity will be based on the interest rate we used to determine the amount of each payment. ANNUITY OPTION C -- JOINT AND SURVIVOR ANNUITY We make monthly payments during the lifetime of the Annuitant and another person you designate and during the lifetime of the survivor of the two. We stop making payments when the last survivor dies. There is no provision for continuance of any payments to a Beneficiary. 25 ANNUITY OPTION D -- MONTHLY PAYMENTS FOR A SPECIFIED PERIOD CERTAIN We make monthly payments for a specified period of time from 5 to 30 years, as you elect. If payments under this option are paid on a variable annuity basis, the Annuitant may elect to receive in one sum the discounted value of the remaining payments, less any applicable withdrawal charge. The discount rate for a Variable Annuity will be the assumed interest rate in effect. If the Annuitant dies during the period selected, the remaining income payments are made as described under Annuity Option B. The election of this Annuity Option may result in the imposition of a penalty tax. SELECTION OF ANNUITY OPTION You select one or more of the Annuity Options, which you may change from time to time during the Accumulation Phase, as long as we receive your selection or change in writing at least 30 days before the Annuity Commencement Date. If we have not received your written selection on the 30th day before the Annuity Commencement Date, you will receive Annuity Option B, for a life annuity with 120 monthly payments certain. You may specify the proportion of your Adjusted Account Value you wish to provide a Variable Annuity or a Fixed Annuity. Under a Variable Annuity, the dollar amount of payments will vary, while under a Fixed Annuity, the dollar amount of payments will remain the same. If you do not specify a Variable Annuity or a Fixed Annuity, your Adjusted Account Value will be divided between Variable Annuities and Fixed Annuities in the same proportions as your Account Value was divided between the Variable and Fixed Accounts on the Annuity Commencement Date. You may allocate your Adjusted Account Value applied to a Variable Annuity among the Sub-Accounts, or we will use your existing allocations. There may be additional limitations on the options you may elect under your particular retirement plan or applicable law. REMEMBER THAT THE ANNUITY OPTIONS MAY NOT BE CHANGED ONCE ANNUITY PAYMENTS BEGIN. AMOUNT OF ANNUITY PAYMENTS ADJUSTED ACCOUNT VALUE The Adjusted Account Value is the amount we apply to provide a Variable Annuity and/or a Fixed Annuity. We calculate Adjusted Account Value by taking your Account Value on the Business Day just before the Annuity Commencement Date and making the following adjustments: - We deduct a proportional amount of the Account Fee, based on the fraction of the current Account Year that has elapsed; - If applicable, we apply the Market Value Adjustment to your Account Value in the Fixed Account, which may result in a deduction, an addition, or no change; and - We deduct any applicable premium tax or similar tax if not previously deducted. VARIABLE ANNUITY PAYMENTS Variable Annuity payments may vary each month. We determine the dollar amount of the first payment using the portion of your Adjusted Account Value applied to a Variable Annuity and the Annuity Payment Rates in your Contract, which are based on an assumed interest rate of 3% per year, compounded annually. See "Annuity Payment Rates." To calculate the remaining payments, we convert the amount of the first payment into Annuity Units for each Sub-Account; we determine the number of those Annuity Units by dividing the portion of the first payment attributable to the Sub-Account by the Annuity Unit Value of that Sub-Account for the Valuation Period ending just before the Annuity Commencement Date. This number of Annuity Units for each Sub-Account will remain constant (unless the Annuitant requests an exchange of Annuity Units). However, the dollar amount of the next Variable Annuity payment -- which is the sum of the number of Annuity Units for each Sub-Account times its Annuity Unit Value for the Valuation 26 Period ending just before the date of the payment -- will increase, decrease, or remain the same, depending on the net investment return of the Sub-Accounts. If the net investment return of the Sub-Accounts selected is the same as the assumed interest rate of 3%, compounded annually, the payments will remain level. If the net investment return exceeds the assumed interest rate, payments will increase and, conversely, if it is less than the assumed interest rate, payments will decrease. Please refer to the Statement of Additional Information for more information about calculating Variable Annuity Units and Variable Annuity payments, including examples of these calculations. FIXED ANNUITY PAYMENTS Fixed Annuity payments are the same each month. We determine the dollar amount of each Fixed Annuity payment using the fixed portion of your Adjusted Account Value and the applicable Annuity Payment Rates. These will be either (1) the rates in your Contract, which are based on a minimum guaranteed interest rate of 3% per year, compounded annually, or (2) new rates we have published and are using on the Annuity Commencement Date, if they are more favorable. See "Annuity Payment Rates." MINIMUM PAYMENTS If your Adjusted Account Value is less than $2,000, or the first annuity payment for any Annuity Option is less than $20, we will pay the Adjusted Account Value to the Annuitant in one payment. EXCHANGE OF VARIABLE ANNUITY UNITS During the Income Phase, the Annuitant may exchange Annuity Units from one Sub-Account to another, up to 12 times each Account Year. To make an exchange, the Annuitant sends us, at our Annuity Service Mailing Address, a written request stating the number of Annuity Units in the Sub-Account he or she wishes to exchange and the new Sub-Account for which Annuity Units are requested. The number of new Annuity Units will be calculated so the dollar amount of an annuity payment on the date of the exchange would not be affected. To calculate this number, we use Annuity Unit values for the Valuation Period during which we receive the exchange request. We permit only exchanges among Sub-Accounts. No exchanges to or from a Fixed Annuity are permitted. ACCOUNT FEE During the Income Phase, we deduct the annual Account Fee of $35 in equal amounts from each Variable Annuity Payment. We do not deduct the Account Fee from Fixed Annuity payments. ANNUITY PAYMENT RATES The Contract contains Annuity Payment Rates for each Annuity Option described in this Prospectus. The rates show, for each $1,000 applied, the dollar amount of: (a) the first monthly Variable Annuity payment based on the assumed interest rate specified in the applicable Contract (at least 3% per year, compounded annually); and (b) the monthly Fixed Annuity payment, when this payment is based on the minimum guaranteed interest rate specified in the Contract (at least 3% per year, compounded annually). We may change these rates under Group Contracts for Accounts established after the effective date of such change (See "Other Contract Provisions -- Modification"). The Annuity Payment Rates may vary according to the Annuity Option elected and the adjusted age of the Annuitant. The Contract also describes the method of determining the adjusted age of the Annuitant. The mortality table used in determining the Annuity Payment Rates for Options A, B and C is the 1983 Individual Annuitant Mortality Table. 27 ANNUITY OPTIONS AS METHOD OF PAYMENT FOR DEATH BENEFIT You or your Beneficiary may also select one or more Annuity Options to be used in the event of your death before the Income Phase, as described under the "Death Benefit" section of this Prospectus. In that case, your Beneficiary will be the Annuitant. The Annuity Commencement Date will be the first day of the second month beginning after the Death Benefit Date. OTHER CONTRACT PROVISIONS EXERCISE OF CONTRACT RIGHTS An Individual Contract belongs to the individual to whom the Contract is issued. A Group Contract belongs to the Owner. In the case of a Group Contract, the Owner may expressly reserve all Contract rights and privileges; otherwise, each Participant will be entitled to exercise such rights and privileges. In any case, such rights and privileges can be exercised without the consent of the Beneficiary (other than an irrevocably designated Beneficiary) or any other person. Such rights and privileges may be exercised only during the lifetime of the Participant before the Annuity Commencement Date, except as the Contract otherwise provides. The Annuitant becomes the Payee on and after the Annuity Commencement Date. The Beneficiary becomes the Payee on the death of the Participant prior to the Annuity Commencement Date, or on the death of the Annuitant after the Annuity Commencement Date. Such Payee may thereafter exercise such rights and privileges, if any, of ownership which continue. CHANGE OF OWNERSHIP Ownership of a Qualified Contract may not be transferred except to: (1) the Annuitant; (2) a trustee or successor trustee of a pension or profit sharing trust which is qualified under Section 401 of the Internal Revenue Code; (3) the employer of the Annuitant, provided that the Qualified Contract after transfer is maintained under the terms of a retirement plan qualified under Section 403(a) of the Internal Revenue Code for the benefit of the Annuitant; (4) the trustee or custodian of an individual retirement account plan qualified under Section 408 of the Internal Revenue Code for the benefit of the Participants under a Group Contract; or (5) as otherwise permitted from time to time by laws and regulations governing the retirement or deferred compensation plans for which a Qualified Contract may be issued. Subject to the foregoing, a Qualified Contract may not be sold, assigned, transferred, discounted or pledged as collateral for a loan or as security for the performance of an obligation or for any other purpose to any person other than the Company. The Owner of a Non-Qualified Contract may change the ownership of the Contract prior to the last Annuity Commencement Date; and each Participant, in like manner, may change the ownership interest in a Contract. A change of ownership will not be binding on us until we receive written notification. When we receive such notification, the change will be effective as of the date on which the request for change was signed by the Owner or Participant, as appropriate, but the change will be without prejudice to us on account of any payment we make or any action we take before receiving the change. If you change the Owner of a Non-Qualified Contract, you will become immediately liable for the payment of taxes on any gain realized under the Contract prior to the change of ownership, including possible liability for a 10% federal excise tax. VOTING OF SERIES FUND SHARES We will vote Series Fund shares held by the Sub-Accounts at meetings of shareholders of the Series Fund or in connection with similar solicitations, but will follow voting instructions received from persons having the right to give voting instructions. During the Accumulation Phase, you will have the right to give voting instructions, except in the case of a Group Contract where the Owner has reserved this right. During the Income Phase, the Payee -- that is the Annuitant or Beneficiary entitled to receive benefits -- is the person having such voting rights. We will vote any shares attributable to us and Series Fund shares for which no timely voting instructions are received in the same proportion as the shares for which we receive instructions from Owners, Participants and Payees, as applicable. 28 Owners of Qualified Contracts issued on a group basis may be subject to other voting provisions of the particular plan and of the Investment Company Act of 1940. Employees who contribute to plans that are funded by the Contracts may be entitled to instruct the Owners as to how to instruct us to vote the Series Fund shares attributable to their contributions. Such plans may also provide the additional extent, if any, to which the Owners shall follow voting instructions of persons with rights under the plans. If no voting instructions are received from any such person with respect to a particular Participant Account, the Owner may instruct the Company as to how to vote the number of Series Fund shares for which instructions may be given. Neither the Variable Account nor the Company is under any duty to provide information concerning the voting instruction rights of persons who may have such rights under plans, other than rights afforded by the Investment Company Act of 1940, or any duty to inquire as to the instructions received or the authority of Owners, Participants or others, as applicable, to instruct the voting of Series Fund shares. Except as the Variable Account or the Company has actual knowledge to the contrary, the instructions given by Owners under Group Contracts and Payees will be valid as they affect the Variable Account, the Company and any others having voting instruction rights with respect to the Variable Account. All Series Fund proxy material, together with an appropriate form to be used to give voting instructions, will be provided to each person having the right to give voting instructions at least 10 days prior to each meeting of the shareholders of the Series Fund. We will determine the number of Series Fund shares as to which each such person is entitled to give instructions as of the record date set by the Series Fund for such meeting, which is expected to be not more than 90 days prior to each such meeting. Prior to the Annuity Commencement Date, the number of Series Fund shares as to which voting instructions may be given to the Company is determined by dividing the value of all of the Variable Accumulation Units of the particular Sub-Account credited to the Participant Account by the net asset value of one Series Fund share as of the same date. On or after the Annuity Commencement Date, the number of Series Fund shares as to which such instructions may be given by a Payee is determined by dividing the reserve held by the Company in the Sub-Account with respect to the particular Payee by the net asset value of a Series Fund share as of the same date. After the Annuity Commencement Date, the number of Series Fund shares as to which a Payee is entitled to give voting instructions will generally decrease due to the decrease in the reserve. PERIODIC REPORTS During the Accumulation Period we will send you, or such other person having voting rights, at least once during each Account Year, a statement showing the number, type and value of Accumulation Units credited to your Account and the Fixed Accumulation Value of your Account, which statement shall be accurate as of a date not more than 2 months previous to the date of mailing. These periodic statements contain important information concerning your transactions with respect to a Contract. It is your obligation to review each such statement carefully and to report to us, at the address or telephone number provided on the statement, any errors or discrepancies in the information presented therein within 60 days of the date of such statement. Unless we receive notice of any such error or discrepancy from you within such period, we may not be responsible for correcting the error or discrepancy. In addition, every person having voting rights will receive such reports or prospectuses concerning the Variable Account and the Series Fund as may be required by the Investment Company Act of 1940 and the Securities Act of 1933. We will also send such statements reflecting transactions in your Account as may be required by applicable laws, rules and regulations. Upon request, we will provide you with information regarding fixed and variable accumulation values. SUBSTITUTION OF SECURITIES Shares of any or all Series of the Series Fund may not always be available for investment under the Contract. We may add or delete Series or other investment companies as variable investment options under the Contracts. We may also substitute for the shares held in any Sub-Account shares of 29 another Series or shares of another registered open-end investment company or unit investment trust, provided that the substitution has been approved , if required, by the SEC. In the event of any substitution pursuant to this provision, we may make appropriate endorsement to the Contract to reflect the substitution. CHANGE IN OPERATION OF VARIABLE ACCOUNT At our election and subject to any necessary vote by persons having the right to give instructions with respect to the voting of Series Fund shares held by the Sub-Accounts, the Variable Account may be operated as a management company under the Investment Company Act of 1940 or it may be deregistered under the Investment Company Act of 1940 in the event registration is no longer required. Deregistration of the Variable Account requires an order by the SEC. In the event of any change in the operation of the Variable Account pursuant to this provision, we may make appropriate endorsement to the Contract to reflect the change and take such other action as may be necessary and appropriate to effect the change. SPLITTING UNITS We reserve the right to split or combine the value of Variable Accumulation Units, Annuity Units or any of them. In effecting any such change of unit values, strict equity will be preserved and no change will have a material effect on the benefits or other provisions of the Contract. MODIFICATION Upon notice to the Participant, in the case of an Individual Contract, and the Owner and Participant(s), in the case of a Group Contract (or the Payee(s) during the Income Phase), we may modify the Contract if such modification: (i) is necessary to make the Contract or the Variable Account comply with any law or regulation issued by a governmental agency to which the Company or the Variable Account is subject; (ii) is necessary to assure continued qualification of the Contract under the Internal Revenue Code or other federal or state laws relating to retirement annuities or annuity contracts; (iii) is necessary to reflect a change in the operation of the Variable Account or the Sub-Account(s) (See "Change in Operation of Variable Account"); (iv) provides additional Variable Account and/or fixed accumulation options; or (v) as may otherwise be in the best interests of Owners, Participants, or Payees, as applicable. In the event of any such modification, we may make appropriate endorsement in the Contract to reflect such modification. In addition, upon notice to the Owner, we may modify a Group Contract to change the withdrawal charges, Account Fees, mortality and expense risk charges, administrative expense charges, the tables used in determining the amount of the first monthly variable annuity and fixed annuity payments and the formula used to calculate the Market Value Adjustment, provided that such modification applies only to Participant Accounts established after the effective date of such modification. In order to exercise our modification rights in these particular instances, we must notify the Owner of such modification in writing. The notice shall specify the effective date of such modification which must be at least 60 days following the date we mail notice of modification. All of the charges and the annuity tables which are provided in the Group Contract prior to any such modification will remain in effect permanently, unless improved by the Company, with respect to Participant Accounts established prior to the effective date of such modification. DISCONTINUANCE OF NEW PARTICIPANTS We may limit or discontinue the acceptance of new Applications and the issuance of new Certificates under a Group Contract by giving 30 days prior written notice to the Owner. This will not affect rights or benefits with respect to any Participant Accounts established under such Group Contract prior to the effective date of such limitation or discontinuance. 30 RESERVATION OF RIGHTS We reserve the right, to the extent permitted by law, to: (1) combine any 2 or more variable accounts; (2) add or delete Series, sub-series thereof or other investment companies and corresponding Sub-Accounts; (3) add or remove Guarantee Periods available at any time for election by a Participant; and (4) restrict or eliminate any of the voting rights of Participants (or Owners) or other persons who have voting rights as to the Variable Account. Where required by law, we will obtain approval of changes from Participants or any appropriate regulatory authority. In the event of any change pursuant to this provision, we may make appropriate endorsement to the Contract to reflect the change. RIGHT TO RETURN If you are not satisfied with your Contract, you may return it by mailing or delivering it to us at the Annuity Service Mailing Address on the cover of this Prospectus within 10 days after it was delivered to you. When we receive the returned Contract, it will be cancelled and we will refund to you your Account Value at the end of the Valuation Period during which we received it. However, if applicable state law requires, we will return the full amount of any Purchase Payment(s) we received. State law may also require us to give you a longer "free look" period or allow you to return the Contract to your sales representative. If you are establishing an Individual Retirement Account ("IRA"), the Internal Revenue Code requires that we give you a disclosure statement containing certain information about the Contract and applicable legal requirements. We must give you this statement on or before the date the IRA is established. If we give you the disclosure statement before the seventh day preceding the date the IRA is established, you will not have any right of revocation under the Code. If we give you the disclosure statement at a later date, then you may give us a notice of revocation at any time within 7 days after your Contract Date. Upon such revocation, we will refund your Purchase Payment(s). This right of revocation with respect to an IRA is in addition to the return privilege set forth in the preceding paragraph. We allow a Participant establishing an IRA a "ten day free-look," notwithstanding the provisions of the Internal Revenue Code. FEDERAL TAX STATUS INTRODUCTION This section describes general federal income tax consequences based upon our understanding of current federal tax laws. Actual federal tax consequences may vary depending on, among other things, the type of retirement plan with which you use a Contract and whether (depending on the site of Contract issuance) Puerto Rico tax law applies. Also, Congress has the power to enact legislation affecting the tax treatment of annuity contracts, and such legislation could apply retroactively to Contracts that you purchased before the date of enactment. We do not make any guarantee regarding the federal, state, or local tax status of any Contract or any transaction involving any Contract. You should consult a qualified tax professional for advice before purchasing a Contract or executing any other transaction (such as a rollover, distribution, withdrawal or payment) involving a Contract. DEDUCTIBILITY OF PURCHASE PAYMENTS For federal income tax purposes, Purchase Payments made under Non-Qualified Contracts are not deductible. PRE-DISTRIBUTION TAXATION OF CONTRACTS Generally, an increase in the value of a Contract will not give rise to tax, prior to distribution. However, corporate (or other non-natural person) Owners of, and Participants under, a Non-Qualified Contract incur current tax, regardless of distribution, on Contract value increases. Such current taxation does not apply, though, to (i) immediate annuities, which the Internal Revenue Code (the "Code") defines as a single premium contract with an annuity commencement date within one year of 31 the date of purchase, or (ii) any Contract that the non-natural person holds as agent for a natural person (such as where a bank or other entity holds a Contract as trustee under a trust agreement). The Internal Revenue Service could assert that Owners or Participants under both Qualified Contracts and Non-Qualified Contracts annually receive a taxable deemed distribution equal to the cost of any life insurance benefit under the Contract. You should note that qualified retirement investments automatically provide tax deferral regardless of whether the underlying contract is an annuity. DISTRIBUTIONS AND WITHDRAWALS FROM NON-QUALIFIED CONTRACTS The Account Value will include an amount attributable to Purchase Payments, the return of which is not taxable, and an amount attributable to investment earnings, the return of which is taxable at ordinary income rates. The relative portions of a distribution that derive from nontaxable Purchase Payments and taxable investment earnings depend upon the timing of the distribution. If you withdraw less than your entire Account Value under a Non-Qualified Contract before the Annuity Commencement Date, you must treat the withdrawal first as a return of investment earnings. You may treat only withdrawals in excess of the amount of the Account Value attributable to investment earnings as a return of Purchase Payments. Account Value amounts assigned or pledged as collateral for a loan will be treated as if withdrawn from the Contract. If a Payee receives annuity payments under a Non-Qualified Contract after the Annuity Commencement Date, however, the Payee treats a portion of each payment as a nontaxable return of Purchase Payments. In general, the nontaxable portion of such a payment bears the same ratio to the total payment as the Purchase Payments bear to the Payee's expected return under the Contract. The remainder of the payment constitutes a taxable return of investment earnings. Once the Payee has received nontaxable payments in an amount equal to total Purchase Payments, all future distributions constitute fully taxable ordinary income. If the Annuitant dies before the Payee recovers the full amount of Purchase Payments, the Payee may deduct an amount equal to unrecovered Purchase Payments. Upon the transfer of a Non-Qualified Contract by gift (other than to the Participant's spouse), the Participant must treat an amount equal to the Account Value minus the total amount paid for the Contract as income. A penalty tax of 10% may apply to taxable cash withdrawals and lump-sum payments from Non-Qualified Contracts. This penalty will not apply in certain circumstances, such as distributions pursuant to the death of the Participant or distributions under an immediate annuity (as defined above), or after age 59 1/2. DISTRIBUTIONS AND WITHDRAWALS FROM QUALIFIED CONTRACTS Generally, distributions from a Qualified Contract will constitute fully taxable ordinary income. Also, a 10% penalty tax will, except in certain circumstances, apply to distributions prior to age 59 1/2. Distributions from a Qualified Contract are not subject to current taxation or a 10% penalty, however, if: - the distribution is not a hardship distribution or part of a series of payments for life or for a specified period of 10 years or more (an "eligible rollover distribution"), and - the Participant or Payee rolls over the distribution (with or without actually receiving the distribution) into a qualified retirement plan eligible to receive the rollover. Only you or your spouse may elect to roll over a distribution to an eligible retirement plan. 32 WITHHOLDING In the case of an eligible rollover distribution (as defined above) from a Qualified Contract (other than from a Contract issued for use with an individual retirement account), we (or the plan administrator) must withhold and remit to the U.S. Government 20% of the distribution, unless the Participant or Payee elects to make a direct rollover of the distribution to another qualified retirement plan that is eligible to receive the rollover; however, only you or your spouse may elect a direct rollover. In the case of a distribution from (i) a Non-Qualified Contract, (ii) a Qualified Contract issued for use with an individual retirement account, or (iii) a Qualified Contract where the distribution is not an eligible rollover distribution, we will withhold and remit to the U.S. Government a part of the taxable portion of each distribution unless, prior to the distribution, the Participant or Payee provides us his or her taxpayer identification number and instructs us (in the manner prescribed) not to withhold. The Participant or Payee may credit against his or her federal income tax liability for the year of distribution any amounts that we (or the plan administrator) withhold. PURCHASE OF IMMEDIATE ANNUITY CONTRACT AND DEFERRED ANNUITY CONTRACT You should consider the following information only if you intend to purchase an immediate annuity contract and a deferred annuity contract together. We understand that the Treasury Department might reconsider the tax treatment of annuity payments under an immediate annuity contract (as defined above) purchased together with a deferred annuity contract. We believe that any adverse change in the existing tax treatment of such immediate annuity contracts would not apply to contracts issued before the Treasury Department announces the change. However, there can be no assurance that the Treasury Department will not apply any such change retroactively. INVESTMENT DIVERSIFICATION AND CONTROL The Treasury Department has issued regulations that prescribe investment diversification requirements for mutual fund series underlying nonqualified variable contracts. Contracts must comply with these regulations to qualify as annuities for federal income tax purposes. Contracts that do not meet the guidelines are subject to current taxation on annual increases in value. We believe that each series of the Series Fund complies with these regulations. The preamble to the regulations states that the Internal Revenue Service may promulgate guidelines under which an owner's excessive control over investments underlying the contract will preclude the contract from qualifying as an annuity for federal tax purposes. We cannot predict whether such guidelines, if in fact promulgated, will be retroactive. We will take any action (including modification of the Contract and/or the Variable Account) necessary to comply with any retroactive guidelines. TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT As a life insurance company under the Code, we will record and report operations of the Variable Account separately from other operations. The Variable Account will not, however, constitute a regulated investment company or any other type of taxable entity distinct from our other operations. We will not incur tax on the income of the Variable Account (consisting primarily of interest, dividends, and net capital gains) if we use this income to increase reserves under Contracts participating in the Variable Account. QUALIFIED RETIREMENT PLANS You may use Qualified Contracts with several types of qualified retirement plans. Because tax consequences will vary with the type of qualified retirement plan and the plan's specific terms and conditions, we provide below only brief, general descriptions of the consequences that follow from using Qualified Contracts in connection with various types of qualified retirement plans. We stress that the rights of any person to any benefits under these plans may be subject to the terms and conditions of the plans themselves, regardless of the terms of the Qualified Contracts that you are using. These terms and conditions may include restrictions on, among other things, ownership, transferability, assignability, contributions and distributions. Owners, Participants, Payees, Beneficiaries and administrators of 33 qualified retirement plans should consider, with the guidance of a tax adviser, whether the death benefit payable under the Contract affects the qualified status of their retirement plan. PENSION AND PROFIT-SHARING PLANS Sections 401(a), 401(k) and 403(a) of the Code permit business employers and certain associations to establish various types of retirement plans for employees. The Tax Equity and Fiscal Responsibility Act of 1982 eliminated most differences between qualified retirement plans of corporations and those of self-employed individuals. Self-employed persons may therefore use Qualified Contracts as a funding vehicle for their retirement plans, as a general rule. TAX-SHELTERED ANNUITIES Section 403(b) of the Code permits public school employees and employees of certain types of charitable, educational and scientific organizations specified in Section 501(c)(3) of the Code to purchase annuity contracts and, subject to certain limitations, exclude the amount of purchase payments from gross income for tax purposes. The Code imposes restrictions on cash withdrawals from Section 403(b) annuities. If the Contracts are to receive tax deferred treatment, cash withdrawals of amounts attributable to salary reduction contributions (other than withdrawals of accumulation account value as of December 31, 1988) may be made only when the Participant attains age 59 1/2, separates from service with the employer, dies or becomes disabled (within the meaning of Section 72(m)(7) of the Code). These restrictions apply to (i) any post-1988 salary reduction contributions, (ii) any growth or interest on post-1988 salary reduction contributions, and (iii) any growth or interest on pre-1989 salary reduction contributions that occurs on or after January 1, 1989. It is permissible, however, to withdraw post-1988 salary reduction contributions in cases of financial hardship. While the Internal Revenue Service has not issued specific rules defining financial hardship, we expect that to qualify for a hardship distribution, the Participant must have an immediate and heavy bona fide financial need and lack other resources reasonably available to satisfy the need. Hardship withdrawals (as well as certain other premature withdrawals) will be subject to a 10% tax penalty, in addition to any withdrawal charge applicable under the Contracts. Under certain circumstances the 10% tax penalty will not apply if the withdrawal is for medical expenses. Under the terms of a particular Section 403(b) plan, the Participant may be entitled to transfer all or a portion of the Account Value to one or more alternative funding options. Participants should consult the documents governing their plan and the person who administers the plan for information as to such investment alternatives. INDIVIDUAL RETIREMENT ACCOUNTS Sections 219 and 408 of the Code permit eligible individuals to contribute to an individual retirement program, including Simplified Employee Pension Plans, Employer/Association of Employees Established Individual Retirement Account Trusts, and Simple Retirement Accounts. Such IRAs are subject to limitations on contribution levels, the persons who may be eligible, and on the time when distributions may commence. In addition, certain distributions from some other types of retirement plans may be placed in an IRA on a tax-deferred basis. If we sell Contracts for use with IRAs, the Internal Revenue Service or other agency may impose supplementary information requirements. We will provide purchasers of the Contracts for such purposes with any necessary information. You will have the right to revoke the Contract under certain circumstances, as described in the section of this Prospectus entitled "Right to Return." ROTH IRAS Section 408A of the Code permits an individual to contribute to an individual retirement program called a Roth IRA. Unlike contributions to a traditional IRA under Section 408 of the Code, contributions to a Roth IRA are not tax-deductible. Provided certain conditions are satisfied, distributions are generally tax-free. Like traditional IRAs, Roth IRAs are subject to limitations on contribution 34 amounts and the timing of distributions. If an individual converts a traditional IRA into a Roth IRA the full amount of the IRA is included in taxable income. The Internal Revenue Service and other agencies may impose special information requirements with respect to Roth IRAs. If and when we make Contracts available for use with Roth IRAs, we will provide any necessary information. ADMINISTRATION OF THE CONTRACTS We perform certain administrative functions relating to the Contracts, Participant Accounts, and the Variable Account. These functions include, but are not limited to, maintaining the books and records of the Variable Account and the Sub-Accounts; maintaining records of the name, address, taxpayer identification number, Contract number, Participant Account number and type, the status of each Participant Account and other pertinent information necessary to the administration and operation of the Contracts; processing Applications, Purchase Payments, transfers and full and partial withdrawals; issuing Contracts and Certificates; administering annuity payments; furnishing accounting and valuation services; reconciling and depositing cash receipts; providing confirmations; providing toll-free customer service lines; and furnishing telephonic transfer services. DISTRIBUTION OF THE CONTRACTS We offer the Contracts on a continuous basis. The Contracts are sold by licensed insurance agents in those states where the Contracts may be lawfully sold. Such agents will be registered representatives of broker-dealers registered under the Securities Exchange Act of 1934 who are members of the National Association of Securities Dealers, Inc. and who have entered into distribution agreements with the Company and the general distributor, Clarendon Insurance Agency, Inc. ("Clarendon"), One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. Clarendon, a wholly-owned subsidiary of the Company, is registered with the SEC under the Securities Exchange Act of 1934 as a broker-dealer and is a member of the National Association of Securities Dealers, Inc. Commissions and other distribution compensation will be paid by the Company to the selling agents and will not be more than 7.34% of Purchase Payments. In addition, after the first Account Year, broker-dealers who have entered into distribution agreements with the Company may receive an annual renewal commission of no more than 1.00% of the Participant's Account Value. In addition to commissions, the Company may, from time to time, pay or allow additional promotional incentives, in the form of cash or other compensation. We reserve the right to offer these additional incentives only to certain broker-dealers that sell or are expected to sell during specified time periods certain minimum amounts of the Contracts or Certificates or other contracts offered by the Company. Promotional incentives may change at any time. Commissions will not be paid with respect to Accounts established for the personal account of employees of the Company or any of its affiliates, or of persons engaged in the distribution of the Contracts, or of immediate family members of such employees or persons. In addition, commissions may be waived or reduced in connection with certain transactions described in this Prospectus under the heading "Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest Rates." The Company began offering the Contracts in 1998. During 1998, approximately $3,190,367 in commissions was paid to Clarendon in connection with the distribution of the Contracts. PERFORMANCE INFORMATION From time to time the Variable Account may publish reports to shareholders, sales literature and advertisements containing performance information relating to the Sub-Accounts. This information may include standardized and non-standardized "Average Annual Total Return," "Cumulative Growth Rate" and "Compound Growth Rate." The Government Securities Series Sub-Account and the High Yield Series Sub-Account may also advertise "yield." The Money Market Series Sub-Account may advertise "yield" and "effective yield." Average Annual Total Return measures the net income of the Sub-Account and any realized or unrealized gains or losses of the Series in which it invests, over the period stated. Average Annual Total Return figures are annualized and represent the average annual percentage change in the value of an investment in a Sub-Account over that period. Standardized Average Annual Total Return information 35 covers the period after the Variable Account was established or, if shorter, the life of the Series. Non-standardized Average Annual Total Return covers the life of each Series, which may predate the Variable Account. Cumulative Growth Rate represents the cumulative change in the value of an investment in the Sub-Account for the period stated, and is arrived at by calculating the change in the Accumulation Unit Value of a Sub-Account between the first and the last day of the period being measured. The difference is expressed as a percentage of the Accumulation Unit Value at the beginning of the base period. "Compound Growth Rate" is an annualized measure, calculated by applying a formula that determines the level of return which, if earned over the entire period, would produce the cumulative return. Average Annual Total Return figures assume an initial purchase payment of $1,000 and reflect all applicable withdrawal and Contract charges. The Cumulative Growth Rate and Compound Growth Rate figures that we advertise do not reflect withdrawal charges or the Account Fee, although they reflect all recurring charges. Results calculated without withdrawal and/or certain Contract charges will be higher. We may also use other types of rates of return that do not reflect withdrawal and Contract charges. The performance figures used by the Variable Account are based on the actual historical performance of the Series Fund for the specified periods, and the figures are not intended to indicate future performance. For periods before the date the Contracts became available, we calculate the performance information for the Sub-Account on a hypothetical basis. To do this, we reflect deductions of the current Contract fees and charges from the historical performance of the corresponding series. Yield is a measure of the net dividend and interest income earned over a specific one month or 30-day period (7-day period for the Money Market Series Sub-Account), expressed as a percentage of the value of the Sub-Account's Accumulation Units. Yield is an annualized figure, which means that we assume that the Sub-Account generates the same level of net income over a one-year period and compound that income on a semi-annual basis. We calculate the effective yield for the Money Market Series Sub-Account similarly, but include the increase due to assumed compounding. The Money Market Sub-Account's effective yield will be slightly higher than its yield as a result of its compounding effect. The Variable Account may also from time to time compare its investment performance to various unmanaged indices or other variable annuities and may refer to certain rating and other organizations in its marketing materials. More information on performance and our computations is set forth in the Statement of Additional Information. The Company may also advertise the ratings and other information assigned to it by independent industry ratings organizations. Some of these organizations are A.M. Best, Moody's Investor's Service, Standard and Poor's Insurance Rating Services, and Duff and Phelps. Each year A.M. Best reviews the financial status of thousands of insurers, culminating in the assignment of Best's rating. These ratings reflect A.M. Best's current opinion of the relevant financial strength and operating performance of an insurance company in comparison to the norms of the life/health industry. Best's ratings range from A++ to F. Standard and Poor's and Duff and Phelps' ratings measure the ability of an insurance company to meet its obligations under insurance policies it issues. These two ratings do not measure the insurance company's ability to meet non-policy obligations. Ratings in general do not relate to the performance of the Sub-Accounts. We may also advertise endorsements from organizations, individuals or other parties that recommend the Company or the Contracts. We may occasionally include in advertisements (1) comparisons of currently taxable and tax deferred investment programs, based on selected tax brackets; or (2) discussions of alternative investment vehicles and general economic conditions. AVAILABLE INFORMATION The Company and the Variable Account have filed with the SEC registration statements under the Securities Act of 1933 relating to the Contracts. This Prospectus does not contain all of the 36 information contained in the registration statements and their exhibits. For further information regarding the Variable Account, the Company and the Contracts, please refer to the registration statements and their exhibits. In addition, the Company is subject to the informational requirements of the Securities Exchange Act of 1934. We file reports and other information with the SEC to meet these requirements. You can inspect and copy this information and our registration statements at the SEC's public reference facilities at the following locations: WASHINGTON, D.C. -- 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; CHICAGO, ILLINOIS -- 500 West Madison Street, Chicago, IL 60661; NEW YORK, NEW YORK -- 7 World Trade Center, 13th Floor, New York, NY 10048. The Washington, D.C. office will also provide copies by mail for a fee. You may also find these materials on the SEC's website (http:// www.sec.gov). INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company's Annual Report on Form 10-K for the year ended December 31, 1998 filed with the SEC is incorporated by reference in this Prospectus. Any statement contained in a document we incorporate by reference is deemed modified or superceded to the extent that a later filed document, including this Prospectus, shall modify or supercede that statement. Any statement so modified or superceded shall not be deemed, except as so modified or superceded, to constitute part of this Prospectus. The Company will furnish, without charge, to each person to whom a copy of this Prospectus is delivered, upon the written or oral request of such person, a copy of the document referred to above which has been incorporated by reference in this Prospectus, other than exhibits to such document (unless such exhibits are specifically incorporated by reference in this Prospectus). Requests for such document should be directed to the Secretary, Sun Life Assurance Company of Canada (U.S.), One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481, telephone (800) 225-3950. ADDITIONAL INFORMATION ABOUT THE COMPANY BUSINESS OF THE COMPANY We are engaged in the sale of individual variable life insurance and individual and group fixed and variable annuities. These contracts are sold in both the tax qualified and non-tax qualified markets. These products are distributed through individual insurance agents, insurance brokers and registered broker-dealers. The following table sets forth premiums and deposits by major product categories for each of the last three years. See notes to financial statements for industry segment information.
1998 1997 1996 ------------ ------------ ------------ (IN THOUSANDS) Individual insurance products $ 155,907 $ 204,670 $ 207,845 Retirement products $ 2,194,895 $ 2,204,693 $ 1,834,327 ------------ ------------ ------------ $ 2,350,802 $ 2,409,363 $ 2,042,172 ------------ ------------ ------------ ------------ ------------ ------------
We have obtained authorization to do business in 48 states, the District of Columbia and Puerto Rico, and anticipate that we will be authorized to do business in all states except New York. We have formed a wholly-owned subsidiary, Sun Life Insurance and Annuity Company of New York, which issues individual fixed and combination fixed/variable annuity contracts and group life and long-term disability insurance in New York. Our other active subsidiaries are Sun Capital Advisers, Inc., a registered investment adviser, Clarendon Insurance Agency, Inc., a registered broker-dealer that acts as the general distributor of the Contracts and other annuity and life insurance contracts that we and our affiliates issue, Sun Life of Canada (U.S.) Distributors, Inc., a registered broker-dealer and investment adviser, New London Trust, F.S.B., a federally chartered savings bank, Sun Life Financial Services Limited, which provides off-shore administrative services to us and our parent, Sun Life Assurance 37 Company of Canada ("Sun Life (Canada)"), and Sun Life Information Services Ireland Limited, an offshore technology center. We are a wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). Life Holdco is a wholly-owned subsidiary of Sun Life Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("U.S. Holdco"). U.S. Holdco is a wholly-owned subsidiary of Sun Life (Canada), 150 King Street West, Toronto, Ontario, Canada. Sun Life (Canada) is a mutual life insurance company incorporated pursuant to Act of Parliament of Canada in 1865 and currently transacts business in all of the Canadian provinces and territories, in all U.S. states (except New York), and in the District of Columbia, Puerto Rico, the Virgin Islands, Great Britain, Ireland, Hong Kong, Bermuda and the Philippines. SELECTED FINANCIAL DATA The following selected financial data for the Company should be read in conjunction with the statutory financial statements of the Company and notes thereto included in this Prospectus beginning on page [45.]
FOR THE YEARS ENDED DECEMBER 31 --------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS) Revenues Premiums, annuity deposits and other revenue $ 2,581,463 $ 2,623,629 $ 2,215,322 $ 1,883,901 $ 1,997,525 Net investment income and realized gains 187,208 298,121 310,172 315,966 312,583 ----------- ----------- ----------- ----------- ----------- 2,768,671 2,921,750 2,525,494 2,199,867 2,310,108 ----------- ----------- ----------- ----------- ----------- Benefits and expenses Policyholder benefits 2,416,950 2,579,104 2,232,528 1,995,208 2,102,290 Other expenses 214,607 206,065 175,342 150,937 186,892 ----------- ----------- ----------- ----------- ----------- 2,631,557 2,785,169 2,407,870 2,146,145 2,289,182 ----------- ----------- ----------- ----------- ----------- Operating gain 137,114 136,581 117,624 53,722 20,926 Federal income tax expense (benefit) 11,713 7,339 (5,400) 17,807 19,469 ----------- ----------- ----------- ----------- ----------- Net income $ 125,401 $ 129,242 $ 123,024 $ 35,915 $ 1,457 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Assets $16,902,621 $15,925,357 $13,621,952 $12,359,683 $10,117,822 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Surplus notes $ 565,000 $ 565,000 $ 315,000 $ 650,000 $ 335,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See Note 1 to financial statements for changes in accounting principles and reporting. See discussion in Management's Discussion and Analysis of Financial Conditions and Results of Operations. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT This Prospectus includes forward looking statements by the Company under the Private Securities Litigation Reform Act of 1995. These statements are not matters of historical fact; they relate to such topics as future product sales, 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 38 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: - The Company's ability to identify and address 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 their own Year 2000 issues in a timely manner. - Heightened competition, particularly in terms of price, product features, and distribution capability, which could constrain the Company's growth and profitability. - Changes in interest rates and market conditions. - Regulatory and legislative developments. - Developments in consumer preferences and behavior patterns. RESULTS OF OPERATIONS NET INCOME Net income decreased by $3.8 million to $125.4 million in 1998, reflecting an increase of $22.5 million in income from operations and a decrease of $26.3 million in net realized capital gains. (In the following discussion, "income from operations" refers to the statutory statement of operations line item, net gain from operations after dividends to policyholders and federal income tax and before realized capital gains.) Income from operations increased from $102.5 million in 1997 to $125.0 million in 1998, mainly as a result of the following factors: - A $16.7 million increase, to $31.4 million in 1998, in the income from operations from the Company's Retirement Products and Services segment. (This is discussed in the "Retirement Products and Services Segment" section below.) - The effect of terminating certain reinsurance agreements with the Company's ultimate parent. The termination of these agreements was the predominant factor in the $71.1 million increase in income from operations for the Company's Individual Insurance segment. - The effects of the Company's December 1997 reorganization (described in the "Corporate Segment" section below), as a result of which Massachusetts Financial Services Company ("MFS") was no longer a subsidiary of the Company. As a result of this reorganization, dividends from subsidiaries were lower in 1998 than in 1997 and certain subsidiary tax benefits were no longer available to the Company. Also affecting income from operations for the Corporate segment in 1998 was that income earned on the proceeds of a December 1997 issuance of a $250 million surplus note was lower than the related interest expense. Net realized capital gains decreased from $26.7 million in 1997 to $0.4 million in 1998. This change also reflected the Company's reorganization, as a result of which the Company had a realized capital gain of $21.2 million in 1997. Net income increased by $6.2 million to $129.2 million in 1997, as compared to 1996 reflecting a decrease of $15.6 million in income from operations and an increase of $21.8 million in net realized capital gains. Income from operations decreased from $118.2 million in 1996 to $102.5 million in 1997, mainly as a result of the following factors: - A $7.6 million decrease, to $14.7 million, in income from operations from the Company's Retirement Products and Services segment. (This is discussed in the "Retirement Products and Services Segment" section below.) - An increase of $6.5 million, compared to 1996, in the effects of the reinsurance arrangements between the Company and its ultimate parent. 39 - A decrease, by approximately $9 million, in dividends from subsidiaries, as well as higher taxes and expenses in the Corporate segment. As noted above, the $21.9 million increase in net realized capital gains, from $4.8 million in 1996 to $26.7 million in 1997, was caused mainly by the December 1997 Company reorganization, as a result of which the Company had a realized capital gain of $21.2 million in 1997. INCOME FROM OPERATIONS BY SEGMENT The Company's income from operations reflects the operations of its three business segments: the Retirement Products and Services segment, the Individual Insurance segment and the Corporate segment. The following table provides a summary: Income from Operations by Segment* ($ in millions)
% CHANGE ---------------------------- 1998 1997 1996 1998/1997 1997/1996 --------- --------- --------- ------------- ------------- Individual Insurance 89.1 18.0 11.5 395.0% 56.5% Retirement Products and Services 31.4 14.7 22.3 113.6% (34.1)% Corporate 4.5 69.8 84.4 (93.6)% (17.3)% --------- --------- --------- ----- ----- 125.0 102.5 118.2 22.0% (13.3)% --------- --------- --------- ----- ----- --------- --------- --------- ----- -----
*Before realized capital gains These results are discussed more fully below. RETIREMENT PRODUCTS AND SERVICES SEGMENT The Retirement Products and Services segment focuses on the savings and retirement needs of those preparing for retirement or those who have already retired. It primarily markets to upscale consumers in the U.S., selling individual and group fixed and variable annuities. Its major product lines, "Regatta" and "Futurity," are combination fixed/variable annuities. In these combination annuities, contract holders have the choice of allocating payments either to a fixed account, which provides a guaranteed rate of return, or to variable accounts. Withdrawals from the Company's fixed account are subject to market value adjustment. In the variable accounts, the contract holder can choose from a range of investment options and styles. The return depends upon investment performance of the options selected. Investment funds available under Regatta are managed by 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 these 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 distributed through a dedicated wholesaler network, including Sun Life of Canada (US) Distributors, Inc., that services similar distribution channels. Although new pension products are not currently sold, there has been a substantial block of group retirement business in-force, including guaranteed investment contracts ("GICs"), pension plans and group annuities. A significant portion of these pension contracts are non-surrenderable, with the result that the Company's liquidity exposure is limited. GICs were marketed directly in the U.S. through independent managers. In 1997, the Company decided to no longer market group pension and GIC products. Following are the major factors affecting the Retirement Products and Services segment results compared to the prior year: 40 1998 COMPARED TO 1997: - A SHIFTING PATTERN IN SALES. Annuity deposits declined by about $27 million, or 1%, to $2.2 billion in 1998. Fixed annuity account deposits were lower by approximately 7% in 1998, while deposits into variable annuity accounts have been increasing in total and as a proportion of total annuity deposits. These trends reflected market conditions and competitive factors. Deposits into the Dollar Cost Averaging (DCA) programs, a feature of the Company's combination fixed/variable annuity products, were a significant element of account deposits. Under these programs, which were redesigned in late 1996, deposits are made into the fixed portion of the annuity contract and receive a bonus rate of interest for the policy year. During the year, the fixed deposit is systematically transferred to the variable portion of the contract in equal periodic installments. DCA deposits overall were flat in 1998 compared to 1997. This pattern resulted, in part, from heightened competition, as other companies introduced similar DCA programs within the past year. During the fourth quarter of 1998, the Company introduced a higher DCA rate and a new six-month DCA program. DCA deposits for that quarter were higher, compared to the preceding 1998 quarters. An increase in variable account deposits in 1998 reflected both the continuing strong growth in equity markets generally and the continuing strong performance of the investment funds underlying the Company's variable annuity products. The continuing strong equity markets, low interest rate environment, and demographic trends, among other factors, have increased the demand and market for wealth accumulation products in the U.S., particularly for variable annuities. These factors have contributed to the growth in the Company's variable account deposits in 1998, despite heightened competition. The Company introduced its Futurity line of products in February 1998. Related deposits represented about 6% of the total for the Retirement Products and Services segment in 1998, reflecting this recent introduction. The Company expects that sales for the Futurity product will continue to increase in the future, based on its 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 respond favorably to future introductions of new Futurity products and product enhancements. - HIGHER FEE INCOME RESULTING FROM HIGHER VARIABLE ANNUITY ACCOUNT BALANCES. The main factors driving this growth in account balances have been market appreciation and net deposit activity. This growth has generated corresponding increases in fee income, since fees are determined based on the average assets held in these accounts. Fee income increased by approximately $43 million, or 39%, in 1998. - WHILE THERE HAS BEEN A SHIFT TO VARIABLE ACCOUNTS FROM THE GENERAL ACCOUNT, NET INVESTMENT INCOME HAS DECLINED. Net investment income reflects only income earned on invested assets of the general account. In 1998, net investment income for the Retirement Products and Services segment decreased by about $40 million, or 20%, compared to 1997, mainly as a result of the decline in average invested assets in the Company's general account. This decline in average general account assets mainly reflected the shift in deposits in recent years from the fixed account to variable accounts. It also reflected the Company's decision in 1997 to no longer market group pension and GIC products. - LOWER POLICYHOLDER BENEFITS, MAINLY REFLECTING LOWER SURRENDER ACTIVITY COMPARED TO 1997. During 1997 and into the first half of 1998, surrender and withdrawal activity was high. This activity primarily related to a block of separate account contracts that had been issued seven or more years previously and for which the surrender charge periods had expired. While variable account surrenders have continued to rise, general account surrenders have declined. As a result of this pattern of activity, policyholder benefits (of which surrenders and withdrawals, the related changes in the liability for premium and other deposit funds, and related separate 41 account transfers are the major elements) increased in 1997 and were lower in 1998. The Company expects that as the separate account block of business continues to grow, and as a higher proportion of it is no longer subject to surrender charges, surrenders will tend to increase. - INVESTMENTS IN TECHNOLOGY AND INFRASTRUCTURE TO ENHANCE ANNUITY OPERATIONS. As a result of these investments, operational expenses increased by approximately $12 million, or 25%, in 1998 compared to 1997. These increases reflected three main factors: (1) HIGHER VOLUMES OF ANNUITY BUSINESS, REQUIRING GREATER ADMINISTRATIVE SUPPORT. The Company expects that increases in the volume of its annuity business will continue to have a similar effect on expenses in the near term. (2) IMPROVEMENTS TO THE COMPUTER SYSTEMS AND TECHNOLOGY THAT SUPPORT THE ANNUITY BUSINESS. These improvements involved information systems supporting the growth of the Company's in-force business, particularly its combination fixed/variable annuities. The Company expects to continue to invest in its systems and technology in the future. The extent and nature of these investments will depend on the Company's assessments of the relative costs and benefits of given projects. (3) COSTS ASSOCIATED WITH THE PRODUCT DESIGN AND IMPLEMENTATION OF THE NEW FUTURITY MULTI-MANAGER ANNUITY PRODUCT AND THE DEVELOPMENT OF A NEW PRODUCT WITHIN THE REGATTA PRODUCT LINE. The Company expects to continue to invest in further product enhancements in the future. 1997 COMPARED TO 1996: - STRONG FIXED ACCOUNT DEPOSITS. Fixed account deposits in 1997 were approximately $650 million, or 240%, higher than in 1996. This increase resulted mainly from the Company's redesign of its DCA programs in late 1996. The Company benefited at the time from the popularity of its DCA program features and from the absence of major competitors offering similar features. - IN 1997, VARIABLE ANNUITY DEPOSITS WERE ABOUT $200 MILLION, OR 16%, LOWER THAN IN 1996. This trend reflected heightened competition, uncertainties in the marketplace regarding the attractiveness of variable annuities, and customer preferences for depositing into the DCA programs rather than directly into the variable accounts. - HIGHER FEE INCOME RESULTING FROM HIGHER VARIABLE ANNUITY ACCOUNT BALANCES. The main factors driving this growth in account balances were market appreciation and net deposit activity. This growth generated corresponding increases in fee income, since fees are determined based on the average assets held in these accounts. - DECLINING GENERAL ACCOUNT BALANCES, RESULTING IN DECLINING NET INVESTMENT INCOME. In 1997, net investment income for the Retirement Products and Services segment decreased by about 16%, mainly as a result of a decline in average invested assets in the Company's general account. This decline in average general account assets mainly reflected the Company's decision in 1997 to no longer market group pension and GIC products. - HIGHER POLICYHOLDER BENEFITS, MAINLY REFLECTING HIGH SURRENDER ACTIVITY IN 1997. As noted above, surrender and withdrawal activity was high in 1997. This activity primarily related to a block of separate account contracts that had been issued seven or more years previously and for which the surrender charge period had expired. As a result of this pattern of activity, policyholder benefits (of which surrenders and withdrawals, the related changes in the liability for premium and other deposit funds, and related separate account transfers are the major elements) were unusually high in 1997 compared to 1996. 42 - HIGHER COMMISSIONS. Commissions increased by approximately $22 million, or 20%, in 1997, directly reflecting higher sales of combination fixed/variable annuity products in 1997 compared to 1996. - HIGHER OPERATIONAL EXPENSES. Operational expenses increased by approximately $5 million, or 13%, as a result of the additional staffing needed to administer higher volumes of business and because of non-recurring costs of moving the Retirement Products and Services operations to a new facility. INDIVIDUAL INSURANCE SEGMENT The Individual Insurance segment comprises two main elements: internal reinsurance and variable life products. INTERNAL REINSURANCE In recent years, the Company has had various reinsurance agreements with its ultimate parent, Sun Life (Canada). In some of these arrangements, Sun Life (Canada) has reinsured the mortality risks of individual life policies sold in prior years by the Company. In another agreement, which became effective January 1, 1991 and terminated October 1, 1998, the Company reinsured certain individual life insurance contracts issued by Sun Life (Canada). The latter agreement had a significant effect on net income in both 1997 and 1998. The former agreements, in the aggregate, also affected net income in those years, but to a much lesser extent. The effects of these agreements on the Company's net income are summarized in the following table. INTERNAL REINSURANCE-EFFECT ON INCOME FROM OPERATIONS BEFORE INCOME TAXES ($ IN MILLIONS)
1998 1997 1996 --------- --------- --------- 1991 Agreement Effect on operations $ 24.6 $ 37.1 $ 35.2 Effect of termination 65.7 -- -- Other Agreements Effect on operations (2.1) (1.4) (1.6) --------- --------- --------- Total $ 88.2 $ 35.7 $ 33.6 --------- --------- --------- --------- --------- ---------
Because the 1991 agreement was in effect only through the first nine months of 1998, related net income was correspondingly lower in 1998 than in 1997. Also contributing to the lower 1998 net income from operations from this agreement were proportionately higher death claims in 1998. The effect of terminating this agreement was to further increase 1998 net income by $65.7 million. Neither the net income effect of this agreement's operations nor that of its termination will recur. The termination-related increase in 1998 represents a reasonable approximation of the value of the stream of future earnings that the agreement would have generated had it not been terminated. VARIABLE LIFE PRODUCTS This business includes the sale of individual variable life insurance products, primarily the Company's variable universal life product for the company-owned life insurance ("COLI") market. This product was introduced in late 1997. The Company expects the variable life business to grow and become more significant in the future. 43 CORPORATE SEGMENT This segment includes the capital of the Company, its investments in subsidiaries and items not otherwise attributable to either the Retirement Products and Services and Individual Insurance segments. In 1998, income from operations decreased by $65.3 million to $4.5 million for this segment. This decrease reflected two main factors: - DIVIDENDS FROM SUBSIDIARIES WERE LOWER THAN IN 1997 BY $37.5 MILLION. This decrease mainly resulted from a December 1997 reorganization, in which the Company transferred its ownership of MFS to its parent company. As a result of this reorganization, the Company received no dividends from MFS in 1998. By comparison, it received $33.1 million of MFS dividends in 1997. - Net investment income other than dividends from subsidiaries, was lower than in 1997 by $5.9, reflecting the effect of the Company's December 1997 issuance of a $250 million surplus note to its upstream holding company. Interest expense exceeded investment earnings on the related funds. In 1997, income from operations for this segment decreased by $14.6 million, to $69.8 million. This decrease mainly reflected a decrease, by approximately $9 million, in dividends from subsidiaries. It also reflected higher taxes and expenses. FINANCIAL CONDITION AND LIQUIDITY ASSETS The Company's total assets comprise those held in its general account and those held in its separate accounts. General account assets support general account liabilities. Separate accounts and their assets are of two main types: - Those assets held in a "fixed" separate account, which the Company established for amounts that contract holders allocate to the fixed portion of their combination fixed/variable deferred annuity contracts. Fixed separate account assets are available to fund general account liabilities and general account assets are available to fund the liabilities of this fixed separate account. The Company manages the assets of this fixed separate account according to general account investment policy guidelines. - Those assets held in a number of registered and non-registered "variable" separate accounts as investment vehicles for the Company's variable life and annuity contracts. Policyholders may choose from among various investment options offered under these contracts according to their individual needs and preferences. Policyholders assume the investment risks associated with these choices. General account and fixed separate account assets are not available to fund the liabilities of these variable accounts. The following table summarizes significant changes in asset balances during 1998 and 1997. The changes are discussed below.
ASSETS % CHANGE 1998 1997 1996 1998/1997 1997/1996 ---------- ---------- ---------- ------------ ------------ ($ IN MILLIONS) General account assets $ 2,932.2 $ 4,513.5 $ 4,593.9 (35.0)% (1.75)% Fixed separate account assets 2,195.6 2,343.9 2,108.8 (6.3)% 11.15% ---------- ---------- ---------- ------ ------ $ 5,127.8 $ 6,857.4 $ 6,702.7 (25.2)% 2.31% Variable separate account assets 11,774.8 9,068.0 6,919.2 29.9% 31.06% ---------- ---------- ---------- ------ ------ Total assets $ 16,902.6 $ 15,925.4 $ 13,621.9 6.1% 16.91% ---------- ---------- ---------- ------ ------ ---------- ---------- ---------- ------ ------
General account and fixed separate account assets, taken together, decreased by 25% in 1998, but variable separate account assets increased by 30% that year. In 1997, growth in the general account and fixed separate account was low; variable separate account assets increased by 31%. This growth in variable accounts relative to the general and fixed accounts reflects two main factors: appreciation of 44 the funds held in the variable separate accounts has exceeded that of the funds held in the general and fixed separate accounts; and annuity deposits into variable accounts have increased, while annuity deposits into fixed accounts have slowed. The Company believes this pattern reflects 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 Company's general account are available to support general account liabilities. For management purposes, it is the Company's practice to segment its general account to facilitate the matching of assets and liabilities. General account assets primarily comprise cash and invested assets, which represented 98.7% of general account assets at year-end 1998. Major types of invested asset holdings included bonds, mortgages, real estate and common stock. The Company's bond holdings comprised 60.9% of the Company's portfolio at year-end 1998. Bonds included both public and private issues. It is the Company's policy to acquire only investment-grade securities. As a result, the overall quality of the bond portfolio is high. At year-end 1998, only 5.3% of these securities were rated below-investment-grade; I.E., they had National Association of Insurance Commissioners ("NAIC") ratings lower than "1" or "2." The Company's mortgage holdings amounted to $535.0 million at year-end 1998, representing 18.5% of the total portfolio. All mortgage holdings at year-end 1998 were in good standing. The Company believes that the high quality of its mortgage portfolio is largely attributable to its stringent underwriting standards. At year-end 1998, investment real estate amounted to $78.0 million, representing about 2.7% of the total portfolio. The Company invests in real estate to enhance yields and, because of the long-term nature of these investments, the Company uses them for purposes of matching with products having long-term liability durations. Common stock holdings amounted to $128.4 million, representing about 4.4% of the portfolio. These holdings comprised the Company's ownership shares in subsidiaries. Other general account assets decreased by $1,021.4 million in 1998. This change primarily reflected the effect of terminating the internal reinsurance agreement with the Company's ultimate parent, discussed in "Internal Reinsurance," above. LIABILITIES As with assets, the proportion of variable separate account liabilities to total liabilities has been increasing. Most of the Company's liabilities comprise reserves for life insurance and for annuity contracts and deposit funds. The Company expects the declining trend in general account liabilities to continue, because it believes that net maturities will continue to exceed sales for the fixed contracts associated with these liabilities. This trend stems mainly from the Company's 1997 decision to discontinue selling group pension and GIC contracts and to focus its marketing efforts on its combination fixed/variable annuity products. In December 1997, the Company borrowed $110.0 million from Sun Life Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("U.S. Holdco"), its upstream holding company. The Company repaid this note during the first quarter of 1998. The termination of the internal reinsurance agreement discussed above resulted in a $1.0 billion decrease in liabilities as compared to 1997. CAPITAL MARKETS RISK MANAGEMENT See "Quantitative and Qualitative Disclosures About Market Risk" below for a discussion of the Company's capital markets risk management. CAPITAL RESOURCES CAPITAL ADEQUACY The National Association of Insurance Commissioners ("NAIC") adopted regulations at the end of 1993 that established minimum capitalization requirements for insurance companies, based on risk-based capital ("RBC") formulas. These requirements are intended to identify undercapitalized companies, so that specific regulatory actions can be taken on a timely basis. The RBC formula for life 45 insurance companies sets 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 1998. LIQUIDITY The Company's liquidity requirements are generally met by funds from operations. The Company's main uses of funds are to pay out death benefits and other maturing insurance and annuity contract obligations; to make pay-outs on contract terminations; to purchase new investments; to fund new business ventures; and to pay normal operating expenditures and taxes. The Company's main sources of funds are premiums and deposits on insurance and annuity products; proceeds from the sale of investments; income from investments; and repayments of investment principal. In managing its general account and fixed separate account assets in relation to its liabilities, the Company has segmented these assets by product or by groups of products. The Company manages each segment's assets based on an investment policy that it has established for that segment. Among other matters, this investment policy considers liquidity requirements and provides cash flow estimates. The Company reviews these policies quarterly. The Company's liquidity targets are intended to enable it to meet its day-to-day cash requirements. On a quarterly basis, the Company compares its total "liquifiable" assets to its total demand liabilities. Liquifiable assets comprise cash and assets that could quickly be converted to cash should the need arise. These assets include short-term investments and other current assets and investment-grade bonds. The Company's policy is to maintain a liquidity ratio in excess of 100%, and it did so throughout 1998. Based on its ongoing liquidity analyses, the Company believes that its available liquidity is more than sufficient to meet its liquidity needs. DEMUTUALIZATION On January 27, 1998, Sun Life (Canada) announced that its Board of Directors had requested management world-wide to develop a plan to convert from a mutual life insurance company into a publicly traded stock company through demutualization worldwide. Management has put in place a full time task force which, together with a worldwide team of actuarial, financial and legal advisers, has begun work. The Board will decide later this year whether to proceed with demutualization, following the completion of the plan. Demutualization would require regulatory and policyholder approval. Based on information known to date, the potential demutualization of Sun Life (Canada) is not expected to have any significant impact on the Company. YEAR 2000 COMPLIANCE During the fourth quarter of 1996, the Company, Sun Life (Canada) 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 works with dedicated personnel from all business units and with the legal and audit departments, reports directly to the Company's senior management on a monthly basis. In addition, the Company's Year 2000 project is periodically reviewed by internal and external auditors. To date, relevant systems have been identified and their components inventoried, needed resolutions have been documented, timelines and project plans have been developed, and remediation and testing are in process. Over 90% of the components have been remediated, tested and are certified as Year 2000 compliant. The majority of the remaining components are in the testing phase and are expected to be certified over the course of this year. In mid-1997, the project team contacted all key vendors to obtain either their certification for the products and services provided or their plan to make those products and services compliant. Approximately 95% of these vendors have responded and the project team has reviewed the responses 46 and validated and conducted tests with the vendors where appropriate. In addition, the project team continues to work with critical business partners, such as third-party administrators, investment property managers, investment mortgage correspondents, and others, with the goal that these partners will continue to be able to support the Company's objective of assuring Year 2000 compliance. Non-IT applications, including building security, HVAC systems, and other such systems, will be tested. Compliant client server and mainframe environments have been built which 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 current production. Although the Company expects all critical systems to be Year 2000 compliant before the end of 1999, there can be no assurance that this result will be achieved. Factors giving rise to this uncertainty include possible loss of technical resources to perform the work, failure to identify all susceptible systems, non-compliance by third-parties whose systems and operations affect the Company, and other similar uncertainties. A possible worst-case scenario might include one or more of the Company's significant systems being non-compliant. Such a scenario could result in material disruption to the Company's operations. Consequences of such disruptions could include, among other possibilities, the inability to update customers' accounts, process payments and other financial transactions; and 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 a material 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 failure to achieve planned Year 2000 compliance, the Company has established contingency planning at the business unit and corporate levels. Each business unit has ranked its applications as being of high, medium or low business risk to ensure that the most critical are addressed first. The business units also have developed alternate plans of action where possible, and established dates for the alternate plans to be enacted. On the corporate level, the Company is in the process of enhancing its business continuation plan by identifying minimum requirements for facilities, computing, staffing, and other factors, and it is developing a plan to support those requirements. As of year-end 1998, the Company had expended, cumulatively, approximately $4.2 million on its Year 2000 effort, and it expects to incur a further $1.3 million on this effort in 1999. SALE OF SUBSIDIARY In February 1999, the Company completed the sale of its wholly-owned subsidiary, Massachusetts Casualty Insurance Company ("MCIC"), to Centre Solutions (U.S.) Limited, a wholly-owned subsidiary of Centre Reinsurance Holdings, Limited, for approximately $34 million. MCIC sold individual disability insurance throughout the U.S. This transaction is not expected to have a significant effect on the operations of the Company. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This discussion covers market risks associated with investment portfolios that support the Company's general account liabilities. This discussion does not cover market risks associated with those investment portfolios that support separate account products. For these products, the policyholder, rather than the Company, assumes these market risks. GENERAL The assets of the Company's 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 47 policies to ensure that the policies remain appropriate, taking into account each segment's liability characteristics. TYPES OF MARKET RISKS The Company's stringent underwriting standards and practices have resulted in high-quality portfolios and have the effect of limiting credit risk. It is the Company's policy, for example, not to purchase below-investment-grade securities. Also, as a matter of investment policy, the Company assumes no foreign currency or commodity risk; nor does it assume equity price risk except to the extent that it holds real estate in its portfolios. (At year-end 1998, investment real estate holdings represented approximately 3% of its total general account portfolio.) The management of interest rate risk exposure is discussed below. INTEREST RATE RISK MANAGEMENT The Company's fixed interest rate liabilities are primarily supported by well diversified portfolios of fixed interest investments. They are also supported by holdings of real estate and floating rate notes. All of these fixed interest investments are held for other than trading purposes and can include publicly issued and privately placed bonds and commercial mortgage loans. Public bonds can include Treasury bonds, corporate bonds, and money market instruments. The Company's fixed income portfolios also hold securitized assets, including mortgage-backed securities (MBS) and asset-backed securities. These securities are subject to the same standards applied to other portfolio investments, including relative value criteria and diversification guidelines. In portfolios backing interest-sensitive liabilities, the Company's policy is to limit MBS holdings to less than 10% of total portfolio assets. In all portfolios, the Company restricts MBS investments to pass-through securities issued by U.S. Government agencies and to collateralized mortgage obligations, which are expected to exhibit relatively low volatility. The Company does not engage in leveraged transactions and it does not invest in the more speculative forms of these instruments such as the interest-only, principal-only, inverse floater, or residual tranches. Changes in the level of domestic interest rates affect the market value of fixed interest assets and liabilities. Segments whose liabilities mainly arise from the sale of products containing interest rate guarantees for certain terms are sensitive to changes in interest rates. In these segments, the Company uses "immunization" strategies, which are specifically designed to minimize the loss from wide fluctuations in interest rates. The Company supports these strategies using analytical and modeling software acquired from outside vendors. Significant features of the Company's immunization models include: - an economic or market value basis for both assets and liabilities; - an option pricing methodology; - the use of effective duration and convexity to measure interest rate sensitivity; and - the use of "key rate durations" to estimate interest rate exposure at different parts of the yield curve and to estimate the exposure to non-parallel shifts in the yield curve. The Company's Interest Rate Risk Committee meets monthly. After reviewing duration analyses, market conditions and forecasts, the Committee develops specific asset management strategies for the interest-sensitive portfolios. These strategies may involve managing to achieve small intentional mismatches, either in terms of total effective duration or for certain key rate durations, between the liabilities and related assets of particular segments. The Company manages these mismatches to a tolerance range of plus or minus 0.5. Asset strategies may include the use of Treasury futures or interest rate swaps to adjust the duration profiles for particular portfolios. All derivative transactions are conducted under written operating guidelines and are marked to market. Total positions and exposures are reported to the Company's 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. 48 Liabilities categorized as financial instruments and held in the Company's general account at December 31, 1998 had a fair value of $1,538.3 million. Fixed income investments supporting those liabilities had a fair value of $2,710.1 million at that date. The Company performed a sensitivity analysis on these interest-sensitive liabilities and assets at December 31, 1998. The analysis showed that if there were an immediate increase of 100 basis points in interest rates, the fair value of the liabilities would show a net decrease of $46.3 million and the corresponding assets would show a net decrease of $113.2 million. By comparison, liabilities categorized as financial instruments and held in the Company's general account at December 31, 1997 had a fair value of $1,986.4 million. Fixed income investments supporting those liabilities had a fair value of $3,276.2 million at that date. The Company performed a sensitivity analysis on these interest-sensitive liabilities and assets at December 31, 1997. 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 $56.0 million and the corresponding assets would show a net decrease of $108.0 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 believes its exposure to interest rate changes will not materially affect its near-term financial position, results of operations, or cash flows. REINSURANCE The Company has agreements with Sun Life (Canada) which provide that Sun Life (Canada) will reinsure the mortality risks of the individual life insurance contracts previously sold by the Company. Under these agreements, basic death benefits and supplementary benefits are reinsured on a yearly renewable term basis and coinsurance basis, respectively. Reinsurance transactions under these agreements in 1998 had the effect of decreasing net income from operations by $2,128,000. Effective January 1, 1991 the Company entered into an agreement with Sun Life (Canada) under which certain individual life insurance contracts issued by Sun Life (Canada) were reinsured by the Company on a 90% coinsurance basis. Also effective January 1, 1991, the Company entered into an agreement with Sun Life (Canada) which provides that Sun Life (Canada) will reinsure the mortality risks in excess of $500,000 per policy for the individual life insurance contracts assumed by the Company in the reinsurance agreement described above. Death benefits are reinsured on a yearly renewable term basis. The life reinsurance assumed agreement requires the reinsurer to withhold funds in an amount equal to the reserves assumed. These agreements had the effect of increasing income from operations by approximately $24,579,000 for the year ended December 31, 1998. The Company terminated these agreements, effective October 1, 1998, resulting in an increase in income from operations of $65,679,000, which included a cash settlement. The Company has also executed reinsurance agreements with unaffiliated companies. These agreements provide reinsurance of certain individual life insurance contracts on a modified coinsurance basis under which all deficiency reserves are ceded; as well as reinsurance for variable universal life on a yearly renewable term basis for which the Company has a maximum retention of $2,000,000. 49 RESERVES In accordance with the life insurance laws and regulations under which the Company operates, it is obligated to carry on its books, as liabilities, actuarially determined reserves to meet its obligations on its outstanding contracts. Reserves are based on mortality tables in general use in the United States and are computed to equal amounts that, with additions from premiums to be received, and with interest on such reserves compounded annually at certain assumed rates, will be sufficient to meet the Company's policy obligations at their maturities or in the event of an insured's death. In the accompanying Financial Statements, these reserves are determined in accordance with statutory regulations. INVESTMENTS Of the Company's total assets of $16.9 billion at December 31, 1998, 82.7% ($13.98 billion) consisted of unitized and non-unitized separate account assets, 10.4% ($1.76 billion) was invested in bonds and similar securities, 3.2% ($541 million) was invested in mortgages, 0.7 % ($118.3 million) was invested in subsidiaries, 0.6% ($101.4 million) was invested in real estate, and the remaining 2.4% ($405.6 million) was invested in cash and other assets. COMPETITION The Company is engaged in a business that is highly competitive because of the large number of stock and mutual life insurance companies and other entities marketing insurance products. According to a 1998 statistical study, published by A.M. Best, the Company ranked 37th among North American life insurance companies based upon total assets as of December 31, 1997. Its ultimate parent company, Sun Life (Canada), ranked 21st. EMPLOYEES The Company and Sun Life (Canada) have entered into a service agreement which provides that the latter will furnish the Company, as required, with personnel as well as certain services and facilities on a cost reimbursement basis. Expenses under this agreement amounted to approximately $16,344,000 in 1998. As of March 31, 1999, the Company had 392 direct employees employed at its Principal Executive Office in Wellesley Hills, Massachusetts and at its Retirement Products and Services Division in Boston, Massachusetts. PROPERTIES The Company occupies office space owned by it and leased to Sun Life (Canada), and certain unrelated parties for lease terms not exceeding five years. The Company also occupies office space which it leases from unaffiliated parties for various lease terms. Rent received by the Company under the leases amounted to approximately $6,856,000 in 1998. STATE REGULATION The Company is subject to the laws of the State of Delaware governing life insurance companies and to regulation by the Commissioner of Insurance of Delaware. An annual statement is filed with the Commissioner of Insurance on or before March lst in each year relating to the operations of the Company for the preceding year and its financial condition on December 31st of such year. Its books and records are subject to review or examination by the Commissioner or his agents at any time and a full examination of its operations is conducted at periodic intervals. The Company is also subject to the insurance laws and regulations of the other states and jurisdictions in which it is licensed to operate. The laws of the various jurisdictions establish supervisory agencies with broad administrative powers with respect to licensing to transact business, overseeing trade practices, licensing agents, approving policy forms, establishing reserve requirements, fixing maximum interest rates on life insurance policy loans and minimum rates for accumulation of surrender values, prescribing the form and content of required financial statements and regulating the type and amounts of investments permitted. Each insurance company is required to file detailed annual reports 50 with supervisory agencies in each of the jurisdictions in which it does business and its operations and accounts are subject to examination by such agencies at regular intervals. In addition, many states regulate affiliated groups of insurers, such as the Company, its parent and its affiliates, under insurance holding company legislation. Under such laws, inter-company transfers of assets and dividend payments from insurance subsidiaries may be subject to prior notice or approval, depending on the size of such transfers and payments in relation to the financial positions of the companies involved. Under insurance guaranty fund laws in most states, insurers doing business therein can be assessed (up to prescribed limits) for policyholder losses incurred by insolvent companies. The amount of any future assessments of the Company under these laws cannot be reasonably estimated. However, most of these laws do provide that an assessment may be excused or deferred if it would threaten an insurer's own financial strength and many permit the deduction of all or a portion of any such assessment from any future premium or similar taxes payable. Although the federal government generally does not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures which may significantly affect the insurance business include employee benefit regulation, removal of barriers preventing banks from engaging in the insurance business, tax law changes affecting the taxation of insurance companies, the tax treatment of insurance products and its impact on the relative desirability of various personal investment vehicles. LEGAL PROCEEDINGS There are no pending legal proceedings affecting the Variable Account. We and our subsidiaries are engaged in various kinds of routine litigation which, in management's judgment, is not of material importance to our respective total assets or material with respect to the Variable Account. ACCOUNTANTS The financial statements of the Variable Account for the year ended December 31, 1998 included in the Statement of Additional Information and the statutory financial statements of the Company for the years ended December 31, 1998, 1997 and 1996 included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. FINANCIAL STATEMENTS The financial statements of the Company which are included in this Prospectus should be considered only as bearing on the ability of the Company to meet its obligations with respect to amounts allocated to the Fixed Account and with respect to the death benefit and the Company's assumption of the mortality and expense risks. They should not be considered as bearing on the investment performance of the Series Fund shares held in the Sub-Accounts of the Variable Account. The financial statements of the Variable Account for the year ended December 31, 1998 are included in the Statement of Additional Information. ------------------------ 51 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, 1998 AND 1997 (IN THOUSANDS)
1998 1997 ------------- ------------- ADMITTED ASSETS Bonds $ 1,763,468 $ 1,910,699 Common stocks 128,445 117,229 Mortgage loans on real estate 535,003 684,035 Properties acquired in satisfaction of debt 17,207 22,475 Investment real estate 78,021 78,426 Policy loans 41,944 40,348 Cash and short-term investments 265,226 544,418 Other invested assets 64,177 55,716 Life insurance premiums and annuity considerations due and uncollected -- 9,203 Investment income due and accrued 35,706 39,279 Federal income tax recoverable and interest thereon 1,110 -- Receivable from parent, subsidiaries and affiliates -- 27,136 Funds withheld on reinsurance assumed -- 982,653 Other assets 1,928 1,842 ------------- ------------- General account assets 2,932,235 4,513,459 Separate account assets: Unitized 11,774,745 9,068,021 Non-unitized 2,195,641 2,343,877 ------------- ------------- Total Admitted Assets $ 16,902,621 $ 15,925,357 ------------- ------------- ------------- ------------- LIABILITIES Aggregate reserve for life policies and contracts $ 1,216,107 $ 2,188,243 Supplementary contracts 1,885 2,247 Policy and contract claims 369 2,460 Provision for policyholders' dividends and coupons payable -- 32,500 Liability for premium and other deposit funds 1,000,875 1,450,705 Surrender values on cancelled policies 5 215 Interest maintenance reserve 40,490 33,830 Commissions to agents due or accrued 2,615 2,826 General expenses due or accrued 5,932 6,238 Transfers from Separate Accounts due or accrued (361,863) (284,078) Taxes, licenses and fees due or accrued, excluding FIT 401 105 Federal income taxes due or accrued 25,019 56,384 Unearned investment income 23 34 Amounts withheld or retained by company as agent or trustee 529 47 Remittances and items not allocated 5,176 1,363 Borrowed money -- 110,142 Asset valuation reserve 44,392 47,605 Payable to parent, subsidiaries, and affiliates 30,381 -- Payable for securities 428 27,104 Other liabilities 9,770 2,924 ------------- ------------- General account liabilities 2,022,534 3,680,894 Separate account liabilities: Unitized 11,774,522 9,067,891 Non-unitized 2,195,641 2,343,877 ------------- ------------- Total liabilities 15,992,697 15,092,662 ------------- ------------- CAPITAL STOCK AND SURPLUS Common capital stock 5,900 5,900 ------------- ------------- Surplus notes 565,000 565,000 Gross paid in and contributed surplus 199,355 199,355 Unassigned funds 139,669 62,440 ------------- ------------- Surplus 904,024 826,795 ------------- ------------- Total common capital stock and surplus 909,924 832,695 ------------- ------------- Total Liabilities, Capital Stock and Surplus $ 16,902,621 $ 15,925,357 ------------- ------------- ------------- -------------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS. 52 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) STATUTORY STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN 000'S)
1998 1997 1996 ---------- ---------- ---------- INCOME: Premiums and annuity considerations $ 210,198 $ 254,066 $ 266,942 Deposit-type funds 2,140,604 2,155,297 1,775,230 Considerations for supplementary contracts without life contingencies and dividend accumulations 2,086 1,615 2,340 Net investment income 184,532 270,249 303,753 Amortization of interest maintenance reserve 2,282 1,166 1,557 Income from fees associated with investment management and administration and contract guarantees from Separate Account 141,211 109,757 83,278 Net gain from operations from Separate Account -- 5 -- Other income 87,364 102,889 87,532 ---------- ---------- ---------- Total 2,768,277 2,895,044 2,520,632 ---------- ---------- ---------- BENEFITS AND EXPENSES: Death benefits 15,335 17,284 12,394 Annuity benefits 153,636 148,135 146,654 Disability benefits and benefits under accident and health policies 104 132 105 Surrender benefits and other fund withdrawals 1,933,833 1,854,004 1,507,263 Interest on policy or contract funds (140) 699 2,205 Payments on supplementary contracts without life contingencies and dividend accumulations 2,528 1,687 2,120 Increase (decrease) in aggregate reserves for life and accident and health policies and contracts (972,135) 127,278 162,678 Decrease in liability for premium and other deposit funds (449,831) (447,603) (392,348) Increase (decrease) in reserve for supplementary contracts without life contingencies and for dividend and coupon accumulations (362) 42 327 ---------- ---------- ---------- Total 682,968 1,701,658 1,441,398 Commissions on premiums and annuity considerations (direct business only) 137,718 132,700 109,894 Commissions and expense allowances on reinsurance assumed 13,032 17,951 18,910 General insurance expenses 58,132 46,624 37,206 Insurance taxes, licenses and fees, excluding federal income taxes 7,388 8,267 8,431 Increase (decrease) in loading on and cost of collection in excess of loading on deferred and uncollected premiums (1,663) 523 901 Net transfers to Separate Accounts 722,851 844,130 761,941 Reserve and fund adjustments on reinsurance terminated 1,017,112 -- -- ---------- ---------- ---------- Total 2,637,538 2,751,853 2,378,681 ---------- ---------- ---------- Net gain from operations before dividends to policyholders and Federal Income Taxes 130,739 143,191 141,951 Dividends to policyholders (5,981) 33,316 29,189 ---------- ---------- ---------- Net gain from operations after dividends to policyholders and before Federal Income Taxes 136,720 109,875 112,762 Federal income tax expense (benefit), (excluding tax on capital gains) 11,713 7,339 (5,400) ---------- ---------- ---------- Net gain from operations after dividends to policyholders and federal income taxes and before realized capital gains 125,007 102,536 118,162 Net realized capital gains less capital gains tax and transferred to the IMR 394 26,706 4,862 ---------- ---------- ---------- NET INCOME $ 125,401 $ 129,242 $ 123,024 ---------- ---------- ---------- ---------- ---------- ----------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS. 53 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN 000'S)
1998 1997 1996 ---------- ----------- ----------- Capital and surplus, Beginning of year $ 832,695 $ 567,143 $ 792,452 ---------- ----------- ----------- Net income 125,401 129,242 123,024 Change in net unrealized capital gains (losses) (384) 1,152 (1,715) Change in non-admitted assets and related items (1,086) (463) 67 Change in reserve on account of change in valuation basis -- 39,016 -- Change in asset valuation reserve 3,213 6,307 (11,812) Surplus (contributed to) withdrawn from Separate Accounts during period 82 -- 100 Other changes in surplus in Separate Accounts Statements 10 -- -- Change in surplus notes -- 250,000 (335,000) Dividends to stockholders (50,000) (159,722) -- Aggregate write-ins for gains and losses in surplus (7) 20 27 ---------- ----------- ----------- Net change in capital and surplus for the year 77,229 265,552 (225,309) ---------- ----------- ----------- Capital and surplus, End of year $ 909,924 $ 832,695 $ 567,143 ---------- ----------- ----------- ---------- ----------- -----------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS. 54 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) STATUTORY STATEMENTS OF CASH FLOW YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
1998 1997 1996 ----------- ----------- ----------- Cash Provided by Operations: Premiums, annuity considerations and deposit funds received $ 2,361,669 $ 2,410,919 $ 2,059,577 Considerations for supplementary contracts and dividend accumulations received 2,086 1,615 2,340 Net investment income received 236,944 345,279 324,914 Other income received 253,147 208,223 88,295 ----------- ----------- ----------- Total receipts 2,853,846 2,966,036 2,475,126 ----------- ----------- ----------- Benefits paid (other than dividends) 2,107,736 2,020,747 1,671,483 Insurance expenses and taxes paid (other than federal income and capital gains taxes) 217,023 203,650 172,015 Net cash transferred to Separate Accounts 800,636 895,465 755,605 Dividends paid to policyholders 26,519 28,316 22,689 Federal income tax payments (recoveries),(excluding tax on capital gains) 46,965 1,397 (15,363) Other--net (138) 698 2,205 ----------- ----------- ----------- Total payments 3,198,741 3,150,273 2,608,634 ----------- ----------- ----------- Net cash used in operations (344,895) (184,237) (133,508) ----------- ----------- ----------- Proceeds from long-term investments sold, matured or repaid (after deducting taxes on capital gains of $2,038 for 1998, $750 for 1997 and $1,555 for 1996) 1,261,396 1,343,803 1,768,147 Issuance (repayment) of surplus notes -- 250,000 (335,000) Other cash provided (used) (40,529) 71,095 147,956 ----------- ----------- ----------- Total cash provided 1,220,867 1,664,898 1,581,103 ----------- ----------- ----------- Cash Applied: Cost of long-term investments acquired (967,901) (773,783) (1,318,880) Other cash applied (187,263) (310,519) (177,982) ----------- ----------- ----------- Total cash applied (1,155,164) (1,084,302) (1,496,862) Net change in cash and short-term investments (279,192) 396,359 (49,267) Cash and short-term investments: Beginning of year 544,418 148,059 197,326 ----------- ----------- ----------- End of year $ 265,226 $ 544,418 $ 148,059 ----------- ----------- ----------- ----------- ----------- -----------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS. 55 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL Sun Life Assurance Company of Canada (U.S.) (the "Company") is incorporated as a life insurance company and is currently engaged in the sale of individual variable life insurance, individual fixed and variable annuities, group fixed and variable annuities and group pension contracts. Effective May 1, 1997, the Company became a wholly-owned subsidiary of the newly established Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On December 18, 1997, Life Holdco became a wholly-owned subsidiary of the Sun Life Assurance Company of Canada - U.S. Operations Holdings, Inc. ("US Holdco"). US Holdco is a wholly-owned subsidiary of Sun Life Assurance Company of Canada ("SLOC"). Prior to December 18, 1997, Life Holdco was a direct wholly-owned subsidiary of SLOC. The Company, which is domiciled in the State of Delaware, prepares its financial statements in accordance with statutory accounting practices prescribed or permitted by the State of Delaware Insurance Department. Prescribed accounting practices include practices described in a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations and general administrative rules. Permitted accounting practices encompass all accounting practices not so prescribed. The permitted accounting practices adopted by the Company are not material to the financial statements. Prior to 1996, statutory accounting practices were recognized by the insurance industry and the accounting profession as generally accepted accounting principles for mutual life insurance companies and stock life insurance companies wholly-owned by mutual life insurance companies. In April 1993, the Financial Accounting Standards Board ("FASB") issued an interpretation (the "Interpretation"), that became effective in 1996, which changed the previous practice of mutual life insurance companies (and stock life insurance companies that are wholly-owned subsidiaries of mutual life insurance companies) with respect to utilizing statutory basis financial statements for general purposes, in that it will no longer allow such financial statements to be described as having been prepared in conformity with generally accepted accounting principles ("GAAP"). Consequently, these financial statements prepared in conformity with statutory accounting practices, as described above, vary from and are not intended to present the Company's financial position, results of operations or cash flow in conformity with generally accepted accounting principles. (See Note 20 for further discussion relative to the Company's basis of financial statement presentation.) The effects on the financial statements of the variances between the statutory basis of accounting and GAAP, although not reasonably determinable, are presumed to be material. INVESTED ASSETS Bonds are carried at cost, adjusted for amortization of premium or accrual of discount. Investments in non-insurance subsidiaries are carried on the equity basis. Investments in mortgage backed securities are generally carried at amortized cost. Changes in prepayment assumptions and resulting cash flows are evaluated periodically. The adjusted yield is used to calculate investment income in future periods. If current book value exceeds future undiscounted cash flows, a realized capital loss is recorded and amortized through IMR. Investments in insurance subsidiaries are carried at their statutory surplus values. Mortgage loans acquired at a premium or discount are carried at amortized values and other mortgage loans are carried at the amounts of the unpaid balances. Real estate investments are carried at the lower of cost, adjusted for accumulated depreciation or appraised value, less encumbrances. Short-term investments are carried at amortized cost, which approximates fair value. Depreciation of buildings and improvements is calculated using the straight-line method over the estimated useful life of the property, generally 40 to 50 years. 56 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): POLICY AND CONTRACT RESERVES The reserves for life insurance and annuity contracts, developed by accepted actuarial methods, have been established and maintained on the basis of published mortality tables using assumed interest rates and valuation methods that will provide reserves at least as great as those required by law and contract provisions. INCOME AND EXPENSES For life and annuity contracts, premiums are recognized as revenues over the premium paying period, whereas commissions and other costs applicable to the acquisition of new business are charged to operations as incurred. SEPARATE ACCOUNTS The Company has established unitized separate accounts applicable to various classes of contracts providing for variable benefits. Contracts for which funds are invested in separate accounts include variable life insurance and individual and group qualified and non-qualified variable annuity contracts. Assets and liabilities of the separate accounts, representing net deposits and accumulated net investment earnings less fees, held primarily for the benefit of contract holders, are shown as separate captions in the financial statements. Assets held in the separate accounts are carried at market value as determined by quoted market prices of the underlying investments. The Company has also established a non-unitized separate account for amounts allocated to the fixed portion of certain combination fixed/variable deferred annuity contracts. The assets of this account are available to fund general account liabilities, and general account assets are available to fund liabilities of this account. Gains (losses) from mortality experience and investment experience of the separate accounts, not applicable to contract owners, are transferred to (from) the general account. Accumulated gains (losses) that have not been transferred are recorded as a payable (receivable) to (from) the general account. Amounts payable to the general account of the Company were $361,863,000 in 1998 and $284,078,000 in 1997. CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING As described more fully in Note 10, during 1997 the Company changed certain assumptions used in determining actuarial reserves. In March 1998, the National Association of Insurance Commissioners adopted the Codification of Statutory Accounting Principles ("Codification"). The Codification, which is intended to standardize regulatory accounting and reporting for the insurance industry, is proposed to be effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices and it is uncertain when, or if, the state of Delaware will require adoption of Codification for the preparation of statutory financial statements. The Company has not finalized the quantification of the effects of Codification on its statutory financial statements. OTHER Preparation of the financial statements requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to amounts as presented in the current year. 57 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 2. INVESTMENTS IN SUBSIDIARIES The Company owns all of the outstanding shares of Sun Life Insurance and Annuity Company of New York ("Sun Life (N.Y.)"), Massachusetts Casualty Insurance Company ("MCIC"), Sun Life of Canada (U.S.) Distributors, Inc. (formerly Sun Investment Services Company) ("Sundisco"), New London Trust, F.S.B. ("NLT"), 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 Ltd. ("SLISL"). On February 5, 1999, the Company finalized the sale of MCIC, a disability insurance company which issues primarily individual disability income policies, to Centre Solutions (U.S.) Limited, a wholly-owned subsidiary of Centre Reinsurance Holdings Limited for approximately $34 million. The impact of this sale to the ongoing operations of the Company is not expected to be material. On September 28, 1998, the Company formed SLISL as an offshore technology center for the purpose of completing systems projects for affiliates. On October 30, 1997, the Company established a wholly-owned special purpose corporation, SPE 97-1, for the purpose of engaging in activities incidental to securitizing mortgage loans. On December 31, 1997, the Company purchased from Massachusetts Financial Services ("MFS") all of the outstanding shares of Clarendon, a registered broker-dealer that acts as the general distributor of certain annuity and life insurance contracts issued by the Company and its affiliates. Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares of MFS. On December 24, 1997, the Company transferred all of its shares of MFS to Life Holdco in the form of a dividend valued at $159,722,000. As a result of this transaction, the Company realized a gain of $21,195,000 of undistributed earnings. MFS, a registered investment adviser, serves as investment adviser to the mutual funds in the MFS family of funds as well as certain mutual funds and separate accounts established by the Company. The MFS Asset Management Group provides investment advice to substantial private clients. Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity contracts and group life and disability insurance contracts in the State of New York. Sundisco is a registered investment adviser and broker-dealer. NLT is a federally chartered savings bank. SLFSL serves as the marketing administrator for the distribution of the offshore products of Sun Life Assurance Company of Canada (Bermuda), an affiliate. Sun Capital is a registered investment adviser. Sunfinco and Sunbesco are currently inactive. On September 28, 1998 a $500,000 note was issued by SLISL to the Company at a rate of 6.0%, maturing on September 28, 2002. A $110,000,000 note was issued to the Company by MFS on February 11, 1998 at an interest rate of 6.0% due February 11, 1999. Another $110,000,000 note was issued to the Company by MFS on December 22, 1998 at an interest rate of 5.55% due February 11, 1999. On December 23, 1997, the Company issued a $110,000,000 note to US Holdco at an interest rate of 5.80%, which was repaid on March 1, 1998. A $110,000,000 note was also issued to the 58 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 2. INVESTMENTS IN SUBSIDIARIES (CONTINUED): Company by MFS on December 23, 1997 at an interest rate of 5.85% and was repaid on February 11, 1998. On December 31, 1996, the Company issued a $58,000,000 note to SLOC at an interest rate of 5.70% which was repaid on February 10, 1997. Also on December 31, 1996, the Company was issued a $58,000,000 note by MFS at an interest rate of 5.76%. This note was repaid to the Company on February 10, 1997. On December 31, 1998, 1997 and 1996, the Company had an additional $20,000,000 in notes issued by MFS, scheduled to mature in 2000. During 1998, 1997, and 1996, the Company contributed capital in the following amounts to its subsidiaries:
1998 1997 1996 --------- --------- --------- (IN THOUSANDS) MCIC -- $ 2,000 $ 10,000 SLFSL $ 750 1,000 1,500 SPE 97-1 -- 20,377 -- Sundisco 10,000 -- -- Sun Capital 500 -- -- Clarendon 10 -- -- SLISL 502 -- --
Summarized combined financial information of the Company's subsidiaries as of December 31, 1998, 1997 and 1996 and for the years then ended, follows:
1998 1997 1996 ------------- ------------- ------------- (IN THOUSANDS) Intangible assets $ -- $ -- $ 9,646 Other assets 1,315,317 1,190,951 1,376,014 Liabilities (1,186,872) (1,073,966) (1,241,617) ------------- ------------- ------------- Total net assets $ 128,445 $ 116,985 $ 144,043 ------------- ------------- ------------- ------------- ------------- ------------- Total revenues $ 222,853 $ 750,364 $ 717,280 Operating expenses (221,933) (646,896) (624,199) Income tax expense (1,222) (43,987) (42,820) ------------- ------------- ------------- Net income (loss) $ (302) $ 59,481 $ 50,261 ------------- ------------- ------------- ------------- ------------- -------------
On December 24, 1997, the Company transferred all of its shares of MFS to its parent, Life Holdco. 59 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 3. BONDS Investments in debt securities are as follows:
DECEMBER 31, 1998 ---------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS (LOSSES) VALUE ------------ ----------- ----------- ------------ (IN THOUSANDS) Long-term bonds: United States government and government agencies and authorities $ 140,417 $ 7,635 $ (177) $ 147,875 States, provinces and political subdivisions 16,632 2,219 -- 18,851 Public utilities 397,670 38,740 (238) 436,172 Transportation 197,207 22,481 (18) 219,670 Finance 144,958 12,542 (494) 157,006 All other corporate bonds 866,584 50,814 (6,419) 910,979 ------------ ----------- ----------- ------------ Total long-term bonds 1,763,468 134,431 (7,346) 1,890,553 ------------ ----------- ----------- ------------ Short-term bonds: U.S. Treasury Bills, bankers acceptances and commercial paper 43,400 -- -- 43,400 Affiliates 220,000 -- -- 220,000 ------------ ----------- ----------- ------------ Total short-term bonds 263,400 -- -- 263,400 ------------ ----------- ----------- ------------ Total bonds $ 2,026,868 $ 134,431 $ (7,346) $ 2,153,953 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
DECEMBER 31, 1997 ---------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS (LOSSES) VALUE ------------ ----------- ----------- ------------ (IN THOUSANDS) Long-term bonds: United States government and government agencies and authorities $ 126,923 $ 5,529 $ -- $ 132,452 States, provinces and political subdivisions 22,361 2,095 -- 24,456 Public utilities 398,939 35,338 (91) 434,186 Transportation 214,130 22,000 (390) 235,740 Finance 157,891 5,885 (120) 163,656 All other corporate bonds 990,455 52,678 (5,456) 1,037,677 ------------ ----------- ----------- ------------ Total long-term bonds 1,910,699 123,525 (6,057) 2,028,167 ------------ ----------- ----------- ------------ Short-term bonds: U.S. Treasury Bills, bankers acceptances and commercial paper 431,032 -- -- 431,032 Affiliates 110,000 -- -- 110,000 ------------ ----------- ----------- ------------ Total short-term bonds 541,032 -- -- 541,032 ------------ ----------- ----------- ------------ Total bonds $ 2,451,731 $ 123,525 $ (6,057) $ 2,569,199 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
60 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 3. BONDS (CONTINUED): The amortized cost and estimated fair value of bonds at December 31, 1998 are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call and/or prepayment penalties.
DECEMBER 31, 1998 -------------------------- AMORTIZED ESTIMATED COST FAIR VALUE ------------ ------------ (IN THOUSANDS) Maturities: Due in one year or less $ 459,631 $ 460,787 Due after one year through five years 329,625 336,516 Due after five years through ten years 264,372 283,840 Due after ten years 703,341 781,253 ------------ ------------ 1,756,969 1,862,396 Mortgage-backed securities 269,899 291,557 ------------ ------------ Total bonds $ 2,026,868 $ 2,153,953 ------------ ------------ ------------ ------------
Proceeds from sales and maturities of investments in debt securities during 1998, 1997, and 1996 were $1,016,811,000, $980,264,000, and $1,554,016,000, gross gains were $17,025,000, $10,732,000, and $16,975,000 and gross losses were $866,000, $2,446,000, and $10,885,000, respectively. Bonds included above with an amortized cost of approximately $2,572,000, $2,578,000 and $2,060,000 at December 31, 1998, 1997 and 1996, respectively, were on deposit with governmental authorities as required by law. Excluding investments in U.S. government and agencies securities, the Company is not exposed to significant concentration of credit risk in its portfolio. 4. SECURITIES LENDING The Company has a securities lending program operated on its behalf by the Company's primary custodian, Chase Manhattan Bank of New York. The custodian has indemnified the Company against losses arising from this program. There were no securities out on loan as of December 31, 1998 and 1997. Income resulting from this program was $94,000, $200,000 and $137,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 5. MORTGAGE LOANS The Company invests in commercial first mortgage loans throughout the United States. The Company monitors the condition of the mortgage loans in its portfolio. In those cases where mortgages have been restructured, appropriate allowances for losses have been made. In those cases where, in management's judgment, the mortgage loans' values are impaired, appropriate losses are recorded. 61 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 5. MORTGAGE LOANS (CONTINUED): The following table shows the geographical distribution of the mortgage loan portfolio.
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- (IN THOUSANDS) California $ 82,397 $ 119,122 Massachusetts 53,528 58,981 Michigan 34,357 42,912 New York 21,190 45,696 Ohio 36,171 51,862 Pennsylvania 93,587 97,949 Washington 36,548 54,948 All other 177,225 212,565 ---------- ---------- $ 535,003 $ 684,035 ---------- ---------- ---------- ----------
The Company has restructured mortgage loans totaling $30,743,000 and $26,284,000 at December 31, 1998 and 1997, respectively, against which there are allowances for losses of $2,120,000 and $3,026,000, respectively. The Company has made commitments of mortgage loans on real estate into the future.The outstanding commitments for these mortgages amount to $18,005,000 and $12,300,000 at December 31, 1998 and 1997, respectively. 6. INVESTMENT GAINS AND LOSSES
YEARS ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 ---------- ---------- --------- (IN THOUSANDS) Net realized gains (losses): Bonds $ 5,659 $ 2,882 $ 5,631 Common stock of affiliates -- 21,195 -- Common stocks 48 Mortgage loans 2,374 3,837 763 Real estate 955 2,912 599 Other invested assets (3,827) (717) 567 ---------- ---------- --------- Subtotal 5,209 30,109 7,560 Capital gains tax expense 4,815 3,403 2,698 ---------- ---------- --------- Total $ 394 $ 26,706 $ 4,862 ---------- ---------- --------- ---------- ---------- --------- Changes in unrealized gains (losses): Common stock of affiliates $ (302) $ (2,894) $ (5,739) Mortgage loans (1,312) 1,524 (600) Real estate 403 3,377 4,624 Other invested assets 827 (855) -- ---------- ---------- --------- Total $ (384) $ 1,152 $ (1,715) ---------- ---------- --------- ---------- ---------- ---------
Realized capital gains and losses on bonds and mortgages and interest rate swaps which relate to changes in levels of interest rates are charged or credited to an interest maintenance reserve ("IMR") and amortized into income over the remaining contractual life of the security sold. The net realized capital 62 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 6. INVESTMENT GAINS AND LOSSES (CONTINUED): gains credited to the interest maintenance reserve were $8,943,000 in 1998, $6,321,000 in 1997, and $7,710,000 in 1996. All gains and losses are transferred net of applicable income taxes. 7. NET INVESTMENT INCOME Net investment income consisted of:
YEARS ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- (IN THOUSANDS) Interest income from bonds $ 167,436 $ 188,924 $ 178,695 Income from investment in common stock of affiliates 3,675 41,181 50,408 Interest income from mortgage loans 53,269 76,073 92,591 Real estate investment income 15,932 17,161 16,249 Interest income from policy loans 2,881 3,582 2,790 Other investment income (loss) (641) (193) 1,710 ---------- ---------- ---------- Gross investment income 242,552 326,728 342,443 ---------- ---------- ---------- Interest on surplus notes and notes payable (44,903) (42,481) (23,061) Investment expenses (13,117) (13,998) (15,629) ---------- ---------- ---------- Net investment income $ 184,532 $ 270,249 $ 303,753 ---------- ---------- ---------- ---------- ---------- ----------
8. DERIVATIVES The Company uses derivative instruments for interest rate risk management purposes, including hedges against specific interest rate risk and to minimize the Company's exposure to fluctuations in interest rates. The Company's use of derivatives has included U.S. Treasury futures, conventional interest rate swaps, and forward spread lock interest rate swaps. In the case of interest rate futures, gains or losses on contracts that qualify as hedges are deferred until the earliest of the completion of the hedging transaction, determination that the transaction will no longer take place, or determination that the hedge is no longer effective. Upon completion of the hedge, where it is impractical to allocate gains or losses to specific hedged assets or liabilities, gains or losses are deferred in IMR and amortized over the remaining life of the hedged assets. At December 31, 1998 and 1997 there were no futures contracts outstanding. In the case of interest rate and foreign currency swap agreements and forward spread lock interest rate swap agreements, gains or losses on terminated swaps are deferred in the IMR and amortized over the shorter of the remaining life of the hedged asset sold or the remaining term of the swap contract. The net differential to be paid or received on interest rate swaps is recorded monthly as interest rates change. 63 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 8. DERIVATIVES (CONTINUED): Options are used to hedge the stock market interest exposure in the mortality and expense risk charges and guaranteed minimum death benefit features of the Company's variable annuities. The Company's open positions are as follows:
SWAPS OUTSTANDING AT DECEMBER 31, 1998 --------------------------------- NOTIONAL MARKET VALUE PRINCIPAL AMOUNTS OF POSITIONS ------------------ ------------- (IN THOUSANDS) Conventional interest rate swaps $ 45,000 $ 508 Foreign currency swap 1,178 263
SWAPS OUTSTANDING AT DECEMBER 31, 1997 --------------------------------- NOTIONAL MARKET VALUE PRINCIPAL AMOUNTS OF POSITIONS ------------------ ------------- (IN THOUSANDS) Conventional interest rate swaps $ 80,000 $ (2,891) Foreign currency swap 1,700 208 Forward spread lock swaps 50,000 274 Asian Put Option S & P 500 75,000 693
The market value of swaps is the estimated amount that the Company would receive or pay on termination or sale, taking into account current interest rates and the current credit worthiness of the counterparties. The Company is exposed to potential credit loss in the event of nonperformance by counterparties. The counterparties are major financial institutions and management believes that the risk of incurring losses related to credit risk is remote. 9. LEVERAGED LEASES The Company is a lessor in a leveraged lease agreement entered into on October 21, 1994, under which equipment having an estimated economic life of 25-40 years was leased for a term of 9.75 years. The Company's equity investment represented 22.9% of the purchase price of the equipment. The balance of the purchase price was furnished by third-party long-term debt financing, collateralized by the equipment and non-recourse to the Company. At the end of the lease term, the Master Lessee may exercise a fixed price purchase option to purchase the equipment. 64 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 9. LEVERAGED LEASES (CONTINUED): The Company's net investment in leveraged leases is composed of the following elements:
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- (IN THOUSANDS) Lease contracts receivable $ 78,937 $ 92,605 Less non-recourse debt (78,920) (92,589) ---------- ---------- 17 16 Estimated residual value of leased assets 41,150 41,150 Less unearned and deferred income (8,932) (10,324) ---------- ---------- Investment in leveraged leases 32,235 30,842 Less fees (138) (163) ---------- ---------- Net investment in leveraged leases $ 32,097 $ 30,679 ---------- ---------- ---------- ----------
The net investment is included in "other invested assets" on the balance sheet. 10. REINSURANCE The Company has agreements with SLOC which provide that SLOC will reinsure the mortality risks of the individual life insurance contracts sold by the Company. Under these agreements basic death benefits and supplementary benefits are reinsured on a yearly renewable term basis and coinsurance basis, respectively. Reinsurance transactions under these agreements had the effect of decreasing income from operations by approximately $2,128,000, $1,381,000 and $1,603,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Effective January 1, 1991, the Company entered into an agreement with SLOC under which certain individual life insurance contracts issued by SLOC were reinsured by the Company on a 90% coinsurance basis. During 1997 SLOC changed certain assumptions used in determining the gross and the ceded reserve balance. The Company reflected the effect of the changes in assumptions to its assumed reserves as a direct credit to surplus. The effect of the change was a $39,016,000 decrease in reserves. Also, the agreement required SLOC to reinsure the mortality risks in excess of $500,000 per policy for the individual life insurance contracts assumed by the Company. Such death benefits are reinsured on a yearly renewable term basis. The life reinsurance assumed agreement required the reinsurer to withhold funds in amounts equal to the reserves assumed. These agreements had the effect of increasing income from operations by approximately $24,579,000, $37,050,000 and $35,161,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company terminated this agreement effective October 1, 1998, resulting in an increase in income from operations of $65,679,000 which included a cash settlement. 65 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 10. REINSURANCE (CONTINUED): The following are summarized pro-forma results of operations of the Company for the years ended December 31, 1998, 1997 and 1996 before the effect of reinsurance transactions with SLOC:
YEARS ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ (IN THOUSANDS) Income: Premiums, annuity deposits and other revenues $ 2,377,364 $ 2,340,733 $ 1,941,423 Net investment income and realized gains 187,208 298,120 310,172 ------------ ------------ ------------ Subtotal 2,564,572 2,638,853 2,251,595 ------------ ------------ ------------ Benefits and Expenses: Policyholder benefits 2,312,247 2,350,354 2,011,998 Other expenses 203,238 187,591 155,531 ------------ ------------ ------------ Subtotal 2,515,485 2,537,945 2,167,529 ------------ ------------ ------------ Income from operations $ 49,087 $ 100,908 $ 84,066 ------------ ------------ ------------ ------------ ------------ ------------
The Company has an agreement with an unrelated company which provides reinsurance of certain individual life insurance contracts on a modified coinsurance basis and under which all deficiency reserves related to these contracts are reinsured. Reinsurance transactions under this agreement had the effect of increasing income from operations by $3,008,000 in 1998, and decreasing income from operations by $2,658,000 in 1997 and $46,000 in 1996. 11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT LIABILITIES The withdrawal characteristics of general account and separate account annuity reserves and deposits are as follows:
DECEMBER 31, 1998 ----------------------------- AMOUNT % OF TOTAL ------------- -------------- (IN THOUSANDS) Subject to discretionary withdrawal-with adjustment: With market value adjustment $ 2,896,529 19 At book value less surrender charges (surrender charge >5%) 10,227,212 66 At book value (minimal or no charge or adjustment) 1,264,453 8 Not subject to discretionary withdrawal provision 1,106,197 7 ------------- --- Total annuity actuarial reserves and deposit liabilities $ 15,494,391 100 ------------- --- ------------- ---
DECEMBER 31, 1997 ----------------------------- AMOUNT % OF TOTAL ------------- -------------- (IN THOUSANDS) Subject to discretionary withdrawal-with adjustment: With market value adjustment $ 3,415,394 25 At book value less surrender charges (surrender charge >5%) 7,672,211 57 At book value (minimal or no charge or adjustment) 1,259,698 9 Not subject to discretionary withdrawal provision 1,164,651 9 ------------- --- Total annuity actuarial reserves and deposit liabilities $ 13,511,954 100 ------------- --- ------------- ---
66 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 12. SEGMENT INFORMATION The Company offers financial products and services such as fixed and variable annuities, retirement plan services and life insurance on an individual basis. Within these areas, the Company conducts business principally in two operating segments and maintains a corporate segment to provide for the capital needs of the various operating segments and to engage in other financing related activities. The Individual Insurance 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 Retirement Products and Services ("RPS") segment markets and administers individual and group variable annuity products, individual and group fixed annuity products which include market value adjusted annuities, and other retirement benefit products. The following amounts pertain to the various business segments:
FEDERAL TOTAL TOTAL PRETAX INCOME TOTAL (IN THOUSANDS) REVENUES EXPENDITURES* INCOME TAXES ASSETS - --------------------------------------- ----------- -------------- --------- --------- ---------- 1998 Individual Insurance $ 229,710 $ 144,800 $ 84,910 $ (4,148) $ 199,683 RPS 2,527,608 2,483,715 43,893 12,486 16,123,905 Corporate 10,959 3,042 7,917 3,375 579,033 ----------- -------------- --------- --------- ---------- Total $2,768,277 $2,631,557 $ 136,720 $ 11,713 $16,902,621 ----------- -------------- --------- --------- ---------- 1997 Individual Insurance 304,141 272,333 31,808 13,825 1,143,697 RPS 2,533,006 2,507,591 25,414 10,667 14,043,221 Corporate 57,897 5,244 52,653 (17,153) 738,439 ----------- -------------- --------- --------- ---------- Total $2,895,044 $2,785,169 $ 109,875 $ 7,339 $15,925,357 ----------- -------------- --------- --------- ---------- 1996 Individual Insurance 281,309 255,846 25,463 13,931 817,115 RPS 2,174,602 2,151,126 23,476 1,203 12,057,572 Corporate 64,721 898 63,823 (20,534) 689,266 ----------- -------------- --------- --------- ---------- Total $2,520,632 $2,407,870 $ 112,762 $ (5,400) $13,563,953 ----------- -------------- --------- --------- ----------
- ------------------------ * Total expenditures include dividends to policyholders of $(5,981) for 1998, $33,316 for 1997 and $29,189 for 1996. 13. RETIREMENT PLANS The Company participates with SLOC in a noncontributory defined benefit pension plan covering essentially all employees. The benefits are based on years of service and compensation. The funding policy for the pension plan is to contribute an amount which at least satisfies the minimum amount required by ERISA; currently, the plan is fully funded. The Company is charged for its share of the pension cost based upon its covered participants. Pension plan assets consist principally of separate accounts of SLOC. The Company's share of the group's accrued pension cost was $1,178,000 and $593,000 at December 31, 1998 and 1997, respectively. The Company's share of net periodic pension cost was $586,000, $146,000 and $27,000, for 1998, 1997 and 1996, respectively. 67 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 13. RETIREMENT PLANS (CONTINUED): The Company also participates with SLOC and certain affiliates in a 401(k) savings plan for which substantially all employees are eligible. The Company matches, up to specified amounts, employees' contributions to the plan. Company contributions were $231,000, $259,000 and $233,000 for the years ended December 31, 1998, 1997 and 1996, respectively. OTHER POST-RETIREMENT BENEFIT PLANS In addition to pension benefits the Company provides certain health, dental, and life insurance benefits ("post-retirement benefits") for retired employees and dependents. Substantially all employees may become eligible for these benefits if they reach normal retirement age while working for the Company, or retire early upon satisfying an alternate age plus service condition. Life insurance benefits are generally set at a fixed amount. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106 requires an accrual of the estimated cost of retiree benefit payments during the years the employee provides services. SFAS No. 106 allows recognition of the cumulative effect of the liability in the year of adoption or the amortization of the obligation over a period of up to 20 years. The obligation of approximately $455,000 is recognized over a period of ten years. The Company's cash flows are not affected by implementation of this standard, but implementation decreased net income by $95,000, $117,000, and $8,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The Company's post retirement health, dental and life insurance benefits currently are not funded. 68 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 13. RETIREMENT PLANS (CONTINUED): OTHER POST-RETIREMENT BENEFIT PLANS CONTINUED The following table sets forth the change in the pension and other postretirement benefit plans' benefit obligations and assets as well as the plans' funded status reconciled with the amount shown in the Company's financial statements at December 31:
PENSION BENEFITS OTHER BENEFITS 1998 1997 1998 1997 ---------- ---------- ---------- --------- (IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of year $ 79,684 $ 70,848 $ 9,845 $ 9,899 Service cost 4,506 4,251 240 306 Interest cost 6,452 5,266 673 725 Amendments -- 1,000 -- -- Actuarial loss (gain) 21,975 -- 308 (801) Benefits paid (1,825) (1,681) (647) (284) ---------- ---------- ---------- --------- Benefit obligation at end of year $ 110,792 $ 79,684 $ 10,419 $ 9,845 ---------- ---------- ---------- --------- ---------- ---------- ---------- --------- The Company's share: Benefit obligation at beginning of year $ 5,094 $ 4,529 $ 385 $ 384 Benefit obligation at end of year $ 9,125 $ 5,094 $ 416 $ 385 Change in plan assets: Fair value of plan assets at beginning of year $ 136,610 $ 122,807 $ -- $ -- Actual return on plan assets 16,790 15,484 -- -- Employer contribution -- -- 647 284 Benefits paid (1,825) (1,681) (647) (284) ---------- ---------- ---------- --------- Fair value of plan assets at end of year $ 151,575 $ 136,610 $ -- $ -- ---------- ---------- ---------- --------- ---------- ---------- ---------- --------- Funded status $ 40,783 $ 56,926 $ (10,419) $ (9,845) Unrecognized net actuarial gain (loss) (2,113) (18,147) 586 257 Unrecognized transition obligation (asset) (24,674) (26,730) 185 230 Unrecognized prior service cost 7,661 8,241 -- -- ---------- ---------- ---------- --------- Prepaid (accrued) benefit cost $ 21,657 $ 20,290 $ (9,648) $ (9,358) ---------- ---------- ---------- --------- ---------- ---------- ---------- --------- The Company's share of accrued benefit cost $ (1,178) $ (593) $ (195) $ (102) Weighted-average assumptions as of December 31: Discount rate 6.75% 7.50% 6.75% 7.50% Expected return on plan assets 8.00% 7.50% N/A N/A Rate of compensation increase 4.50% 4.50% N/A N/A
69 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 13. RETIREMENT PLANS (CONTINUED): For measurement purposes, a 10.1% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998 (5.7% for dental benefits). The rates were assumed to decrease gradually to 5% for 2005 and remain at that level thereafter.
1998 1997 1998 1997 ---------- --------- --------- --------- Components of net periodic benefit cost: Service cost $ 4,506 $ 4,251 $ 240 $ 306 Interest cost 6,452 5,266 673 725 Expected return on plan assets (10,172) (9,163) -- -- Amortization of transition obligation (asset) (2,056) (2,056) 45 45 Amortization of prior service cost 580 517 -- -- Recognized net actuarial (gain) loss (677) (789) (20) 71 ---------- --------- --------- --------- Net periodic benefit cost $ (1,367) $ (1,974) $ 938 $ 1,147 ---------- --------- --------- --------- ---------- --------- --------- --------- The Company's share of net periodic benefit cost $ 586 $ 146 $ 95 $ 117 ---------- --------- --------- --------- ---------- --------- --------- ---------
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT INCREASE DECREASE ------------------- ------------------- (IN THOUSANDS) Effect on total of service and interest cost components $ 210 $ (170) Effect on postretirement benefit obligation 2,026 (1,697)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1998 and 1997:
DECEMBER 31, 1998 --------------------------------------- CARRYING AMOUNT ESTIMATED FAIR VALUE ----------------- -------------------- (IN THOUSANDS) ASSETS: Bonds $ 2,026,868 $ 2,153,953 Mortgages 535,003 556,143 Derivatives -- 771 LIABILITIES: Insurance reserves $ 121,100 $ 121,100 Individual annuities 274,448 271,849 Pension products 1,104,489 1,145,351 DECEMBER 31, 1997 --------------------------------------- CARRYING AMOUNT ESTIMATED FAIR VALUE ----------------- -------------------- (IN THOUSANDS) ASSETS: Bonds $ 2,451,731 $ 2,569,199 Mortgages 684,035 706,975 LIABILITIES: Insurance reserves $ 123,128 $ 123,128 Individual annuities 307,668 302,165 Pension products 1,527,433 1,561,108 Derivatives -- (1,716)
70 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED): The major methods and assumptions used in estimating the fair values of financial instruments are as follows: The fair values of short-term bonds are estimated to be the amortized cost. The fair values of long-term bonds which are publicly traded are based upon market prices or dealer quotes. For privately placed bonds, fair values are estimated by taking into account prices for publicly traded bonds of similar credit risk and maturity and repayment and liquidity characteristics. The fair values of the Company's general account insurance reserves and liabilities under investment-type contracts (insurance, annuity and pension contracts that do not involve mortality or morbidity risks) are estimated using discounted cash flow analyses or surrender values. Those contracts that are deemed to have short-term guarantees have a carrying amount equal to the estimated market value. The fair values of mortgages are estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair values of derivative financial instruments are estimated using the process described in Note 8. 15. STATUTORY INVESTMENT VALUATION RESERVES The asset valuation reserve ("AVR") provides a reserve for losses from investments in bonds, stocks, mortgage loans, real estate and other invested assets with related increases or decreases being recorded directly to surplus. Realized capital gains and losses on bonds and mortgages which relate to changes in levels of interest rates are charged or credited to an interest maintenance reserve ("IMR") and amortized into income over the remaining contractual life of the security sold. The table shown below presents changes in the major elements of the AVR and IMR.
YEARS ENDED DECEMBER 31, 1998 1997 -------------------- -------------------- AVR IMR AVR IMR --------- --------- --------- --------- (IN THOUSANDS) Balance, beginning of year $ 47,605 $ 33,830 $ 53,911 $ 28,675 Net realized investment gains, net of tax 256 8,942 17,400 6,321 Amortization of net investment gains -- (2,282) -- (1,166) Unrealized investment losses (6,550) -- (2,340) -- Required by formula 3,081 -- (21,366) -- --------- --------- --------- --------- Balance, end of year $ 44,392 $ 40,490 $ 47,605 $ 33,830 --------- --------- --------- --------- --------- --------- --------- ---------
16. FEDERAL INCOME TAXES The Company and its subsidiaries file a consolidated federal income tax return. Federal income taxes are calculated for the consolidated group based upon amounts determined to be payable as a result of operations within the current year. No provision is recognized for timing differences which may exist between financial statement and taxable income. Such timing differences include reserves, depreciation and accrual of market discount on bonds. Cash payments for federal income taxes were approximately $48,144,000, $31,000,000 and $19,264,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company is currently undergoing an audit by the Internal Revenue Service. The Company believes that there will be no material audit adjustments for the periods under examination. 71 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 17. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE) On December 22, 1997, the Company issued a $250,000,000 surplus note to Life Holdco. This note has an interest rate of 8.625% and is due on or after November 6, 2027. On May 9, 1997, the Company issued a short-term note of $600,000,000 to Life Holdco at an interest rate of 5.10%, which was extended at various interest rates. This note was repaid on December 22, 1997. On December 19, 1995, the Company issued surplus notes totaling $315,000,000 to an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and 7.25%. Of these notes, $157,500,000 will mature in the year 2007 and $157,500,000 will mature in the year 2015. Interest on these notes is payable semiannually. Principal and interest on surplus notes are payable only to the extent that the Company meets specified requirements regarding free surplus exclusive of the principal amount and accrued interest, if any, on these notes and with the consent of the Delaware Insurance Commissioner. The Company accrued $4,259,000 and $ 964,000 for interest on surplus notes for the years ended December 31, 1998 and 1997, respectively. The Company accrued $4,259,000 and $964,000 for interest on surplus notes for the years ended December 31, 1998 and 1997, respectively. The Company expensed $44,903,000, $42,481,000 and $23,061,000 for interest on surplus notes and notes payable for the years ended December 31, 1998, 1997 and 1996, respectively. 18. 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 $16,344,000 in 1998, $15,997,000 in 1997, and $20,192,000 in 1996. The Company leases office space to SLOC under lease agreements with terms expiring in September, 1999 and options to extend the terms for each of thirteen successive five-year terms at fair market rental not to exceed 125% of the fixed rent for the term which is ending. Rent received by the Company under the leases for 1998 amounted to approximately $6,856,000. 19. RISK-BASED CAPITAL Effective December 31, 1993, the NAIC adopted risk-based capital requirements for life insurance companies. The risk-based capital requirements provide a method for measuring the minimum acceptable amount of adjusted capital that a life insurer should have, as determined under statutory accounting practices, taking into account the risk characteristics of its investments and products. The Company has met the minimum risk-based capital requirements at December 31, 1998, 1997 and 1996. 20. ACCOUNTING POLICIES AND PRINCIPLES The financial statements of the Company have been prepared on the basis of statutory accounting practices which, prior to 1996, were considered by the insurance industry and the accounting profession to be in accordance with GAAP for mutual life insurance companies. The primary differences between statutory accounting practices and GAAP are described as follows. Under statutory accounting practices, financial statements are not consolidated and investments in subsidiaries are shown at net equity value. Accordingly, the assets, liabilities and results of operations of the Company's subsidiaries are not consolidated with the assets, liabilities and results of operations, respectively, of the Company. Changes 72 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 20. ACCOUNTING POLICIES AND PRINCIPLES (CONTINUED): in net equity value of the common stock of the Company's United States life insurance subsidiaries are directly reflected in the Company's surplus. Changes in the net equity value of the common stock of all other subsidiaries are directly reflected in the Company's Asset Valuation Reserve. Dividends paid by subsidiaries to the Company are included in the Company's net investment income. Other differences between statutory accounting practices and GAAP include the following: statutory accounting practices do not recognize the following assets or liabilities which are reflected under GAAP: deferred policy acquisition costs, deferred federal income taxes and statutory nonadmitted assets. Asset Valuation Reserves and Interest Maintenance Reserves are established under statutory accounting practices but not under GAAP. Methods for calculating real estate depreciation and investment valuation allowances differ under statutory accounting practices and GAAP. Actuarial assumptions and reserving methods differ under statutory accounting practices and GAAP. Premiums for universal life and investment-type products are recognized as income for statutory purposes and as deposits to policyholders' accounts for GAAP. Because the Company's management uses financial information prepared in conformity with accounting principles generally accepted in Canada in the normal course of business, the management of Sun Life Assurance Company of Canada (U.S.) has determined that the cost of complying with Statement No. 120, "Accounting and Reporting by Mutual Insurance Enterprises and by Insurance Enterprises for Certain Long Duration Participating Contracts", exceeds the benefits that the Company, or the users of its financial statements, would experience. Consequently, the Company has elected not to apply such standards in the preparation of these financial statements. 73 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) We have audited the accompanying statutory statements of admitted assets, liabilities and capital stock and surplus of Sun Life Assurance Company of Canada (U.S.) (the "Company") as of December 31, 1998 and 1997, and the related statutory statements of operations, changes in capital stock and surplus, and cash flow for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described more fully in Notes 1 and 20 to the financial statements, the Company prepared these financial statements using accounting practices prescribed or permitted by the Insurance Department of the State of Delaware, which is a comprehensive basis of accounting other than generally accepted accounting principles. The effects on the financial statements of the differences between the statutory basis of accounting and generally accepted accounting principles, although not reasonably determinable, are presumed to be material. In our opinion, the statutory financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities, and capital stock and surplus of Sun Life Assurance Company of Canada (U.S.) as of December 31, 1998 and 1997, and the results of its operations and its cash flow for each of the three years in the period ended December 31, 1998 on the basis of accounting described in Notes 1 and 20. However, because of the differences between the two bases of accounting referred to in the second preceding paragraph, in our opinion, the statutory financial statements referred to above do not present fairly, in conformity with generally accepted accounting principles, the financial position of Sun Life Assurance Company of Canada (U.S.) as of December 31, 1998 and 1997 or the results of its operations or its cash flow for each of the three years in the period ended December 31, 1998. As management has stated in Note 20, because the Company's management uses financial information prepared in accordance with accounting principles generally accepted in Canada in the normal course of business, the management of Sun Life Assurance Company of Canada (U.S.) has determined that the cost of complying with Statement No. 120, ACCOUNTING AND REPORTING BY MUTUAL LIFE INSURANCE ENTERPRISES AND BY INSURANCE ENTERPRISES FOR CERTAIN LONG-DURATION PARTICIPATING CONTRACTS, would exceed the benefits that the Company, or the users of its financial statements, would experience. Consequently, the Company has elected not to apply such standards in the preparation of these financial statements. DELOITTE & TOUCHE LLP Boston, Massachusetts February 5, 1999 74 TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION Calculation of Performance Data -- Average Annual Total Return....................... Non-Standardized Investment Performance.............................................. Advertising and Sales Literature..................................................... Calculations......................................................................... Example of Variable Accumulation Unit Value Calculation............................ Example of Variable Annuity Unit Calculation....................................... Example of Variable Annuity Payment Calculation.................................... Calculation of Annuity Unit Values................................................. Distribution of the Contracts........................................................ Designation and Change of Beneficiary................................................ Custodian............................................................................ Financial Statements.................................................................
75 This Prospectus sets forth information about the Contracts and the Variable Account that a prospective purchaser should know before investing. Additional information about the Contracts and the Variable Account has been filed with the Securities and Exchange Commission in a Statement of Additional Information dated May 1, 1999 which is incorporated herein by reference. The Statement of Additional Information is available upon request and without charge from Sun Life Assurance Company of Canada (U.S.). To receive a copy, return this request form to the address shown below or telephone (617) 348-9600 or (800) 752-7215. - -------------------------------------------------------------------------------- To: Sun Life Assurance Company of Canada (U.S.) Annuity Service Mailing Address: c/o Retirement Products and Services P.O. Box 1024 Boston, Massachusetts 02103 Please send me a Statement of Additional Information for MFS Regatta Platinum Variable and Fixed Annuity Sun Life of Canada (U.S.) Variable Account F. Name - -------------------------------------------------------------- Address - -------------------------------------------------------------- ------------------------------------------------------------------------- City - ------------------------------------ State - -------------- Zip - ------- Telephone - ---------------------------------------------------------------- 76 APPENDIX A GLOSSARY The following terms as used in this Prospectus have the indicated meanings: ACCOUNT OR PARTICIPANT ACCOUNT: An account established for each Participant to which Net Purchase Payments are credited. ACCOUNT VALUE: The Variable Accumulation Value, if any, plus the Fixed Accumulation Value, if any, of your Account for any Valuation Period. ACCOUNT YEAR AND ACCOUNT ANNIVERSARY: Your first Account Year is the period of (a) 12 full calendar months plus (b) the part of the calendar month in which we issue your Contract (if not on the first day of the month), beginning with the Contract Date. Your Account Anniversary is the first day immediately after the end of an Account Year. Each Account Year after the first is the 12 calendar month period that begins on your Account Anniversary. If, for example, the Contract Date is in March, the first Account Year will be determined from the Contract Date but will end on the last day of March in the following year; your Account Anniversary is April 1 and all Account Years after the first will be measured from April 1. ACCUMULATION PHASE: The period before the Annuity Commencement Date and during the lifetime of the Participant during which you make Purchase Payments under the Contract. This is called the "Accumulation Period" in the Contract. ANNUITANT: The person or persons to whom the first annuity payment is made. If the Annuitant dies prior to the Annuity Commencement Date, the new Annuitant will be the Co-Annuitant, if any. If the Co-Annuitant dies or if no Co-Annuitant is named, the Participant becomes the Annuitant upon the Annuitant's death prior to the Annuity Commencement Date. If you have not named a sole Annuitant on the 30th day before the Annuity Commencement Date and both the Annuitant and Co-Annuitant are living, the Co-Annuitant will be the sole Annuitant during the Income Phase. *ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment under each Contract is to be made. *ANNUITY OPTION: The method you choose for making annuity payments. ANNUITY UNIT: A unit of measure used in the calculation of the amount of the second and each subsequent variable annuity payment from the Variable Account. APPLICATION: The document signed by you or other evidence acceptable to us that serves as your application for participation under a Group Contract or purchase of an Individual Contract. *BENEFICIARY: Prior to the Annuity Commencement Date, the person or entity having the right to receive the death benefit and, for Non-Qualified Contracts, who, in the event of the Participant's death, is the "designated beneficiary" for purposes of Section 72(s) of the Internal Revenue Code. After the Annuity Commencement Date, the person or entity having the right to receive any payments due under the Annuity Option elected, if applicable, upon the death of the Payee. BUSINESS DAY: Any day the New York Stock Exchange is open for trading. CERTIFICATE: The document for each Participant which evidences the coverage of the Participant under a Group Contract. COMPANY: Sun Life Assurance Company of Canada (U.S.). CONTRACT DATE: The date on which we issue your Contract. This is called the "Date of Coverage" in the Contract. DEATH BENEFIT DATE: If you have elected a death benefit payment option before your death that remains in effect, the date on which we receive Due Proof of Death. If your Beneficiary elects the * You specify these items on the Contract Specifications page or Certificate Specifications page, and may change them, as we describe in this Prospectus. 77 death benefit payment option, the later of (a) the date on which we receive the Beneficiary's election and (b) the date on which we receive Due Proof of Death. If we do not receive the Beneficiary's election within 60 days after we receive Due Proof of Death, the Death Benefit Date will be the last day of the 60 day period and we will pay the death benefit in cash. DUE PROOF OF DEATH: An original certified copy of an official death certificate, an original certified copy of a decree of a court of competent jurisdiction as to the finding of death, or any other proof satisfactory to the Company. EXPIRATION DATE: The last day of a Guarantee Period. FIXED ACCOUNT: The general account of the Company, consisting of all assets of the Company other than those allocated to a separate account of the Company. FIXED ACCOUNT VALUE: The value of that portion of your Account allocated to the Fixed Account. FIXED ANNUITY: An annuity with payments which do not vary as to dollar amount. GROUP CONTRACT: A Contract issued by the Company on a group basis. GUARANTEE AMOUNT: Each separate allocation of Account Value to a particular Guarantee Period (including interest earned thereon). GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is credited. GUARANTEED INTEREST RATE: The rate of interest we credit on a compound annual basis during any Guarantee Period. INCOME PHASE: The period on and after the Annuity Commencement Date and during the lifetime of the Annuitant during which we make annuity payments under the Contract. INDIVIDUAL CONTRACT: A Contract issued by the Company on an individual basis. NET INVESTMENT FACTOR: An index applied to measure the investment performance of a Sub-Account from one Valuation Period to the next. The Net Investment Factor may be greater or less than or equal to one. NET PURCHASE PAYMENT: The portion of a Purchase Payment which remains after the deduction of any applicable premium tax or similar tax. NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement plan that does not receive favorable federal income tax treatment under Sections 401, 403, 408, or 408A of the Internal Revenue Code. The Participant's interest in the Contract must be owned by a natural person or agent for a natural person for the Contract to receive income tax treatment as an annuity. OWNER: The person, persons or entity entitled to the ownership rights stated in a Group Contract and in whose name or names the Group Contract is issued. The Owner may designate a trustee or custodian of a retirement plan which meets the requirements of Section 401, Section 408(c), Section 408(k), Section 408(p) or Section 408A of the Internal Revenue Code to serve as legal owner of assets of a retirement plan, but the term "Owner," as used herein, shall refer to the organization entering into the Group Contract. PARTICIPANT: In the case of an Individual Contract, the owner of the Contract. In the case of a Group Contract, the person named in the Contract who is entitled to exercise all rights and privileges of ownership under the Contract, except as reserved by the Owner. PAYEE: A recipient of payments under a Contract. The term includes an Annuitant or a Beneficiary who becomes entitled to benefits upon the death of the Participant. PURCHASE PAYMENT (PAYMENT): An amount paid to the Company as consideration for the benefits provided by a Contract. 78 QUALIFIED CONTRACT: A Contract used in connection with a retirement plan which may receive favorable federal income tax treatment under Sections 401, 403, 408 or 408A of the Internal Revenue Code of 1986, as amended. SERIES FUND: MFS/Sun Life Series Trust. SEVEN-YEAR ANNIVERSARY: The seventh Account Anniversary and each succeeding Account Anniversary occurring at any seven year interval thereafter; for example, the 14th, 21st and 28th Account Anniversaries. SUB-ACCOUNT: That portion of the Variable Account which invests in shares of a specific series of the Series Fund. VALUATION PERIOD: The period of time from one determination of Variable Accumulation Unit or Annuity Unit values to the next subsequent determination of these values. Value determinations are made as of the close of the New York Stock Exchange on each day that the Exchange is open for trading. VARIABLE ACCOUNT: Variable Account F of the Company, which is a separate account of the Company consisting of assets set aside by the Company, the investment performance of which is kept separate from that of the general assets of the Company. VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of Variable Account Value. VARIABLE ACCOUNT VALUE: The value of that portion of your Account allocated to the Variable Account. VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount in relation to the investment performance of the Variable Account. 79 APPENDIX B CONDENSED FINANCIAL INFORMATION--ACCUMULATION UNIT VALUES The following information should be read in conjunction with the Variable Account's financial statements appearing in the Prospectus, all of which has been audited by Deloitte & Touche LLP, independent certified public accountants.
PERIOD ENDED DECEMBER 31, 1998* ------------ BOND SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $10.4201 Units outstanding end of period................. 628,000 CAPITAL APPRECIATION SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $11.3405 Units outstanding end of period................. 1,683,164 CAPITAL OPPORTUNITIES SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $10.8048 Units outstanding end of period................. 556,955 EMERGING GROWTH SERIES Unit Value: Beginning of period $10.0000 End of period................................. $11.5819 Units outstanding end of period................. 1,651,404 EQUITY INCOME SERIES Unit Value: Beginning of period $10.0000 End of period................................. $10.5234 Units outstanding end of period................. 272,362 GLOBAL ASSET ALLOCATION SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $ 9.7081 Units outstanding end of period................. 228,839 GLOBAL GOVERNMENTS SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $11.2639 Units outstanding end of period................. 76,270 GLOBAL GROWTH SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $10.2820 Units outstanding end of period................. 162,856 GLOBAL TOTAL RETURN SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $10.4567 Units outstanding end of period................. 152,857
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PERIOD ENDED DECEMBER 31, 1998* ------------ GOVERNMENT SECURITIES SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $10.4116 Units outstanding end of period................. 816,102 HIGH YIELD SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $ 9.5030 Units outstanding end of period................. 1,000,705 INTERNATIONAL GROWTH SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $ 9.3254 Units outstanding end of period................. 338,938 INTERNATIONAL GROWTH AND INCOME SERIES Unit Value: Beginning of period........................... $ 10.000 End of period................................. $10.3378 Units outstanding end of period................. 199,346 MANAGED SECTORS SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $10.5861 Units outstanding end of period................. 211,044 MASSACHUSETTS INVESTORS TRUST SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $10.7939 Units outstanding end of period................. 5,331,018 MASSACHUSETTS INVESTORS GROWTH STOCK SERIES Unit Value: Beginning of period $10.0000 End of period................................. $11.9094 Units outstanding end of period................. 2,428,134 MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $ 8.1616 Units outstanding end of period................. 72,586 MONEY MARKET SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $10.1878 Units outstanding end of period................. 886,479 NEW DISCOVERY SERIES Unit Value: Beginning of period $10.0000 End of period................................. $10.4124 Units outstanding end of period................. 436,178
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PERIOD ENDED DECEMBER 31, 1998* ------------ RESEARCH SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $11.0189 Units outstanding end of period................. 1,751,713 RESEARCH GROWTH AND INCOME SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $10.3415 Units outstanding end of period................. 387,080 RESEARCH INTERNATIONAL SERIES Unit Value: Beginning of period $10.0000 End of period................................. $ 9.4845 Units outstanding end of period................. 181,131 STRATEGIC INCOME SERIES Unit Value: Beginning of period $10.0000 End of period................................. $ 9.8713 Units outstanding end of period................. 157,634 TOTAL RETURN SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $10.2907 Units outstanding end of period................. 2,318,847 UTILITIES SERIES Unit Value: Beginning of period........................... $10.0000 End of period................................. $10.9233 Units outstanding end of period................. 819,649
- ------------------------ * Unit value on date of commencement of operations of the respective Sub-Account. 82 APPENDIX C WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT PART 1: VARIABLE ACCOUNT (THE MARKET VALUE ADJUSTMENT DOES NOT APPLY TO THE VARIABLE ACCOUNT) WITHDRAWAL CHARGE CALCULATION: FULL WITHDRAWAL: Assume a Purchase Payment of $40,000 is made on the Contract Date, no additional Purchase Payments are made and there are no partial withdrawals. The table below presents four examples of the withdrawal charge resulting from a full withdrawal of your Account, based on hypothetical Account Values.
FREENEWWITHDRAWALWITHDRAWALACCOUNT WITHDRAWALPAYMENTSCHARGECHARGEYEAR AMOUNTWITHDRAWNPERCENTAGEAMOUNT -------- HYPOTHETICAL ACCOUNT VALUE -- ------- ------- ------- ------ (a) 1 $ 41,000 $ 4,000 $ 37,000 6.00% $ 2,220 (b) 3 $ 52,000 $ 12,000 $ 40,000 5.00% $ 2,000 (c) 7 $ 80,000 $ 28,000 $ 40,000 3.00% $ 1,200 (d) 9 $ 98,000 $ 68,000 0 0.00% 0
(a) The free withdrawal amount in any Account Year is equal to (1) the Annual Withdrawal Allowance for that year (i.e., 10% of all Purchase Payments made in the last seven Account Years ("New Payments")); plus (2) any unused Annual Withdrawal Allowances from previous years; plus (3) any Purchase Payments made before the last seven Account Years ("Old Payments") not previously withdrawn. In Account Year 1, the free withdrawal amount is $4,000 (the Annual Withdrawal Allowance for that year) because there are no unused Annual Withdrawal Allowances from previous years and no Old Payments. The $41,000 full withdrawal is attributed first to the $4,000 free withdrawal amount. The remaining $37,000 is withdrawn from the Purchase Payment made in Account Year 1 and is subject to the withdrawal charge. (b) In Account Year 3, the free withdrawal amount is $12,000 (the $4,000 Annual Withdrawal Allowance for the current year plus the unused $4,000 Annual Withdrawal Allowances for each of Account Years 1 and 2). The $52,000 full withdrawal is attributed first to the free withdrawal amount and the remaining $40,000 is withdrawn from the Purchase Payment made in Account Year 1. (c) In Account Year 7, the free withdrawal amount is $28,000 (the $4,000 Annual Withdrawal Allowance for the current Account Year plus the unused Annual Withdrawal Allowance of $4,000 for each of Account Years 1 through 6). The $80,000 full withdrawal is attributed first to the free withdrawal amount. The next $40,000 is withdrawn from the Purchase Payment made in Account Year 1 and is subject to the withdrawal charge. The remaining $12,000 exceeds the total of the free withdrawal amount plus all New Payments not previously withdrawn, so it is not subject to the withdrawal charge. (d) In Account Year 9, the free withdrawal amount is $68,000, calculated as follows. There are no Annual Withdrawal Allowances for Account Years 8 or 9 because there are no New Payments in those years. The $40,000 Purchase Payment made in Account Year 1 is now an Old Payment that constitutes a portion of the free withdrawal amount. In addition, the unused Annual Withdrawal Allowances of $4,000 for each of Account Years 1 through 7 are carried forward and available for use in Account Year 9. The $98,000 full withdrawal is attributed first to the free withdrawal amount. Because the remaining $30,000 is not withdrawn from New Payments, this part of the withdrawal also will not be subject to the withdrawal charge. 83 PARTIAL WITHDRAWAL: Assume a single Purchase Payment of $40,000 is made on the Contract Date, no additional Purchase Payments are made, no partial withdrawals have been taken prior to the fifth Account Year, and there are a series of three partial withdrawals made during the fifth Account Year of $9,000, $12,000, and $15,000.
HYPOTHETICAL PARTIAL FREE NEW WITHDRAWAL WITHDRAWAL ACCOUNT WITHDRAWAL WITHDRAWAL PAYMENTS CHARGE CHARGE VALUE AMOUNT AMOUNT WITHDRAWN PERCENTAGE AMOUNT ------------ ----------- ----------- ----------- --------------- ------------- (a) $ 64,000 $ 9,000 $ 20,000 $ 0 4.00% $ 0 (b) $ 56,000 $ 12,000 $ 11,000 $ 1,000 4.00% $ 40 (c) $ 40,000 $ 15,000 $ 0 $ 15,000 4.00% $ 600
(a) In the fifth Account Year, the free withdrawal amount is equal to $20,000 (the $4,000 Annual Withdrawal Allowance for the current year, plus the unused $4,000 for each of the Account Years 1 through 4). The partial withdrawal amount ($9,000) is less than the free withdrawal amount so no New Payments are withdrawn and no withdrawal charge applies. (b) Since a partial withdrawal of $9,000 was taken, the remaining free withdrawal amount is equal to $11,000. The $12,000 partial withdrawal will first be applied against the $11,000 free withdrawal amount. The remaining $1,000 will be withdrawn from the $40,000 New Payment, incurring a withdrawal charge of $40. (c) The free withdrawal amount is zero since the previous partial withdrawals have already used the free withdrawal amount. The entire partial withdrawal amount will result in New Payments being withdrawn and will incur a withdrawal charge. PART 2 -- FIXED ACCOUNT -- EXAMPLES OF THE MARKET VALUE ADJUSTMENT ("MVA") The MVA Factor is: N/12 1 + I ( -------- ) -1 1 + J + b
These examples assume the following: 1) the Guarantee Amount was allocated to a five year Guarantee Period with a Guaranteed Interest Rate of 6% or .06. 2) the date of surrender is two years from the Expiration Date (N = 24). 3) the value of the Guarantee Amount on the date of surrender is $11,910.16. 4) the interest earned in the current Account Year is $674.16. 5) no transfers or partial withdrawals affecting this Guarantee Amount have been made. 6) withdrawal charges, if any, are calculated in the same manner as shown in the examples in Part 1. 84 EXAMPLE OF A NEGATIVE MVA: Assume that on the date of surrender, the current rate (J) is 8% or .08 and the b factor is zero. N/12 1 + I The MVA factor = ( -------- ) -1 1 + J + b
24/12 1 + .06 = ( ------ ) -1 1 + .08 = (.981)(2) -1 = .963 -1 = - .037
The value of the Guarantee Amount less interest credited to the Guarantee Amount in the current Account Year is multiplied by the MVA factor to determine the MVA ($11,910.16 - $674.16) X (-.037) = -$415.73 -$415.73 represents the MVA that will be deducted from the value of the Guarantee Amount before the deduction of any withdrawal charge. For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA would be ($2,000.00 - $674.16) X (-.037) = -$49.06. -$49.06 represents the MVA that will be deducted from the partial withdrawal amount before the deduction of any withdrawal charge. EXAMPLE OF A POSITIVE MVA: Assume that on the date of surrender, the current rate (J) is 5% or .05 and the b factor is zero. N/12 1 + I The MVA factor = ( -------- ) -1 1 + J + b
24/12 1 + .06 = ( ------ ) -1 1 + .05 = (1.010)(2) -1 = 1.019 -1 = - .019
The value of the Guarantee Amount less interested credit to the Guarantee Amount in the current Account Year is multiplied by the MVA factor to determine the MVA ($11,910.16 - $674.16) X .019 = $213.48 $213.48 represents the MVA that would be added to the value of the Guarantee Amount before the deduction of any withdrawal charge. For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA would be ($2,000.00 - $674.16) X .019 = $25.19. $25.19 represents the MVA that would be added to the value of the partial withdrawal amount before the deduction of any withdrawal charge. 85 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) ANNUITY SERVICE MAILING ADDRESS: C/O RETIREMENT PRODUCTS AND SERVICES P.O. BOX 1024 BOSTON, MASSACHUSETTS 02103 TELEPHONE: Toll Free (800) 752-7215 In Massachusetts (617) 348-9600 GENERAL DISTRIBUTOR Clarendon Insurance Agency, Inc. One Sun Life Executive Park Wellesley Hills, Massachusetts 02481 AUDITORS Deloitte Touche LLP 125 Summer Street Boston, Massachusetts 02110 PLAT-1 5/99
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) MAY 1, 1999 PROFILE MFS REGATTA GOLD VARIABLE AND FIXED ANNUITY THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU SHOULD KNOW AND CONSIDER BEFORE PURCHASING THE CONTRACT. THE CONTRACT IS MORE FULLY DESCRIBED IN THE FULL PROSPECTUS WHICH ACCOMPANIES THIS PROFILE. PLEASE READ THE PROSPECTUS CAREFULLY. 1. THE MFS REGATTA GOLD ANNUITY The MFS Regatta Gold Annuity is a flexible payment deferred annuity contract ("Contract") designed for use in connection with retirement and deferred compensation plans, some of which may qualify for favorable federal income tax treatment. The Contract is intended to help you achieve your retirement savings or other long-term investment goals. The Contract has two phases: an Accumulation Phase and an Income Phase. During the Accumulation Phase you make payments into the Contract; any investment earnings under your Contract accumulate on a tax-deferred basis and are taxed as income only when withdrawn. During the Income Phase, we make annuity payments in amounts determined in part by the amount of money you have accumulated under your Contract during the Accumulation Phase. You choose when the Income Phase begins. You may choose among 25 variable investment options and a range of fixed interest options. For a variable investment return you choose one or more Sub-Accounts in our Variable Account, each of which invests in shares of a corresponding series of the MFS/Sun Life Series Trust (collectively, the "Series") listed in Section 4. The value of any portion of your Contract allocated to the Sub-Accounts will fluctuate up or down depending on the performance of the Series you select, and you may experience losses. For a fixed interest rate, you may choose one or more Guarantee Periods offered in our Fixed Account, each of which earns its own Guaranteed Interest Rate if you keep your money in that Guarantee Period for the specified length of time. The Contract is designed to meet your need for investment flexibility. At any time you may have amounts allocated among up to 18 of the available variable and fixed options. Until we begin making annuity payments under your Contract, you can, subject to certain limitations, transfer money between options up to 12 times each year without a transfer charge or adverse tax consequences. 2. ANNUITY PAYMENTS (THE INCOME PHASE) Just as you can elect to have your Contract value accumulate on either a variable or fixed basis, or a combination of both, you can elect to receive annuity payments on either a variable or fixed basis or both. If you choose to have any part of your annuity payments come from the Sub-Accounts, the dollar amount of your annuity payments may fluctuate. The Contract offers a variety of annuity options. You can select from among the following methods of receiving either variable or fixed annuity payments under your Contract: (1) monthly payments continuing for your lifetime (assuming you are the annuitant); (2) monthly payments for your lifetime, but with payments continuing to your chosen beneficiary for 5, 10, 15 or 20 years if you die before the end of the period you have selected; (3) monthly payments for your lifetime and the life of another person (usually your spouse) you have chosen; and (4) monthly payments for a specified number of years (between 5 and 30), with a cash-out option for variable payments. You can also select a fixed payment option where we will hold the amount applied to provide fixed annuity payments, with interest accrued at the rate we determine from time to time, which will be at least 3% per year. We may also agree to other annuity options in our discretion. Once the Income Phase begins, you cannot change your choice of annuity payment method. 3. PURCHASING A CONTRACT You may purchase a Contract for $5,000 or more, under most circumstances. You may increase the value of your investment by adding $1,000 or more at any time during the Accumulation Phase. We will not accept a Purchase Payment if your Account Value is over $1 million, or if the Purchase Payment would cause your Account Value to exceed $1 million, unless we have approved the Payment in advance. 4. ALLOCATION OPTIONS You can allocate your money among Sub-Accounts investing in the following Series of the MFS/ Sun Life Series Trust: Bond Series Managed Sectors Series Capital Appreciation Series Massachusetts Investors Growth Stock Series Capital Opportunities Series Massachusetts Investors Trust Series Emerging Growth Series MFS/Foreign & Colonial Emerging Markets Equity Series Equity Income Series Money Market Series Global Asset Allocation Series New Discovery Series Global Governments Series Research Series Global Growth Series Research Growth and Income Series Global Total Return Series Research International Series Government Securities Series Strategic Income Series High Yield Series Total Return Series International Growth Series Utilities Series International Growth and Income Series
Market conditions will determine the value of an investment in any Series. Each series is described in the Prospectus of the MFS/Sun Life Series Trust. In addition to these variable options, you may also allocate your money to one or more of the Guarantee Periods we make available. For each Guarantee Period, we offer a Guaranteed Interest Rate for the specified length of time. 5. EXPENSES The charges under the Contracts are as follows: During the first 5 years of a Contract, we impose an annual Account Fee equal to the lesser of $30 or 2% of the value of your Contract. After the fifth year, we may change this fee annually, but it will never exceed the lesser of $50 or 2% of the value of your Contract. During the Income Phase, the annual Account Fee is $30. We also deduct insurance charges (which include an administrative expense charge) equal to 1.40% per year of the average daily value of the Contract allocated among the Sub-Accounts. There are no sales charges when you purchase your MFS Regatta Gold Annuity. However, if you withdraw money from your Contract, we will, with certain exceptions, impose a withdrawal charge. Your Contract allows a "free withdrawal amount," which you may withdraw before you incur the withdrawal charge. The rest of your withdrawal is subject to a withdrawal charge equal to a percentage of each purchase payment you withdraw and is determined in accordance with the table below. The percentage varies according to the number of Contract years the purchase payment has been held in your account, including the year in which you made the payment, but not the year in which you withdraw it.
NUMBER OF YEARS IN ACCOUNT WITHDRAWAL CHARGE - ----------------- ----------------------- 0-1 6% 2-3 5% 4-5 4% 6 3% 7 or more 0%
If you withdraw, transfer, or annuitize money allocated to a Guarantee Period more than 30 days before the expiration date of the Guarantee Period, the amount will be subject to a Market Value Adjustment. This adjustment reflects the relationship between our current Guaranteed Interest Rates and the Guaranteed Interest Rate applicable to the amount being withdrawn. Generally, if your Guaranteed Interest Rate is lower than the relevant current rate, then the adjustment will decrease your 2 Contract value. Conversely, if your Guaranteed Interest Rate is higher than the relevant current rate, the adjustment will increase your Contract value. The Market Value Adjustment will not apply to the withdrawal of interest credited during the current year, or to transfers as part of our dollar cost averaging program. In addition to the charges we impose under the Contracts, there are charges (which include management fees and operating expenses) imposed by each Series, which range from 0.56% to 1.55% of the average net assets of the Series, depending upon which Series you have selected. The investment adviser has agreed to waive or reimburse a portion of expenses for some of the Series; without this agreement, Series expenses could be higher. Some of these arrangements may be terminated after one year, or earlier if the Series Fund's Board of Trustees agrees. The following chart is designed to help you understand the expenses you will incur under your Contract, if you invest in one or more of the Sub-Accounts. The column "Total Annual Expenses" shows the sum of the "Total Annual Insurance Charges," as defined just above the chart, and the total expenses for each Series. The next two columns show two examples of the expenses, in dollars, you would pay under a Contract. The examples assume that you invested $1,000 in a Contract which earns 5% annually and that you withdraw your money (1) at the end of one year or (2) at the end of 10 years. For the first year, the Total Annual Expenses are deducted, as well as withdrawal charges. For year 10, the example shows the aggregate of all of the annual expenses deducted for the 10 years, but there is no withdrawal charge. "Total Annual Insurance Charges" include the insurance charges of 1.40%, plus an additional 0.10%, which is used to represent the $30 annual Account Fee based on an assumed Contract value of $35,000. The actual impact of the Account Fee may be greater or less than 0.10%, depending upon the value of your Contract.
EXAMPLES: TOTAL ANNUAL TOTAL ANNUAL TOTAL TOTAL EXPENSES INSURANCE SERIES ANNUAL AT END SUB-ACCOUNT CHARGES EXPENSES EXPENSES 1 YEAR 10 YEARS - ------------------------------------------------- ---------------- --------------- ----------- ----------- ------------- Bond Series 1.50% 1.03% 2.53% $ 81 $ 287 (1.40% + 0.10%) Capital Appreciation Series 1.50% 0.77% 2.27% $ 79 $ 261 (1.40% + 0.10%) Capital Opportunities Series 1.50% 0.86% 2.36% $ 79 $ 270 (1.40% + 0.10%) Emerging Growth Series 1.50% 0.78% 2.28% $ 79 $ 262 (1.40% + 0.10%) Equity Income Series 1.50% 1.03% 2.53% $ 81 $ 287 (1.40% + 0.10%) Global Asset Allocation Series 1.50% 0.90% 2.40% $ 80 $ 274 (1.40% + 0.10%) Global Governments Series 1.50% 0.88% 2.38% $ 80 $ 272 (1.40% + 0.10%) Global Growth Series 1.50% 1.01% 2.51% $ 81 $ 285 (1.40% + 0.10%) Global Total Return Series 1.50% 0.93% 2.43% $ 80 $ 277 (1.40% + 0.10%) Government Securities Series 1.50% 0.62% 2.12% $ 77 $ 245 (1.40% + 0.10%) High Yield Series 1.50% 0.82% 2.32% $ 79 $ 266 (1.40% + 0.10%) International Growth Series 1.50% 1.32% 2.82% $ 84 $ 315 (1.40% + 0.10%) International Growth and Income Series 1.50% 1.16% 2.66% $ 82 $ 299 (1.40% + 0.10%) Managed Sectors Series 1.50% 0.80% 2.30% $ 79 $ 264 (1.40% + 0.10%) Massachusetts Investors Growth Stock Series 1.50% 0.97% 2.47% $ 81 $ 281 (1.40% + 0.10%) Massachusetts Investors Trust Series 1.50% 0.59% 2.09% $ 77 $ 242 (1.40% + 0.10%)
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EXAMPLES: TOTAL ANNUAL TOTAL ANNUAL TOTAL TOTAL EXPENSES INSURANCE SERIES ANNUAL AT END SUB-ACCOUNT CHARGES EXPENSES EXPENSES 1 YEAR 10 YEARS - ------------------------------------------------- ---------------- --------------- ----------- ----------- ------------- MFS/Foreign & Colonial Emerging Markets Equity 1.50% 1.50% 3.00% $ 86 $ 332 Series (1.40% + 0.10%) Money Market Series 1.50% 0.56% 2.06% $ 77 $ 239 (1.40% + 0.10%) New Discovery Series 1.50% 1.28% 2.78% $ 83 $ 311 (1.40% + 0.10%) Research Series 1.50% 0.76% 2.26% $ 79 $ 260 (1.40% + 0.10%) Research Growth and Income Series 1.50% 0.95% 2.45% $ 80 $ 279 (1.40% + 0.10%) Research International Series 1.50% 1.55% 2.05% $ 86 $ 336 (1.40% + 0.10%) Strategic Income Series 1.50% 1.29% 2.79% $ 84 $ 312 (1.40% + 0.10%) Total Return Series 1.50% 0.70% 2.20% $ 78 $ 253 (1.40% + 0.10%) Utilities Series 1.50% 0.86% 2.36% $ 79 $ 270 (1.40% + 0.10%)
For more detailed information about Contract fees and expenses, please refer to the fee table and discussion of Contract charges contained in the full Prospectus which accompanies this Profile. 6. TAXES Your earnings are not taxed until you take them out of your Contract. If you take money out, earnings come out first and are taxed as income. If your Contract is funded with pre-tax or tax deductible dollars (such as with a pension or IRA contribution) -- we call this a Qualified Contract -- your entire withdrawal will be taxable. If you are younger than 59 1/2 when you take money out, you may be charged a 10% federal penalty tax on the earnings. Annuity payments during the Income Phase are considered in part a return of your original investment. That portion of each payment is not taxable as income except under a Qualified Contract, in which case the entire payment will be taxable. In all cases, you should consult with your tax adviser for specific tax information. 7. ACCESS TO YOUR MONEY You can withdraw money from your Contract at any time during the Accumulation Phase. You may withdraw a portion of the value of your Contract in each year without the imposition of the withdrawal charge -- 10% of all payments you have made in the last 7 years, plus any payment we have held for at least 7 years. All other purchase payments you withdraw will be subject to a withdrawal charge ranging from 6% to 0%. (If you purchased your Contract before November 1994 or your state requires, your withdrawal charge will be calculated differently, using the alternative method we describe in the Prospectus. You should check your Contract to see which method applies to you.) You may also be required to pay income tax and possible tax penalties on any money you withdraw. We do not assess a withdrawal charge upon annuitization or transfers. In certain circumstances, we will waive the withdrawal charges for a full withdrawal when you are confined to an eligible nursing home. In addition, there may be other circumstances under which we may waive the withdrawal charge. In addition to the withdrawal charge, amounts you withdraw, transfer or annuitize from the Fixed Account before your Guarantee Period has ended may be subject to a Market Value Adjustment. 8. PERFORMANCE If you invest in one or more Sub-Accounts, the value of your Contract will increase or decrease depending upon the investment performance of the Series you choose. The following chart shows total returns for investment in the Sub-Accounts where the corresponding Series has at least one full calendar year of operations. The returns reflect all charges and deductions of the Series and Sub-Accounts and deduction of the Annual Account Fee. They do not 4 reflect deduction of any withdrawal charges or premium taxes. These charges, if included, would reduce the performance numbers shown. Past performance is not a guarantee of future results.
CALENDAR YEAR --------------------------------------------------------------------------------- SUB-ACCOUNT 1998 1997 1996 1995 1994 1993 1992 ---------------------------------------- --------- --------- --------- --------- --------- --------- --------- Bond Series -- -- -- -- -- -- -- Capital Appreciation Series 26.83% 21.33% 19.70% 32.51% (5.03)% 16.26% 11.53% Capital Opportunities Series 21.10% 25.73% -- -- -- -- -- Emerging Growth Series 31.91% 20.16% 15.38% -- -- -- -- Equity Income Series -- -- -- -- -- -- -- Global Asset Allocation Series 4.97% 9.24% 14.28% 19.85% -- -- -- Global Governments Series 13.77% (2.24)% 3.11% 14.00% (5.91)% 17.16% (1.01)% Global Growth Series 12.87% 13.63% 11.42% 14.29% 1.40% -- -- Global Total Return Series 16.61% 11.98% 12.58% 16.19% -- -- -- Government Securities Series 7.13% 7.15% 0.11% 15.92% (3.61)% 7.07% 5.14% High Yield Series (0.88)% 11.55% 10.46% 15.32% (3.68)% 16.01% 13.34% International Growth Series 0.41% 3.09% -- -- -- -- -- International Growth and Income Series 19.84% 4.95% 3.33% -- -- -- -- Managed Sectors Series 10.62% 23.80% 15.86% 30.34% (3.38)% 2.52% 4.91% Massachusetts Investors Growth Stock Series -- -- -- -- -- -- -- Massachusetts Investors Trust Series 22.03% 30.04% 23.57% 35.44% (2.57)% 6.82% 4.05% MFS/Foreign & Colonial Emerging Markets Equity Series (31.02)% 8.78% -- -- -- -- -- Money Market Series 3.48% 3.52% 3.37% 3.90% 2.17% 1.11% 1.81% New Discovery Series -- -- -- -- -- -- -- Research Series 21.82% 19.07% 22.00% 35.44% -- -- -- Research Growth and Income Series 20.38% -- -- -- -- -- -- Research International Series -- -- -- -- -- -- -- Strategic Income Series -- -- -- -- -- -- -- Total Return Series 10.10% 20.18% 12.38% 24.93% (3.71)% 11.72% 6.77% Utilities Series 15.86% 30.80% 18.57% 30.46% (6.36)% -- -- SUB-ACCOUNT 1991 1990 1989 ---------------------------------------- --------- --------- --------- Bond Series -- -- -- Capital Appreciation Series 38.89% (11.02)% 45.06% Capital Opportunities Series -- -- -- Emerging Growth Series -- -- -- Equity Income Series -- -- -- Global Asset Allocation Series -- -- -- Global Governments Series 13.10% 11.67% 8.31% Global Growth Series -- -- -- Global Total Return Series -- -- -- Government Securities Series 14.17% 7.27% 11.19% High Yield Series 45.49% (15.65)% (2.41)% International Growth Series -- -- -- International Growth and Income Series -- -- -- Managed Sectors Series 59.67% (11.80)% 43.27% Massachusetts Investors Growth Stock Series -- -- -- Massachusetts Investors Trust Series 34.87% (4.86)% 33.69% MFS/Foreign & Colonial Emerging Markets Equity Series -- -- -- Money Market Series 4.23% 6.26% 7.31% New Discovery Series -- -- -- Research Series -- -- -- Research Growth and Income Series -- -- -- Research International Series -- -- -- Strategic Income Series -- -- -- Total Return Series 19.87% 1.15% 15.80% Utilities Series -- -- --
9. DEATH BENEFIT If the annuitant dies before the Contract reaches the Income Phase, the beneficiary will receive a death benefit. To calculate the death benefit, we use a "Death Benefit Date," which is the earliest date we have both due proof of death and a written request specifying the manner of payment. If you were 85 or younger when we issued your Contract, the death benefit is the greatest of: (1) the value of the Contract on the Death Benefit Date; (2) the amount we would pay in the event of a full surrender of the Contract on the Death Benefit Date; (3) the value of the Contract on the most recent 7 year anniversary of the Contract, plus any purchase payments made and adjusted for any partial withdrawals and charges made after that anniversary; (4)your total purchase payments minus the sum of partial withdrawals; interest will accrue daily on each purchase payment and each partial withdrawal at a rate equivalent to 5% per year until the first day of the month following the annuitant's 80th birthday, or until the purchase payment or partial withdrawal has doubled in amount, whichever is earlier. If the annuitant was 86 or older when we issued your Contract, the death benefit is equal to the amount set forth in (2) above, in this Section 9. 10. OTHER INFORMATION FREE LOOK. Depending upon applicable state law, if you cancel your Contract within 10 days after receiving it we will send you the value of your Contract as of the day we received your cancellation request (this may be more or less than the original purchase payment) and we will not deduct a 5 withdrawal charge. However, if applicable state or federal law requires, we will refund the full amount of any purchase payment(s) we receive and the "free look" period may be greater than 10 days. NO PROBATE. In most cases, when you die, the beneficiary will receive the death benefit without going through probate. However, avoiding probate does not mean that the beneficiary will not have tax liability as a result of receiving the death benefit. WHO SHOULD PURCHASE A CONTRACT? The Contract is designed for those seeking long-term tax deferred accumulation of assets and annuity features, generally for retirement or other long-term purposes. The tax-deferred feature is most attractive to purchasers in high federal and state income tax brackets. You should note that qualified retirement investments automatically provide tax deferral regardless of whether the underlying contract is an annuity. You should not buy a Contract if you are looking for a short-term investment or if you cannot risk a decrease in the value of your investment. CONFIRMATIONS AND QUARTERLY STATEMENTS. You will receive a confirmation of each transaction within your Contract. On a quarterly basis, you will receive a complete statement of your transactions over the past quarter and a summary of your account values during that period. ADDITIONAL FEATURES. The MFS Regatta Gold Annuity offers the following additional convenient features, which you may choose at no extra charge. Dollar Cost Averaging -- This program lets you invest gradually in up to 12 Sub-Accounts. Asset Allocation -- One or more asset allocation programs may be available in connection with the Contract. Systematic Withdrawal and Interest Out Program -- These programs allow you to receive quarterly, semi-annual or annual payments during the Accumulation Phase. Portfolio Rebalancing Program -- Under this program, we automatically reallocate your investments in the Sub-Accounts to maintain the proportions you select. You can elect rebalancing on a quarterly, semi-annual or annual basis. Secured Future Program -- This program guarantees the return of your Purchase Payment, and also allows you to allocate a portion of your investment to one or more variable investment options. 11. INQUIRIES If you would like more information about buying a Contract, please contact your broker or registered representative. If you have any other questions, please contact us at: SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) ANNUITY SERVICE MAILING ADDRESS C/O RETIREMENT PRODUCTS AND SERVICES P.O. BOX 1024 BOSTON, MASSACHUSETTS 02103 TEL: TOLL FREE (800) 752-7215 IN MASSACHUSETTS (617) 348-9600 6 PROSPECTUS MAY 1, 1999 MFS REGATTA GOLD Sun Life Assurance Company of Canada (U.S.) and Sun Life of Canada (U.S.) Variable Account F offer the flexible payment deferred annuity contracts and certificates described in this Prospectus to groups and individuals. You may choose among 25 variable investment options and a range of fixed options. The variable options are Sub-Accounts in the Variable Account. Each Sub-Account invests in one of the following series of the MFS/Sun Life Series Trust (the "Series Fund"), a mutual fund advised by our affiliate, Massachusetts Financial Services Company: Bond Series Managed Sectors Series Capital Appreciation Series Massachusetts Investors Growth Stock Series Capital Opportunities Series Massachusetts Investors Trust Series Emerging Growth Series MFS/Foreign & Colonial Emerging Markets Equity Series Equity Income Series Money Market Series Global Asset Allocation Series New Discovery Series Global Government Series Research Series Global Growth Series Research Growth and Income Series Global Total Return Series Research International Series Government Securities Series Strategic Income Series High Yield Series Total Return Series International Growth Series Utilities Series International Growth and Income Series
The fixed account options are available for specified time periods, called Guarantee Periods, and pay interest at a guaranteed rate for each period. THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE SERIES FUND. PLEASE READ THIS PROSPECTUS AND THE SERIES FUND PROSPECTUS CAREFULLY BEFORE INVESTING AND KEEP THEM FOR FUTURE REFERENCE. THEY CONTAIN IMPORTANT INFORMATION ABOUT THE MFS REGATTA GOLD ANNUITY AND THE SERIES FUND. We have filed a Statement of Additional Information dated May 1, 1999 (the "SAI") with the Securities and Exchange Commission (the "SEC"), which is incorporated by reference in this Prospectus. The table of contents for the SAI is on page 77 of this Prospectus. You may obtain a copy without charge by writing to our Annuity Service Mailing Address or by telephoning (800) 752-7215 or (617) 348-9600. In addition, the SEC maintains a website (http://www.sec.gov) that contains the SAI, material incorporated by reference, and other information regarding companies that file with the SEC. THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY US MEANS RECEIPT AT THE FOLLOWING ADDRESS: ANNUITY SERVICE MAILING ADDRESS, C/O SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) RETIREMENT PRODUCTS AND SERVICES, P.O. BOX 1024, BOSTON, MASSACHUSETTS 02103 1 TABLE OF CONTENTS
PAGE Special Terms 4 Expense Summary 4 Summary of Contract Expenses 4 Series Fund Annual Expenses 5 Examples 6 Condensed Financial Information 7 The MFS Regatta Gold Annuity 7 Communicating to Us About Your Contract 7 Sun Life Assurance Company of Canada (U.S.) 8 The Variable Account 8 Variable Account Options: The MFS/Sun Life Series Trust 8 The Fixed Account 10 The Fixed Account Options: The Guarantee Periods 11 The Accumulation Phase 11 Issuing Your Contract 11 Amount and Frequency of Purchase Payments 12 Allocation of Net Purchase Payments 12 Your Account 12 Your Account Value 12 Variable Account Value 12 Fixed Account Value 13 Transfer Privilege 14 Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest Rates 15 Optional Programs 15 Withdrawals, Withdrawal Charge and Market Value Adjustment 16 Cash Withdrawals 16 Withdrawal Charge 18 Market Value Adjustment 20 Contract Charges 21 Account Fee 21 Administrative Expense Charge 22 Mortality and Expense Risk Charge 22 Premium Taxes 22 Series Fund Expenses 22 Modification in the Case of Group Contracts 22 Death Benefit 22 Amount of Death Benefit 23 Method of Paying Death Benefit 23 Selection and Change of Beneficiary 24 Payment of Death Benefit 24 Due Proof of Death 24 The Income Phase -- Annuity Provisions 24 Selection of the Annuitant or Co-Annuitant 24 Selection of the Annuity Commencement Date 25 Annuity Options 25 Selection of Annuity Option 26 Amount of Annuity Payments 26 Exchange of Variable Annuity Units 27 Account Fee 28 Annuity Payment Rates 28 Annuity Options as Method of Payment for Death Benefit 28
2 Other Contract Provisions 28 Exercise of Contract Rights 28 Change of Ownership 28 Death of Participant 29 Voting of Series Fund Shares 29 Periodic Reports 30 Substitution of Securities 30 Change in Operation of Variable Account 31 Splitting Units 31 Modification 31 Discontinuance of New Participants 31 Reservation of Rights 31 Right to Return 32 Federal Tax Status 32 Introduction 32 Deductibility of Purchase Payments 32 Pre-Distribution Taxation of Contracts 32 Distributions and Withdrawals from Non-Qualified Contracts 33 Distribution and Withdrawals from Qualified Contracts 33 Withholding 33 Purchase of Immediate Annuity Contract and Deferred Annuity Contract 34 Investment Diversification and Control 34 Tax Treatment of the Company and the Variable Account 34 Qualified Retirement Plans 34 Pension and Profit-Sharing Plans 35 Tax-Sheltered Annuities 35 Individual Retirement Accounts 35 Roth IRAs 35 Administration of the Contracts 36 Distribution of the Contracts 36 Performance Information 36 Available Information 37 Incorporation of Certain Documents by Reference 38 Additional Information About the Company 38 Business of the Company 38 Selected Financial Data 39 Management's Discussion and Analysis of Financial Condition and Results of Operations 39 Demutualization 47 Year 2000 Compliance 47 Sale of Subsidiary 48 Quantitative and Qualitative Disclosure About Market Risk 48 Reinsurance 50 Reserves 50 Investments 50 Competition 50 Employees 51 Properties 51 State Regulation 51 Legal Proceedings 52 Accountants 52 Financial Statements 52 Table of Contents of Statement of Additional Information 77 Appendix A -- Glossary 79 Appendix B -- Condensed Financial Information-- Accumulation Unit Values 82 Appendix C -- Withdrawals, Withdrawal Charges and the Market Value Adjustment 84
3 SPECIAL TERMS Your Contract is a legal document that uses a number of specially defined terms. We explain most of the terms that we use in this Prospectus in the context where they arise, and some are self-explanatory. In addition, for convenient reference, we have compiled a list of these terms in the Glossary included at the back of this Prospectus as Appendix A. If, while you are reading this Prospectus, you come across a term that you do not understand, please refer to the Glossary for an explanation. EXPENSE SUMMARY The purpose of the following table is to help you understand the costs and expenses that you will bear directly and indirectly under a Contract WHEN YOU ALLOCATE MONEY TO THE VARIABLE ACCOUNT. The table reflects expenses of the Variable Account as well as of each Series of the Series Fund. The table should be considered together with the narrative provided under the heading "Contract Fees" in this Prospectus, and with the Series Fund's prospectus. In addition to the expenses listed below, we may deduct premium taxes. SUMMARY OF CONTRACT EXPENSES TRANSACTION EXPENSES Sales Load Imposed on Purchase Payments............................................ $ 0 Deferred Sales Load (as a percentage of Purchase Payments withdrawn) (1) Number of Account Years Purchase Payment in Account 0-1............................................................................ 6% 2-3............................................................................ 5% 4-5............................................................................ 4% 6.............................................................................. 3% 7 or more...................................................................... 0% Transfer Fee (2)................................................................... $ 0 ANNUAL ACCOUNT FEE per Contract or Certificate (3) $ 30 VARIABLE ACCOUNT ANNUAL EXPENSES (as a percentage of average Variable Account assets) Mortality and Expense Risk Charge................................................ 1.25% Administrative Expense Charge.................................................... 0.15% Other Fees and Expenses of the Variable Account.................................. 0.00% ----- Total Variable Account Annual Expenses............................................. 1.40%
- ------------------------ (1) A portion of your Account may be withdrawn each year without imposition of any withdrawal charge, and after a Purchase Payment has been in your Account for 7 Account Years it may be withdrawn free of the withdrawal charge. (2) A Market Value Adjustment may be imposed on amounts transferred from or within the Fixed Account. (3) The Annual Account Fee is the lesser of $30 and 2% of your Account Value in Account Years 1 through 5; thereafter, the fee may be changed annually, but it may not exceed the lesser of $50 and 2% of your Account Value. 4 SERIES FUND ANNUAL EXPENSES (1) (AS A PERCENTAGE OF SERIES FUND NET ASSETS)
OTHER TOTAL FUND MANAGEMENT EXPENSES(2) EXPENSES FEES (AFTER REIMBURSEMENT) (AFTER REIMBURSEMENT) --------------- ------------------------ ------------------------ Bond Series(3).................................... 0.60% 0.43% 1.03% Capital Appreciation Series....................... 0.73% 0.04% 0.77% Capital Opportunities Series...................... 0.75% 0.11% 0.86% Emerging Growth Series............................ 0.72% 0.06% 0.78% Equity Income Series(3)........................... 0.75% 0.28% 1.03%(3) Global Asset Allocation Series.................... 0.75% 0.15% 0.90% Global Governments Series......................... 0.75% 0.13% 0.88% Global Growth Series.............................. 0.90% 0.11% 1.01% Global Total Return Series........................ 0.75% 0.18% 0.93% Government Securities Series...................... 0.55% 0.07% 0.62% High Yield Series................................. 0.75% 0.07% 0.82% International Growth Series....................... 0.98% 0.34% 1.32% International Growth and Income Series............ 0.98% 0.18% 1.16% Managed Sectors Series............................ 0.74% 0.06% 0.80% Massachusetts Investors Growth Stock Series....... 0.75% 0.22% 0.97% Massachusetts Investors Trust Series.............. 0.55% 0.04% 0.59% MFS/Foreign & Colonial Emerging Markets Equity Series........................................... 1.25% 0.25% 1.50% Money Market Series............................... 0.50% 0.06% 0.56% New Discovery Series(3)........................... 0.90% 0.38% 1.28%(3) Research Series................................... 0.70% 0.06% 0.76% Research Growth and Income Series................. 0.75% 0.20% 0.95% Research International Series(3).................. 1.00% 0.55% 1.55%(3) Strategic Income Series(3)........................ 0.75% 0.54% 1.29%(3) Total Return Series............................... 0.65% 0.05% 0.70% Utilities Series.................................. 0.75% 0.11% 0.86%
- ------------------------ (1) The information relating to Series Fund expenses was provided by the Series Fund and we have not independently verified it. You should consult the Series Fund prospectus for more information about Series Fund expenses (2) Each Series has an expense offset arrangement which reduces the Series' custodian fee based upon the amount of cash maintained by the Series with its custodian and dividend disbursing agent, and may enter into such other arrangements and directed brokerage arrangements (which would also have the effect of reducing the series' expenses). Any such fee reductions are not reflected under "Other Expenses." (3) "Other Expenses" and "Total Fund Expenses" are based on actual expenses for the fiscal year ended December 31, 1998, net of any expense reimbursement and/or fee waiver. MFS has agreed to bear the expenses of certain of the Series (excluding management fees, taxes, extraordinary expenses and brokerage and transaction costs) in excess of the following annual percentage of such Series' average daily net assets: Bond Series...................................................... 0.40% Equity Income Series............................................. 0.25% New Discovery Series............................................. 0.35% Research International Series.................................... 0.50% Strategic Income Series.......................................... 0.50%
Without taking into account the fee waiver and/or expense reimbursement, expenses for these Series would have been as follows: Bond Series -- Other Expenses 0.47% and Total Fund Expenses 1.07%; Equity Income Series -- Other Expenses 0.76% and Total Fund Expenses 1.51%; New Discovery Series -- Other Expenses 0.70% and Total Fund Expenses 1.60%; Research International Series -- Other Expenses 2.86% and Total Fund Expenses 3.86%; and Strategic Income Series -- Other Expenses 0.67% and Total Fund Expenses 1.42%. These arrangements will remain in effect until at least May 1, 2000, absent earlier modification by the Series' Board of Trustees. 5 EXAMPLES If you surrender your Contract at the end of the applicable time period, you would pay the following expenses on a $1,000 investment, assuming a 5% annual return:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------- ----------- ----------- ----------- Bond Series............................................................... $ 81 $ 118 $ 160 $ 287 Capital Appreciation Series............................................... $ 79 $ 110 $ 147 $ 261 Capital Opportunities Series.............................................. $ 79 $ 113 $ 152 $ 270 Emerging Growth Series.................................................... $ 79 $ 110 $ 148 $ 262 Equity Income Series...................................................... $ 81 $ 118 $ 160 $ 287 Global Asset Allocation Series............................................ $ 80 $ 114 $ 154 $ 274 Global Governments Series................................................. $ 80 $ 113 $ 153 $ 272 Global Growth Series...................................................... $ 81 $ 117 $ 159 $ 285 Global Total Return Series................................................ $ 80 $ 115 $ 155 $ 277 Government Securities Series.............................................. $ 77 $ 106 $ 140 $ 245 High Yield Series......................................................... $ 79 $ 112 $ 150 $ 266 International Growth Series............................................... $ 84 $ 126 $ 173 $ 315 International Growth and Income Series.................................... $ 82 $ 121 $ 166 $ 299 Managed Sectors Series.................................................... $ 79 $ 111 $ 149 $ 264 Massachusetts Investors Growth Stock Series............................... $ 81 $ 116 $ 157 $ 281 Massachusetts Investors Trust Series...................................... $ 77 $ 105 $ 139 $ 242 MFS/Foreign & Colonial Emerging Markets Equity Series..................... $ 86 $ 131 $ 182 $ 332 Money Market Series....................................................... $ 77 $ 104 $ 137 $ 239 New Discovery Series...................................................... $ 83 $ 125 $ 172 $ 311 Research Series........................................................... $ 79 $ 110 $ 147 $ 260 Research Growth and Income Series......................................... $ 80 $ 115 $ 156 $ 279 Research International Series............................................. $ 86 $ 132 $ 184 $ 336 Strategic Income Series................................................... $ 84 $ 125 $ 172 $ 312 Total Return Series....................................................... $ 78 $ 108 $ 144 $ 253 Utilities Series.......................................................... $ 79 $ 113 $ 152 $ 270
If you do NOT surrender your Contract, or if you annuitize at the end of the applicable time period, you would pay the following expenses on a $1,000 investment, assuming a 5% annual return:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------- ----------- ----------- ----------- Bond Series............................................................... $ 26 $ 79 $ 135 $ 287 Capital Appreciation Series............................................... $ 23 $ 71 $ 122 $ 261 Capital Opportunities Series.............................................. $ 24 $ 74 $ 126 $ 270 Emerging Growth Series.................................................... $ 23 $ 71 $ 122 $ 262 Equity Income Series...................................................... $ 26 $ 79 $ 135 $ 287 Global Asset Allocation Series............................................ $ 24 $ 75 $ 128 $ 274 Global Governments Series................................................. $ 24 $ 74 $ 127 $ 272 Global Growth Series...................................................... $ 25 $ 78 $ 134 $ 285 Global Total Return Series................................................ $ 25 $ 76 $ 130 $ 277 Government Securities Series.............................................. $ 22 $ 66 $ 114 $ 245 High Yield Series......................................................... $ 24 $ 72 $ 124 $ 266 International Growth Series............................................... $ 29 $ 87 $ 149 $ 315 International Growth and Income Series.................................... $ 27 $ 83 $ 141 $ 299 Managed Sectors Series.................................................... $ 23 $ 72 $ 123 $ 264 Massachusetts Investors Growth Stock Series............................... $ 25 $ 77 $ 132 $ 281 Massachusetts Investors Trust Series...................................... $ 21 $ 65 $ 112 $ 242 MFS/Foreign & Colonial Emerging Markets Equity Series..................... $ 30 $ 93 $ 158 $ 332 Money Market Series....................................................... $ 21 $ 65 $ 111 $ 239 New Discovery Series...................................................... $ 28 $ 86 $ 147 $ 311 Research Series........................................................... $ 23 $ 71 $ 121 $ 260 Research Growth and Income Series......................................... $ 25 $ 76 $ 131 $ 279 Research International Series............................................. $ 31 $ 94 $ 160 $ 336 Strategic Income Series................................................... $ 28 $ 87 $ 147 $ 312 Total Return Series....................................................... $ 22 $ 69 $ 118 $ 253 Utilities Series.......................................................... $ 24 $ 74 $ 126 $ 270
THE EXAMPLES SHOULD NOT BE CONSIDERED TO BE REPRESENTATIONS OF PAST OR FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN. 6 CONDENSED FINANCIAL INFORMATION Historical information about the value of the units we use to measure the variable portion of your Contract ("Variable Accumulation Units") is included in the back of this Prospectus as Appendix B. THE MFS REGATTA GOLD ANNUITY Sun Life Assurance Company of Canada (U.S.) (the "Company", "we" or "us") and Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") offer the MFS Regatta Gold Annuity on a group basis in connection with retirement plans. We issue a Group Contract to the Owner covering all individuals participating under the Group Contract. Each individual receives a Certificate that evidences his or her participation under the Group Contract. In this Prospectus, unless we state otherwise, we refer to participating individuals under Group Contracts as "Participants" and we address Participants as "you"; we use the term "Contracts" to include Group Contracts and Certificates issued under Group Contracts. For the purpose of determining benefits under the Contracts, we establish an Account for each Participant, which we will refer to as "your" Account or a "Participant Account." The Contract provides a number of important benefits for your retirement planning. It has an Accumulation Phase, during which you make payments under the Contract and allocate them to one or more Variable Account or Fixed Account options, and an Income Phase, during which we make payments based on the amount you have accumulated. The Contract provides tax deferral, so that you do not pay taxes on your earnings under the Contract until you withdraw them. It provides a death benefit if the Annuitant dies during the Accumulation Phase. Finally, if you so elect, during the Income Phase we will make payments to you or someone else for life or for another period that you choose. You choose these benefits on a variable or fixed basis or a combination of both. When you choose variable investment options or a Variable Annuity option, your benefits will be responsive to changes in the economic environment, including inflationary forces and changes in rates of return available from different types of investments. With these options, you assume all investment risk under the Contract. When you choose a Guarantee Period in our Fixed Account or a Fixed Annuity option, we assume the investment risk, except in the case of early withdrawals, where you bear the risk of unfavorable interest rate changes. You also bear the risk that the interest rates we will offer in the future and the rates we will use in determining your Fixed Annuity may not exceed our minimum guaranteed rate, which is 3% per year, compounded annually. The Contracts are designed for use in connection with retirement and deferred compensation plans, some of which qualify for favorable federal income tax treatment under Sections 401, 403, 408 or 408A of the Internal Revenue Code. The Contracts are also designed so that they may be used in connection with certain non-tax-qualified retirement plans, such as payroll savings plans and such other groups (trusteed or nontrusteed) as may be eligible under applicable law. We refer to Contracts used with plans that receive favorable tax treatment as "Qualified Contracts," and all others as "Non-Qualified Contracts." COMMUNICATING TO US ABOUT YOUR CONTRACT All materials sent to us, including Purchase Payments, must be sent to our Annuity Service Mailing Address set forth on the first page of this Prospectus. For all telephone communications, you must call (800) 752-7215 or (617) 348-9600. Unless this Prospectus states differently, we will consider all materials sent to us and all telephone communications to be received on the date we actually receive them at the Annuity Service Mailing Address. However, we will consider Purchase Payments, withdrawal requests and transfer instructions to be received on the next Business Day if we receive them (1) on a day that is not a Business Day or (2) after 4:00 p.m., Eastern Time. 7 When we specify that notice to us must be in writing, we reserve the right, in our sole discretion, to accept notice in another form. SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) We are a stock life insurance company incorporated under the laws of Delaware on January 12, 1970. We do business in 48 states, the District of Columbia, and Puerto Rico, and we have an insurance company subsidiary that does business in New York. Our Executive Office mailing address is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. We are an indirect wholly-owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life (Canada)"). Sun Life (Canada) is a mutual life insurance company incorporated pursuant to Act of Parliament of Canada in 1865 and currently transacts business in all of the Canadian provinces and territories, all U.S. states (except New York), the District of Columbia, Puerto Rico, the Virgin Islands, Great Britain, Ireland, Hong Kong, Bermuda and the Philippines. THE VARIABLE ACCOUNT We established the Variable Account as a separate account on July 13, 1989, pursuant to a resolution of our Board of Directors. Under Delaware insurance law and the Contract, the income, gains or losses of the Variable Account are credited to or charged against the assets of the Variable Account without regard to the other income, gains, or losses of the Company. These assets are held in relation to the Contracts described in this Prospectus and other variable annuity contracts that provide benefits that vary in accordance with the investment performance of the Variable Account. Although the assets maintained in the Variable Account will not be charged with any liabilities arising out of any other business we conduct, all obligations arising under the Contracts, including the promise to make annuity payments, are general corporate obligations of the Company. The assets of the Variable Account are divided into Sub-Accounts. Each Sub-Account invests exclusively in shares of a specific Series of the MFS/Sun Life Series Trust (the "Series Fund"). All amounts allocated to the Variable Account will be used to purchase Series Fund shares as designated by you at their net asset value. Any and all distributions made by the Series Fund with respect to the shares held by the Variable Account will be reinvested to purchase additional shares at their net asset value. Deductions from the Variable Account for cash withdrawals, annuity payments, death benefits, Account Fees, contract charges against the assets of the Variable Account for the assumption of mortality and expense risks, administrative expenses and any applicable taxes will, in effect, be made by redeeming the number of Series Fund shares at their net asset value equal in total value to the amount to be deducted. The Variable Account will be fully invested in Series Fund shares at all times. VARIABLE ACCOUNT OPTIONS: THE MFS/SUN LIFE SERIES TRUST The MFS/Sun Life Series Trust (the "Series Fund") is an open-end management investment company registered under the Investment Company Act of 1940. Our affiliate, Massachusetts Financial Services Company ("MFS"), serves as the investment adviser to the Series Fund. The Series Fund is composed of 26 independent portfolios of securities, each of which has separate investment objectives and policies. Shares of the Series Fund are issued in 26 Series, each corresponding to one of the portfolios. The Contracts provide for investment by the Sub-Accounts in shares of the 25 Series of the Series Fund described below. Additional portfolios may be added to the Series Fund which may or may not be available for investment by the Variable Account. BOND SERIES will primarily seek as high a level of current income as is believed to be consistent with prudent investment risk; its secondary objective is to seek to protect shareholders' capital. CAPITAL APPRECIATION SERIES will seek to maximize capital appreciation by investing in securities of all types, with major emphasis on common stocks. 8 CAPITAL OPPORTUNITIES SERIES will seek capital appreciation. EMERGING GROWTH SERIES will seek long-term growth of capital. EQUITY INCOME SERIES will primarily seek reasonable income by investing mainly in income producing securities; its secondary objective is to seek capital appreciation. GLOBAL ASSET ALLOCATION SERIES (formerly, the World Asset Allocation Series) will seek total return over the long term through investments in equity and fixed income securities and will also seek to have low volatility of share price (I.E., net asset value per share) and reduced risk (compared to an aggressive equity/fixed income portfolio). GLOBAL GOVERNMENTS SERIES (formerly, the World Governments Series) will seek to provide moderate current income, preservation of capital and growth of capital by investing in debt obligations that are issued or guaranteed as to principal and interest by either (i) the U.S. Government, its agencies, authorities, or instrumentalities, or (ii) the governments of foreign countries (to the extent that the Series' adviser believes that the higher yields available from foreign government securities are sufficient to justify the risks of investing in these securities). GLOBAL GROWTH SERIES (formerly, the World Growth Series) will seek capital appreciation by investing in securities of companies worldwide growing at rates expected to be well above the growth rate of the overall U.S. economy. GLOBAL TOTAL RETURN SERIES (formerly, the World Total Return Series) will seek total return by investing in securities which will provide above average current income (compared to a portfolio invested entirely in equity securities) and opportunities for long-term growth of capital and income. GOVERNMENT SECURITIES SERIES will seek current income and preservation of capital by investing in U.S. Government and U.S. Government-related securities. HIGH YIELD SERIES will seek high current income and capital appreciation by investing primarily in certain lower rated or unrated securities (possibly with equity features) of U.S. and foreign issuers (also known as "junk bonds"). INTERNATIONAL GROWTH SERIES will seek capital appreciation. INTERNATIONAL GROWTH AND INCOME SERIES will seek capital appreciation and current income. MANAGED SECTORS SERIES will seek capital appreciation by varying the weighting of its portfolio among 13 industry sectors. MASSACHUSETTS INVESTORS GROWTH STOCK SERIES will seek to provide long-term growth of capital and future income rather than current income. MASSACHUSETTS INVESTORS TRUST SERIES (formerly, the Conservative Growth Series) will seek long-term growth of capital and future income while providing more current dividend income than is normally obtainable from a portfolio of only growth stocks. MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES will seek capital appreciation. MONEY MARKET SERIES will seek maximum current income to the extent consistent with stability of principal by investing exclusively in money market instruments maturing in less than 13 months. NEW DISCOVERY SERIES will seek capital appreciation. RESEARCH SERIES will seek to provide long-term growth of capital and future income. RESEARCH GROWTH AND INCOME SERIES will seek to provide long-term growth of capital, current income and growth of income. 9 RESEARCH INTERNATIONAL SERIES will seek capital appreciation. STRATEGIC INCOME SERIES will seek to provide high current income by investing in fixed income securities and will seek to take advantage of opportunities to realize significant capital appreciation while maintaining a high level of current income. TOTAL RETURN SERIES will seek primarily to obtain above-average income (compared to a portfolio entirely invested in equity securities) consistent with prudent employment of capital; its secondary objective is to take advantage of opportunities for growth of capital and income since many securities offering a better than average yield may also possess growth potential. UTILITIES SERIES will seek capital growth and current income (income above that available from a portfolio invested entirely in equity securities) by investing, under normal market conditions, at least 65% of its assets in equity and debt securities of both domestic and foreign companies in the utilities industry. The Series Fund pays fees to MFS for its services pursuant to investment advisory agreements. MFS also serves as investment adviser to each of the funds in the MFS Family of Funds, and to certain other investment companies established by MFS and/or us. MFS Institutional Advisers, Inc., a wholly-owned subsidiary of MFS, provides investment advice to substantial private clients. MFS and its predecessor organizations have a history of money management dating from 1924. MFS operates as an autonomous organization and the obligation of performance with respect to the investment advisory and underwriting agreements (including supervision of the sub-advisers noted below) is solely that of MFS. We undertake no obligation in this regard. MFS has retained Foreign & Colonial Management Limited ("FCM") and its subsidiary, Foreign & Colonial Emerging Markets Limited ("FCEM"), as sub-advisers to manage the MFS/Foreign & Colonial Emerging Markets Series and to manage the assets of the Global Growth Series. MFS may serve as the investment adviser to other mutual funds which have similar investment goals and principal investment policies and risks as the Series, and which may be managed by a Series' portfolio manager(s). While a Series may have many similarities to these other funds, its investment performance will differ from their investment performance. This is due to a number of differences between a Series and these similar products, including differences in sales charges, expense ratios and cash flows. The Series Fund also offers its shares to other separate accounts established by the Company and our New York subsidiary in connection with variable annuity and variable life insurance contracts. Although we do not anticipate any disadvantages to this arrangement, there is a possibility that a material conflict may arise between the interests of the Variable Account and one or more of the other separate accounts investing in the Series Fund. A conflict may occur due to differences in tax laws affecting the operations of variable life and variable annuity separate accounts, or some other reason. We and the Series Fund's Board of Trustees will monitor events for such conflicts, and, in the event of a conflict, we will take steps necessary to remedy the conflict, including withdrawal of the Variable Account from participation in the Series which is involved in the conflict or substitution of shares of other Series or other mutual funds. MORE COMPREHENSIVE INFORMATION ABOUT THE SERIES FUND AND THE MANAGEMENT, INVESTMENT OBJECTIVES, POLICIES, RESTRICTIONS, EXPENSES AND POTENTIAL RISKS OF EACH SERIES MAY BE FOUND IN THE ACCOMPANYING CURRENT PROSPECTUS OF THE SERIES FUND. YOU SHOULD READ THE SERIES FUND PROSPECTUS CAREFULLY BEFORE INVESTING. THE SERIES FUND'S STATEMENT OF ADDITIONAL INFORMATION IS AVAILABLE BY CALLING 1-800-752-7215. THE FIXED ACCOUNT The Fixed Account is made up of all the general assets of the Company other than those allocated to any separate account. Amounts you allocate to Guarantee Periods become part of the Fixed Account, and are available to fund the claims of all classes of our customers, including claims for benefits under the Contracts. 10 We will invest the assets of the Fixed Account in those assets we choose that are allowed by applicable state insurance laws. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks, real estate mortgages, real estate and certain other investments. We intend to invest primarily in investment-grade fixed income securities (i.e. rated by a nationally recognized rating service within the four highest grades) or instruments we believe are of comparable quality. We are not obligated to invest amounts allocated to the Fixed Account according to any particular strategy, except as may be required by applicable state insurance laws. You will not have a direct or indirect interest in the Fixed Account investments. THE FIXED ACCOUNT OPTIONS: THE GUARANTEE PERIODS You may elect one or more Guarantee Period(s) from those we make available from time to time. We publish Guaranteed Interest Rates for each Guarantee Period offered. We may change the Guaranteed Interest Rates we offer from time to time, but no Guaranteed Interest Rate will ever be less than 3% per year, compounded annually. Also, once we have accepted your allocation to a particular Guarantee Period, we promise that the Guaranteed Interest Rate applicable to that allocation will not change for the duration of the Guarantee Period. We determine Guaranteed Interest Rates in our discretion. We do not have a specific formula for establishing the rates for different Guarantee Periods. Our determination will be influenced by the interest rates on fixed income investments in which we may invest with amounts allocated to the Guarantee Periods. We will also consider other factors in determining these rates, including regulatory and tax requirements, sales commissions and administrative expenses borne by us, general economic trends and competitive factors. We cannot predict the level of future interest rates. We may from time to time in our discretion offer interest rate specials for new Purchase Payments that are higher than the rates we are then offering for renewals on transfers. Early withdrawals from your allocation to a Guarantee Period, including cash withdrawals, transfers, and commencement of an annuity, may be subject to a Market Value Adjustment, which could decrease or increase the value of your Account. See "Cash Withdrawals, Withdrawal Charge, and Market Value Adjustment." THE ACCUMULATION PHASE During the Accumulation Phase of your Contract, you make payments into your Account, and your earnings accumulate on a tax-deferred basis. The Accumulation Phase begins with our acceptance of your first Purchase Payment and ends the Business Day before your Annuity Commencement Date. The Accumulation Phase will end sooner if you surrender your Contract or die before the Annuity Commencement Date. ISSUING YOUR CONTRACT When you purchase a Contract, a completed Application and the initial Purchase Payment are sent to us for acceptance. When we accept a Group Contract, we issue the Contract to the Owner; we issue a Certificate to you as a Participant when we accept your Application. We will credit your initial Purchase Payment to your Account within two business days of receiving your completed Application. If your Application is not complete, we will notify you. If we do not have the necessary information to complete the Application within 5 business days, we will send your money back to you or ask your permission to retain your Purchase Payment until the Application is made complete. Then we will apply the Purchase Payment within 2 business days of when the Application is complete. 11 AMOUNT AND FREQUENCY OF PURCHASE PAYMENTS The amount of Purchase Payments may vary; however, we will not accept an initial Purchase Payment of less than $5,000, and each additional Purchase Payment must be at least $1,000, unless we waive these limits. In addition, we will not accept a Purchase Payment if your Account Value is over $1 million, or if the Purchase Payment would cause your Account Value to exceed $1 million, unless we have approved the Payment in advance. Within these limits, you may make Purchase Payments at any time during the Accumulation Phase. ALLOCATION OF NET PURCHASE PAYMENTS You may allocate your Purchase Payments among the different Sub-Accounts and Guarantee Periods we offer. At any time, you may have amounts allocated among up to 18 of the available options. In your Application, you may specify the percentage of each Purchase Payment to be allocated to each Sub-Account or Guarantee Period. These percentages are called your allocation factors. You may change the allocation factors for future Payments by sending us written notice of the change, on our required form. We will use your new allocation factors for the first Purchase Payment we receive with or after we have received notice of the change, and for all future Purchase Payments, until we receive another change notice. Although it is currently not our practice, we may deduct applicable premium or similar taxes from your Purchase Payments. See "Contract Charges -- Premium Taxes." In that case, we will credit your Net Purchase Payment, which is the Purchase Payment minus the amount of those taxes. YOUR ACCOUNT When we accept your first Purchase Payment, we establish an Account for you, which we maintain throughout the Accumulation Phase of your Contract. YOUR ACCOUNT VALUE Your Account Value is the sum of the value of the two components of your Contract: the Variable Account portion of your Contract ("Variable Account Value") and the Fixed Account portion of your Contract ("Fixed Account Value"). These two components are calculated separately, as described below. VARIABLE ACCOUNT VALUE VARIABLE ACCUMULATION UNITS In order to calculate your Variable Account Value, we use a measure called a Variable Accumulation Unit for each Sub-Account. Your Variable Account Value is the sum of your Account Value in each Sub-Account, which is the number of your Variable Accumulation Units for that Sub-Account times the value of each Unit. VARIABLE ACCUMULATION UNIT VALUE The value of each Variable Accumulation Unit in a Sub-Account reflects the net investment performance of that Sub-Account. We determine that value once on each day that the New York Stock Exchange is open for trading (a "Business Day"), at the close of trading, which is currently 4:00 p.m., Eastern Time. The period that begins at the time Variable Accumulation Units are valued on a Business Day and ends at that time on the next Business Day is called a Valuation Period. On days other than Business Days, the value of a Variable Accumulation Unit does not change. To measure these values, we use a factor -- which we call the Net Investment Factor-- which represents the net return on the Sub-Account's assets. At the end of any Valuation Period, the value of a Variable Accumulation Unit for a Sub-Account is equal to the value of that Sub-Account's Variable Accumulation Units at the end of the previous Valuation Period, multiplied by the Net Investment 12 Factor. We calculate the Net Investment Factor by dividing (1) the net asset value of a Series share held in the Sub-Account at the end of that Valuation Period, plus the per share amount of any dividend or capital gains distribution made by that Series during the Valuation Period, by (2) the net asset value per share of the Series share at the end of the previous Valuation Period; we then deduct a factor representing the mortality and expense risk charge and administrative expense charge. See "Contract Charges." For a hypothetical example of how we calculate the value of a Variable Accumulation Unit, see the Statement of Additional Information. CREDITING AND CANCELING VARIABLE ACCUMULATION UNITS When we receive an allocation to a Sub-Account, either from a Net Purchase Payment or a transfer of Account Value, we credit that amount to your Account in Variable Accumulation Units. Similarly, we cancel Variable Accumulation Units when you transfer or withdraw amounts from a Sub-Account, or when we deduct certain charges under the Contract. We determine the number of Units credited or canceled by dividing the dollar amount by the Variable Accumulation Unit value for that Sub-Account at the end of the Valuation Period during which the transaction or charge is effective. FIXED ACCOUNT VALUE Your Fixed Account value is the sum of all amounts allocated to Guarantee Periods, either from Net Purchase Payments, transfers or renewals, plus interest credited on those amounts, and minus withdrawals, transfers out of Guarantee Periods, and any deductions for charges under the Contract taken from your Fixed Account Value. CREDITING INTEREST We credit interest on amounts allocated to a Guarantee Period at the applicable Guaranteed Interest Rate for the duration of the Guarantee Period. The Guarantee Period begins the day we apply your allocation and ends when the number of calendar years (or months if the Guarantee Period is less than one year) in the Guarantee Period (measured from the end of the calendar month in which the amount was allocated to the Guarantee Period) have elapsed. The last day of the Guarantee Period is its Expiration Date. During the Guarantee Period, we credit interest daily at a rate that yields the Guaranteed Interest Rate on an annual effective basis. GUARANTEE AMOUNTS Each separate allocation you make to a Guarantee Period, together with interest credited thereon, is called a Guarantee Amount. Each Guarantee Amount is treated separately for purposes of determining the Market Value Adjustment. RENEWALS We will notify you in writing between 45 and 75 days before the Expiration Date for any Guarantee Amount. A new Guarantee Period of the same duration will begin automatically for that Guarantee Amount on the first day following the Expiration Date, unless before the Expiration Date we receive (1) written notice from you electing a different Guarantee Period from among those we then offer or (2) instructions to transfer all or some of the Guarantee Amount to one or more Sub-Accounts, in accordance with the transfer privilege provisions of the Contract. Each new allocation to a Guarantee Period must be at least $1,000. EARLY WITHDRAWALS If you withdraw, transfer, or annuitize an allocation to a Guarantee Period before the Expiration Date, we will apply a Market Value Adjustment to the transaction. This could result in an increase or decrease of your Account Value, depending on interest rates at the time. You bear the risk that you will receive less than your principal if the Market Value Adjustment applies. 13 TRANSFER PRIVILEGE PERMITTED TRANSFERS During the Accumulation Phase, you may transfer all or part of your Account Value to one or more Sub-Accounts or Guarantee Periods then available, subject to the following restrictions: - you may not make more than 12 transfers in any Account Year; - the amount transferred from a Sub-Account must be at least $1,000 unless you are transferring your entire balance in that Sub-Account; - your Account Value remaining in a Sub-Account must be at least $1,000; - the amount transferred from a Guarantee Period must be the entire Guarantee Amount, except for transfers of interest credited during the current Account Year; - at least 30 days must elapse between transfers to or from Guarantee Periods; - transfers to or from Sub-Accounts are subject to terms and conditions that may be imposed by the Series Fund; and - we impose additional restrictions on market timers, which are further described below. These restrictions do not apply to transfers made under an approved dollar cost averaging program. There is usually no charge imposed on transfers; however, we reserve the right to impose a transfer charge of $15 for each transfer. Transfers out of a Guarantee Period more than 30 days before expiration of the period will be subject to the Market Value Adjustment described below. Under current law there is no tax liability for transfers. REQUESTS FOR TRANSFERS You may request transfers in writing or by telephone. The telephone transfer privilege is available automatically, and does not require your written election. We will require personal identifying information to process a request for transfer made by telephone. We will not be liable for following instructions communicated by telephone that we reasonably believe are genuine. If we receive your transfer request before 4:00 p.m. Eastern Time on a Business Day, it will be effective that day. Otherwise, it will be effective the next Business Day. MARKET TIMERS The Contracts are not designed for professional market timing organizations or other entities using programmed and frequent transfers. If you wish to employ such strategies, you should not purchase a Contract. Accordingly, transfers may be subject to restrictions if exercised by a market timing firm or any other third party authorized to initiate transfer transactions on behalf of multiple Participants. In imposing such restrictions, we may, among other things, not accept (1) the transfer instructions of any agent acting under a power of attorney on behalf of more than one Participant, or (2) the transfer instructions of individual Participants who have executed preauthorized transfer forms that are submitted at the same time by market timing firms or other third parties on behalf of more than one Participant. We will not impose these restrictions unless our actions are reasonably intended to prevent the use of such transfers in a manner that will disadvantage or potentially impair the Contract rights of other Participants. In addition, the Series Fund has reserved the right to temporarily or permanently refuse exchange requests from the Variable Account if, in MFS' judgment, a Series would be unable to invest effectively in accordance with its investment objective and policies, or would otherwise potentially be adversely affected. In particular, a pattern of exchanges that coincide with a market timing strategy may be disruptive to a Series and therefore may be refused. Accordingly, the Variable Account may not be in a position to effectuate transfers and may refuse transfer requests without prior notice. We also 14 reserve the right, for similar reasons, to refuse or delay exchange requests involving transfers to or from the Fixed Account. WAIVERS; REDUCED CHARGES; CREDITS; BONUS GUARANTEED INTEREST RATES We may reduce or waive the withdrawal charge or Account Fee, credit additional amounts, or grant bonus Guaranteed Interest Rates in certain situations. These situations may include sales of Contracts (1) where selling and/or maintenance costs associated with the Contracts are reduced, such as the sale of several Contracts to the same Participant, sales of large Contracts, and certain group sales, and (2) to officers, directors and employees of the Company or its affiliates, registered representatives and employees of broker-dealers with a current selling agreement with the Company and affiliates of such representatives and broker-dealers, employees of affiliated asset management firms, and persons who have retired from such positions ("Eligible Employees") and immediate family members of Eligible Employees. Eligible Employees and their immediate family members may also purchase a Contract without regard to minimum Purchase Payment requirements. For other situations in which withdrawal charges may be waived, see "Withdrawals, Withdrawal Charge and Market Value Adjustment." OPTIONAL PROGRAMS DOLLAR COST AVERAGING Dollar cost averaging allows you to invest gradually, over time, in up to 12 Sub-Accounts. You may select a dollar cost averaging program at no extra charge by allocating a minimum of $1,000 to a designated Sub-Account or to a Guarantee Period we make available in connection with the program. Amounts allocated to the Fixed Account under the program will earn interest at a rate declared by the Company for the Guarantee Period you select. Each month or quarter, as you select, we will transfer the same amount automatically to one or more Sub-Accounts that you choose, up to a maximum of 12 Sub-Accounts. The program continues until your Account Value allocated to the program is depleted or you elect to stop the program. The final amount transferred from the Fixed Account will include all interest earned. Only Purchase Payments may be allocated to a dollar cost averaging program. Previously applied amounts may not be transferred to a dollar cost averaging program. No Market Value Adjustment (either positive or negative) will apply to amounts automatically transferred from the Fixed Account under the dollar cost averaging program, except that if you discontinue or alter the program prior to completion, amounts remaining in the Fixed Account will be transferred to the Money Market Series Sub-Account, unless you instruct us otherwise, and the Market Value Adjustment will be applied. Any new allocation of a Purchase Payment to the program will be treated as commencing a new dollar cost averaging program and is subject to the $1,000 minimum. The main objective of a dollar cost averaging program is to minimize the impact of short-term price fluctuations on Account Value. Since you transfer the same dollar amount to the variable investment options at set intervals, dollar cost averaging allows you to purchase more Variable Accumulation Units (and, indirectly, more Series Fund shares) when prices are low and fewer Variable Accumulation Units (and, indirectly, fewer Series Fund shares) when prices are high. Therefore, you may achieve a lower average cost per Variable Accumulation Unit over the long term. A dollar cost averaging program allows you to take advantage of market fluctuations. However, it is important to understand that a dollar cost averaging program does not assure a profit or protect against loss in a declining market. ASSET ALLOCATION One or more asset allocation programs may be available in connection with the Contracts, at no extra charge. Asset allocation is the process of investing in different asset classes -- such as equity funds, fixed income funds, and money market funds -- depending on your personal investment goals, tolerance for risk, and investment time horizon. By spreading your money among a variety of asset classes, you may be able to reduce the risk and volatility of investing, although there are no guarantees, and asset allocation does not insure a profit or protect against loss in declining market. 15 Currently, you may select one of three asset allocation models, each of which represents a combination of Sub-Accounts with a different level of risk. The available models are the conservative asset allocation model, the moderate asset allocation model, and the aggressive asset allocation model. Each model allocates a different percentage of Account Value to Sub-Accounts investing in the various asset classes, with the conservative model allocating the lowest percentage to Sub-Accounts investing in the equity asset class and the aggressive model allocating the highest percentage to the stock asset class. These models, as well as the terms and conditions of the asset allocation program, are fully described in a separate brochure. Additional programs may be available in the future. If you elect an asset allocation program, we will automatically allocate your Purchase Payments among the Sub-Accounts represented in the model you choose. By your election of an asset allocation program, you thereby authorize us to automatically reallocate your Account Value on a quarterly basis to reflect the current composition of the model you have selected, without further instruction, until we receive notification that you wish to terminate the program, or choose a different model. SYSTEMATIC WITHDRAWAL AND INTEREST OUT PROGRAMS If you have an Account Value of $10,000 or more, you may select our Systematic Withdrawal or Interest Out Program. Under the Systematic Withdrawal Program, you determine the amount and frequency of regular withdrawals you would like to receive from your Fixed and/or Variable Account Value and we will effect them automatically. Under the Interest Out Program, we will automatically pay to you or reinvest interest credited for all Guarantee Periods you have chosen. You may change or stop either program at any time, by written notice to us. Withdrawals may be included in income and subject to a 10% federal tax penalty, as well as all charges and any Market Value Adjustment applicable upon withdrawal. You should consult your adviser before choosing these options. PORTFOLIO REBALANCING PROGRAM Under the Portfolio Rebalancing Program, we transfer funds among the Sub-Accounts to maintain the percentage allocation you have selected among these Sub-Accounts. At your election, we will make these transfers on a quarterly, semi-annual or annual basis. Portfolio Rebalancing does not permit transfers to or from any Guarantee Period. SECURED FUTURE PROGRAM Under this program, we divide your Purchase Payment between the Fixed Account and the Variable Account. For the Fixed Account portion, you choose a Guarantee Period from among those we offer, and we allocate to that Guarantee Period the portion of your Purchase Payment necessary so that at the end of the Guarantee Period, your Fixed Account allocation, including interest, will equal the entire amount of your original Purchase Payment. The remainder of the original Purchase Payment will be invested in Sub-Accounts of your choice. At the end of the Guarantee Period, you will be guaranteed the amount of your Purchase Payment (assuming no withdrawals), plus you will have the benefit, if any, of the investment performance of the Sub-Accounts you have chosen. WITHDRAWALS, WITHDRAWAL CHARGE AND MARKET VALUE ADJUSTMENT CASH WITHDRAWALS REQUESTING A WITHDRAWAL At any time during the Accumulation Phase you may withdraw in cash all or any portion of your Account Value. To make a withdrawal, you must send us a written request at our Annuity Service Mailing Address. Your request must specify whether you want to withdraw the entire amount of your Account or, if less, the amount you wish to withdraw. All withdrawals may be subject to a withdrawal charge (see "Withdrawal Charge" below) and withdrawals from your Fixed Account Value also may be subject to a Market Value Adjustment (see 16 "Market Value Adjustment" below). Upon request we will notify you of the amount we would pay in the event of a full or partial withdrawal. Withdrawals also may have adverse federal income tax consequences, including a 10% penalty tax. See "Federal Tax Status." You should carefully consider these tax consequences before requesting a cash withdrawal. FULL WITHDRAWALS If you request a full withdrawal, we calculate the amount we will pay you as follows. We start with the total value of your Account at the end of the Valuation Period during which we receive your withdrawal request; we deduct the Account Fee for the Account Year in which the withdrawal is made; we add or subtract the amount of any Market Value Adjustment applicable to your Fixed Account Value; and finally, we deduct any applicable withdrawal charge. A full withdrawal results in the surrender of your Contract, and cancellation of all rights and privileges under your Contract. PARTIAL WITHDRAWALS If you request a partial withdrawal we will pay you the actual amount specified in your request and then reduce the value of your Account by deducting the amount paid, adding or deducting any Market Value Adjustment applicable to amounts withdrawn from the Fixed Account, and deducting any applicable withdrawal charge. You may specify the amount you want withdrawn from each Sub-Account and/or Guarantee Amount to which your Account is allocated. If you do not so specify, we will deduct the total amount you request pro rata, based on your allocations at the end of the Valuation Period during which we receive your request. If you request a partial withdrawal that would result in your Account Value being reduced to an amount less than the Account Fee for the Account Year in which you make the withdrawal, we will treat it as a request for a full withdrawal. TIME OF PAYMENT We will pay you the applicable amount of any full or partial withdrawal within 7 days after we receive your withdrawal request, except in cases where we are permitted to defer payment under the Investment Company Act of 1940 and applicable state insurance law. Currently, we may defer payment of amounts you withdraw from the Variable Account only for following periods: - when the New York Stock Exchange is closed except weekends and holidays or when trading on the New York Stock Exchange is restricted; - when it is not reasonably practical to dispose of securities held by the Series Fund or to determine the value of the net assets of the Series Fund, because an emergency exists; or - when an SEC order permits us to defer payment for the protection of Participants. We also may defer payment of amounts you withdraw from the Fixed Account for up to 6 months from the date we receive your withdrawal request. We do not pay interest on the amount of any payments we defer. WITHDRAWAL RESTRICTIONS FOR QUALIFIED PLANS If yours is a Qualified Contract, you should carefully check the terms of the plan for limitations and restrictions on cash withdrawals. Special restrictions apply to withdrawals from Contracts used for Section 403(b) annuities. See "Federal Tax Status -- Tax-Sheltered Annuities." 17 WITHDRAWAL CHARGE We do not deduct any sales charge from your Purchase Payments when they are made. However, we may impose a withdrawal charge (known as a "contingent deferred sales charge") on certain amounts you withdraw. We impose this charge to defray some of our expenses related to the sale of the Contracts, such as commissions we pay to agents, the cost of sales literature, and other promotional costs and transaction expenses. If you purchased your Contract before November 1994, or if your state does not permit our current withdrawal charge, we use the Alternate Withdrawal Charge, described below. The withdrawal charge will never be greater than 6% of the aggregate amount of Purchase Payments you make under the Contract. We may modify the withdrawal charges and limits, upon notice to the Owner of the Group Contract. However, any modification will only apply to Accounts established after the date of the modification. FREE WITHDRAWAL AMOUNT In each Account Year you may withdraw a portion of your Account Value -- which we will call the "free withdrawal amount" -- before incurring the withdrawal charge. For any year, the free withdrawal amount is equal to (1) 10% of the amount of all Purchase Payments you have made during the last 7 Account Years, including the current Account Year (the "Annual Withdrawal Allowance"), plus (2) the amount of all Purchase Payments made before the last 7 Account Years that you have not previously withdrawn. Any portion of the Annual Withdrawal Allowance that you do not use in an Account Year is cumulative; that is, it is carried forward and available for use in future years. For convenience, we refer to Purchase Payments made during the last 7 Account Years (including the current Account Year) as "New Payments," and all Purchase Payments made before the last 7 Account Years as "Old Payments." For example, assume you wish to make a withdrawal from your Contract in Account Year 10. You made an initial Purchase Payment of $10,000 in Account Year 1, you made one additional Purchase Payment of $8,000 in Account Year 8, and you have made no previous withdrawals. Your Account Value in Account Year 10 is $35,000. The free withdrawal amount for Account Year 10 is $19,400, calculated as follows: - $800, which is the Annual Withdrawal Allowance for Account Year 10 (10% of the $8,000 Purchase Payment made in Account Year 8, the only New Payment); plus - $8,600, which is the total of the unused Annual Withdrawal Allowances of $1,000 for each of Account Years 1 through 7 and $800 for each of Account Years 8 and 9 that are carried forward and available for use in Account Year 10; plus - $10,000, which is the amount of all Old Payments that you have not previously withdrawn. WITHDRAWAL CHARGE ON PURCHASE PAYMENTS If you withdraw more than the free withdrawal amount in any Account Year, we consider the excess amount to be withdrawn first from New Payments that you have not previously withdrawn. We impose the withdrawal charge on the amount of these New Payments. Thus, the maximum amount on which we will impose the withdrawal charge in any year will never be more than the total of all New Payments that you have not previously withdrawn. The amount of your withdrawal, if any, that exceeds the total of the free withdrawal amount plus the aggregate amount of all New Payments not previously withdrawn, is not subject to the withdrawal charge. 18 ORDER OF WITHDRAWAL New Payments are withdrawn on a first-in first-out basis until all New Payments have been withdrawn. For example, assume the same facts as in the example above. In Account Year 10 you wish to withdraw $25,000. We attribute the withdrawal first to the free withdrawal amount of $19,400, which is not subject to the withdrawal charge. The remaining $5,600 is withdrawn from the Purchase Payment made in Account Year 8 (the only New Payment) and is subject to the withdrawal charge. The $2,400 balance of the Account Year 8 Purchase Payment will remain in your Account. If you make a subsequent $5,000 withdrawal in Account Year 10, $2,400 of that amount will be withdrawn from the remainder of the Account Year 8 Purchase Payment and will be subject to the withdrawal charge. The other $2,600 of your withdrawal (which exceeds the amount of all New Payments not previously withdrawn) will not be subject to the withdrawal charge. CALCULATION OF WITHDRAWAL CHARGE We calculate the amount of the withdrawal charge by multiplying the Purchase Payments you withdraw by a percentage. The percentage varies according to the number of Account Years the Purchase Payment has been held in your Account, including the year in which you made the Payment, but not the year in which you withdraw it. The applicable percentages are as follows:
NUMBER OF ACCOUNT YEARS PERCENTAGE - -------------- --------------- 0-1 6% 2-3 5% 4-5 4% 6 3% 7 or more 0%
For example, again using the same facts as in the example above, the percentage applicable to the withdrawals in Account Year 10 of Purchase Payments made in Account Year 8 would be 5%, because the number of Account Years the Purchase Payments have been held in your Account would be two. For additional examples of how we calculate withdrawal charges, please see Appendix C. ALTERNATE WITHDRAWAL CHARGE If you purchased your Contract before November 1994, or if your state does not permit the withdrawal charge described above, we will impose the withdrawal charge as follows: FREE WITHDRAWAL AMOUNT In each Account Year you may withdraw a portion of your Account Value which we will call the "free withdrawal amount" before incurring the withdrawal charge. For any year, the free withdrawal amount is equal to (1) 10% of the amount of all Purchase Payments you have made during the last 7 Account Years, including the current Account Year (the "Annual Withdrawal Allowance"), plus (2) the amount of all Purchase Payments made before the last 7 Account Years that you have not previously withdrawn. The Annual Withdrawal Allowance is not cumulative; any portion of the Annual Withdrawal Allowance that you do not use in an Account Year will not be carried forward or available for use in future years. For convenience, we refer to Purchase Payments made during the last 7 Account Years (including the current Account Year) as "New Payments," and all Purchase Payments made before the last 7 Account Years as "Old Payments." Your Account Value minus New Payments and Old Payments is called "accumulated value." 19 ORDER OF WITHDRAWAL When you make a withdrawal, we consider the oldest Payment that you have not already withdrawn to be withdrawn first, then the next oldest, and so forth. Once all Old Payments and New Payments are withdrawn, the balance withdrawn is considered to be accumulated value. CALCULATION OF WITHDRAWAL CHARGE We calculate the amount of the withdrawal charge by multiplying the Purchase Payments you withdraw by a percentage. The percentage varies according to the number of Account Years the Purchase Payment has been held in your Account, including the year in which you made the Payment, but not the year in which you withdraw it. The applicable percentages are as follows:
NUMBER OF ACCOUNT YEARS PERCENTAGE - -------------- --------------- 0-1 6% 2-3 5% 4-5 4% 6 3% 7 or more 0%
For additional examples of how we calculate the Alternate Withdrawal Charge, please see Appendix C. TYPES OF WITHDRAWALS NOT SUBJECT TO WITHDRAWAL CHARGE We do not impose a withdrawal charge on withdrawals from the Accounts of (a) our employees, (b) employees of our affiliates, or (c) licensed insurance agents who sell the Contracts. We also may waive withdrawal charges with respect to Purchase Payments derived from the surrender of other annuity contracts we issue. If approved in your state, we will waive the withdrawal charge for a full withdrawal if (a) at least one year has passed since we issued your Contract and (b) you are confined to an eligible nursing home and have been confined there for at least the preceding 180 days, or any shorter period required by your state. An "eligible nursing home" means a licensed hospital or licensed skilled or intermediate care nursing facility at which medical treatment is available on a daily basis and daily medical records are kept for each patient. You must provide us evidence of confinement in the form we determine. For each Qualified Contract, the free withdrawal amount in any Account Year will be the greater of the free withdrawal amount described above and any amounts required to be withdrawn to comply with the minimum distribution requirement of the Internal Revenue Code. This applies only to the portion of the required minimum distribution attributable to that Qualified Contract. We do not impose the withdrawal charge on amounts you apply to provide an annuity, amounts we pay as a death benefit, or amounts you transfer among the Sub-Accounts, between the Sub-Accounts and the Fixed Account, or within the Fixed Account. MARKET VALUE ADJUSTMENT We will apply a market value adjustment if you withdraw or transfer amounts from your Fixed Account Value more than 30 days before the end of the applicable Guarantee Period. For this purpose, using Fixed Account Value to provide an annuity is considered a withdrawal, and the Market Value Adjustment will apply. However, we will not apply the Market Value Adjustment to automatic transfers to a Sub-Account from a Guarantee Period as part of our dollar cost averaging program. We apply the Market Value Adjustment separately to each Guarantee Amount in the Fixed Account, that is to each separate allocation you have made to a Guarantee Period together with interest credited on that allocation. However, we do not apply the adjustment to the amount of interest credited during your current Account Year. Any withdrawal from a Guarantee Amount is attributed first to such interest. 20 A Market Value Adjustment may decrease, increase or have no effect on your Account Value. This will depend on changes in interest rates since you made your allocation to the Guarantee Period and the length of time remaining in the Guarantee Period. In general, if the Guaranteed Interest Rate we currently declare for Guarantee Periods equal to the balance of your Guarantee Period (or your entire Guarantee Period for Guarantee Periods of less than one year) is higher than your Guaranteed Interest Rate, the Market Value Adjustment is likely to decrease your Account Value. If our current Guaranteed Interest Rate is lower, the Market Value Adjustment is likely to increase your Account Value. We determine the amount of the Market Value Adjustment by multiplying the amount that is subject to the adjustment by the following formula: N/12 1 + I ( -------- ) -1 1 + J
where: I is the Guaranteed Interest Rate applicable to the Guarantee Amount from which you withdraw, transfer or annuitize; J is the Guaranteed Interest Rate we declare at the time of your withdrawal, transfer or annuitization for Guarantee Periods equal to the length of time remaining in the Guarantee Period applicable to your Guarantee Amount, rounded to the next higher number of complete years, for Guarantee Periods of one year or more. For any Guarantee Periods of less than one year, J is the Guaranteed Interest Rate we declare at the time of your withdrawal, transfer or annuitization for a Guarantee Period of the same length as your Guarantee Period. If, at that time, we do not offer the applicable Guarantee Period we will use an interest rate determined by straight-line interpolation of the Guaranteed Interest Rates for the Guarantee Periods we do offer; and N is the number of complete months remaining in your Guarantee Period. We will apply the Market Value Adjustment to the amount being withdrawn after deduction of any Account Fee, if applicable, but before we impose any withdrawal charge on the amount withdrawn. For examples of how we calculate the Market Value Adjustment, see Appendix C. CONTRACT CHARGES ACCOUNT FEE Each year during the Accumulation Phase of your Contract we will deduct from your Account an Account Fee to help cover the administrative expenses we incur related to the issuance of Contracts and the maintenance of Accounts. We deduct the Account Fee on each Account Anniversary, which is the anniversary of the first day of the month after we issue your Contract. In Account Years 1 through 5, the Account Fee is equal to the lesser of (a) $30 and (b) 2% of your Account Value. After Account Year 5, we may change the Account Fee each year, but the Account Fee will never exceed the lesser of (a) $50 and (b) 2% of your Account Value. We deduct the Account Fee pro rata from each Sub-Account and each Guarantee Amount, based on the allocation of your Account Value on your Account Anniversary. We will not charge you the Account Fee if: (1) your Account has been allocated only to the Fixed Account during the applicable Account Year; or (2) your Account Value is more than $75,000 on your Account Anniversary. If you make a full withdrawal of your Account, we will deduct the full amount of the Account Fee at the time of the withdrawal. In addition, on the Annuity Commencement Date we will deduct a pro rata portion of the Account Fee to reflect the time elapsed between the last Account Anniversary and the day before the Annuity Commencement Date. 21 After the Annuity Commencement Date, we will deduct an annual Account Fee of $30 in the aggregate in equal amounts from each Variable Annuity payment we make during the year. We do not deduct any fee from Fixed Annuity payments. ADMINISTRATIVE EXPENSE CHARGE We deduct an administrative expense charge from the assets of the Variable Account at an annual effective rate equal to 0.15% during both the Accumulation Phase and the Income Phase. This charge is designed to reimburse expenses we incur in administering the Contracts, the Accounts and the Variable Account that are not covered by the Account Fee. MORTALITY AND EXPENSE RISK CHARGE We deduct a mortality and expense charge from the assets of the Variable Account at an effective annual rate equal to 1.25% during both the Accumulation Phase and the Income Phase. The mortality risk we assume arises from our contractual obligation to continue to make annuity payments to each Annuitant, regardless of how long the Annuitant lives and regardless of how long all Annuitants as a group live. This obligation assures each Annuitant that neither the longevity of fellow Annuitants nor an improvement in life expectancy generally will have an adverse effect on the amount of any annuity payment received under the contract. The expense risk we assume is the risk that the Account Fee and administrative expense charge we assess under the Contracts may be insufficient to cover the actual total administrative expenses we incur. If the amount of the charge is insufficient to cover the mortality and expense risks, we will bear the loss. If the amount of the charge is more than sufficient to cover the risks, we will make a profit on the charge. We may use this profit for any proper corporate purpose, including the payment of marketing and distribution expenses for the Contracts. PREMIUM TAXES Some states and local jurisdictions impose a premium tax on us that is equal to a specified percentage of the Purchase Payments you make. In many states there is no premium tax. We believe that the amounts of applicable premium taxes currently range from 0% to 3.5%. You should consult a tax adviser to find out if your state imposes a premium tax and the amount of any tax. In order to reimburse us for the premium tax we may pay on Purchase Payments, our policy is to deduct the amount of such taxes from the amount you apply to provide an annuity at the time of annuitization. However, we reserve the right to deduct the amount of any applicable tax from your Account at any time, including at the time you make a Purchase Payment or make a full or partial withdrawal. We do not make any profit on the deductions we make to reimburse premium taxes. SERIES FUND EXPENSES There are fees and charges deducted from each Series of the Series Fund. These fees and expenses are described in the Series Fund's Prospectus and Statement of Additional Information. MODIFICATION IN THE CASE OF GROUP CONTRACTS We may modify the Account Fee, the administrative expense charge and the mortality and expense risk charge upon notice to Owners. However, such modification will apply only with respect to Participant Accounts established after the effective date of the modification. DEATH BENEFIT If the Annuitant dies during the Accumulation Phase, we will pay a death benefit to your Beneficiary, using the payment method elected -- a single cash payment or one of our Annuity Options. (If you have named more than one Annuitant, the death benefit will be payable after the death of the last surviving of the Annuitants.) If the Beneficiary is not living on the date of death, we will pay the death benefit in one sum to you or to your estate. We do not pay a death benefit if the 22 Annuitant dies during the Income Phase. However, the Beneficiary will receive any payments provided under an Annuity Option that is in effect. If you have a Non-Qualified Contract and your spouse is your Beneficiary, upon your death (if you are the Annuitant) your spouse may elect to continue the Contract as the Participant, rather than receive the death benefit. In that case, the death benefit provisions of the Contract will not apply until the death of your spouse. See "Other Contract Provisions -- Death of Participant." AMOUNT OF DEATH BENEFIT To calculate the amount of your death benefit, we use a "Death Benefit Date." The Death Benefit Date is the date we receive proof of the Annuitant's death in an acceptable form ("Due Proof of Death") if you have elected a death benefit payment method before the Annuitant's death and it remains effective. Otherwise, the Death Benefit Date is the later of the date we receive Due Proof of Death or the date we receive either the Beneficiary's election of payment method, or if the Beneficiary is your spouse, Contract continuation. If we do not receive the Beneficiary's election within 60 days after we receive Due Proof of Death, the Death Benefit Date will be the last day of the 60 day period. The amount of the death benefit is determined as of the Death Benefit Date. If the Annuitant was 85 or younger on your Contract Date (the date we accepted your first Purchase Payment), the death benefit will be the greatest of the following amounts: 1. Your Account Value for the Valuation Period during which the Death Benefit Date occurs; 2. The amount we would pay if you had surrendered your entire Account on the Death Benefit Date; 3. Your Account Value on the Seven-Year Anniversary immediately before the Death Benefit Date, adjusted for subsequent Purchase Payments and partial withdrawals and charges made between the Seven-Year Anniversary and the Death Benefit Date; and 4. Your total Purchase Payments minus the sum of partial withdrawals; interest will accrue daily on each Purchase Payment and each partial withdrawal at a rate equivalent to 5% per year until the first day of the month following the Annuitant's 80th birthday, or until the Purchase Payment or partial withdrawal has doubled in amount, whichever is earlier. If you were 86 or older on your Contract Date, the death benefit is equal to amount (2) above; because this amount will reflect any applicable withdrawal charges and market value adjustment, it may be less than your Account Value. If the death benefit we pay is amount (2), (3), or (4), your Account Value will be increased by the excess, if any, of that amount over amount (1). Any such increase will be allocated to the Sub-Accounts in proportion to your Account Value in those Sub-Accounts on the Death Benefit Date. Also, any portion of this new Account Value attributed to the Fixed Account will be transferred to the Money Market Series Sub-Account (without the application of a Market Value Adjustment). The Beneficiary may then transfer to the Fixed Account and begin a new Guarantee Period. METHOD OF PAYING DEATH BENEFIT The death benefit may be paid in a single cash payment or as an annuity (either fixed, variable or a combination), under one or more of our Annuity Options. We describe the Annuity Options in this Prospectus under "Income Phase - -- Annuity Provisions." During the Accumulation Phase, you may elect the method of payment for the death benefit. If no such election is in effect on the date of the Annuitant's death, the Beneficiary may elect either a single cash payment or an annuity. With respect to a Non-Qualified Contract, if you were the Annuitant and the Beneficiary is your spouse, the Beneficiary may elect to continue the Non-Qualified Contract. These elections are made by sending us a completed election form, which we will provide. If we do not receive the Beneficiary's election within 60 days after we receive Due Proof of Death, we will pay the death benefit in a single cash payment. 23 If we pay the death benefit in the form of an Annuity Option, the Beneficiary becomes the Annuitant under the terms of that Annuity Option. Neither you nor the Beneficiary may exercise rights that would adversely affect the treatment of the Contract as an annuity contract under the Internal Revenue Code. (See "Other Contract Provisions -- Death of Participant.") SELECTION AND CHANGE OF BENEFICIARY You select your Beneficiary in your Application. You may change your Beneficiary at any time by sending us written notice on our required form, unless you previously made an irrevocable Beneficiary designation. A new Beneficiary designation is not effective until we record the change. PAYMENT OF DEATH BENEFIT Payment of the death benefit in cash will be made within 7 days of the Death Benefit Date, except if we are permitted to defer payment in accordance with the Investment Company Act of 1940. If an Annuity Option is elected, the Annuity Commencement Date will be the first day of the second calendar month following the Death Benefit Date, and your Account will remain in effect until the Annuity Commencement Date. DUE PROOF OF DEATH We accept the following as proof of any person's death: - an original certified copy of an official death certificate; - an original certified copy of a decree of a court of competent jurisdiction as to the finding of death; or - any other proof we find satisfactory. THE INCOME PHASE -- ANNUITY PROVISIONS During the Income Phase, we make regular monthly payments to your Annuitant. The Income Phase of your Contract begins with the Annuity Commencement Date. On that date, we apply your Account Value, adjusted as described below, under the Annuity Option or Options you have selected, and we make the first payment. Once the Income Phase begins, no lump sum settlement option or cash withdrawals are permitted, except pursuant to Annuity Option D, Monthly Payments for a Specified Period Certain, as described below under the heading "Annuity Options," and you cannot change the Annuity Option selected. You may request a full withdrawal before the Annuity Commencement Date, which will be subject to all charges applicable on withdrawals. See "Cash Withdrawals, Withdrawal Charge and Market Value Adjustment." SELECTION OF THE ANNUITANT OR CO-ANNUITANT You select the Annuitant in your Application. The Annuitant is the person who receives payments during the Income Phase and on whose life these payments are based. In your Contract, the Annuity Options refer to the Annuitant as the "Payee." If you name someone other than yourself as Annuitant and the Annuitant dies before the Income Phase, you become the Annuitant. In a Non-Qualified Contract, if you name someone other than yourself as Annuitant, you may also select a Co-Annuitant, who will become the new Annuitant if the original Annuitant dies before the Income Phase. If you have named both an Annuitant and a Co-Annuitant, you may designate one of them to become the sole Annuitant as of the Annuity Commencement Date, if both are living at that time. If you have not made that designation on the 30th day before the Annuity Commencement Date, and both the Annuitant and the Co-Annuitant are still living, the Co-Annuitant will become the Annuitant. 24 When an Annuity Option has been selected as the method of paying the death benefit, the Beneficiary is the Annuitant. SELECTION OF THE ANNUITY COMMENCEMENT DATE You select the Annuity Commencement Date in your Application. The following restrictions apply to the date you may select: - The earliest possible Annuity Commencement date is the first day of the second month following your Contract Date. - The latest possible Annuity Commencement Date is the first day of the month following the Annuitant's 95th birthday or, if there is a Co-Annuitant, the 95th birthday of the younger of the Annuitant and Co-Annuitant. - The Annuity Commencement Date must always be the first day of a month. You may change the Annuity Commencement Date from time to time by sending us written notice, with the following additional limitations: - We must receive your notice at least 30 days before the current Annuity Commencement Date. - The new Annuity Commencement Date must be at least 30 days after we receive the notice. There may be other restrictions on your selection of the Annuity Commencement Date imposed by your retirement plan or applicable law. In most situations, current law requires that for a Qualified Contract, contain minimum distributions must commence no later than April 1 following the year the Annuitant reaches age 70 1/2 (or, for Qualified Contracts other than IRAs, no later than April 1 following the year the Annuitant retires, if later than the year the Annuitant reaches age 70 1/2). ANNUITY OPTIONS We offer the following Annuity Options for payments during the Income Phase. Each Annuity Option may be selected for either a Variable Annuity, a Fixed Annuity, or a combination of both, except that Option E is available only for a Fixed Annuity. We may also agree to other settlement options, in our discretion. ANNUITY OPTION A -- LIFE ANNUITY We provide monthly payments during the lifetime of the Annuitant. Annuity payments stop when the Annuitant dies. There is no provision for continuation of any payments to a Beneficiary. ANNUITY OPTION B -- LIFE ANNUITY WITH 60, 120, 180 OR 240 MONTHLY PAYMENTS CERTAIN We make monthly payments during the lifetime of the Annuitant. In addition, we guarantee that the Beneficiary will receive monthly payments for the remainder of the period certain, if the Annuitant dies during that period. The election of a longer period results in smaller monthly payments. If no Beneficiary is designated, we pay the discounted value of the remaining payments in one sum to the Annuitant's estate. The Beneficiary may also elect to receive the discounted value of the remaining payments in one sum. The discount rate for this purpose will be the assumed interest rate in effect; the discount rate for a Fixed Annuity will be based on the interest rate we used to determine the amount of each payment. ANNUITY OPTION C -- JOINT AND SURVIVOR ANNUITY We make monthly payments during the lifetime of the Annuitant and another person you designate and during the lifetime of the survivor of the two. We stop making payments when the last survivor dies. There is no provision for continuance of any payments to a Beneficiary. 25 *ANNUITY OPTION D -- MONTHLY PAYMENTS FOR A SPECIFIED PERIOD CERTAIN We make monthly payments for a specified period of time from 5 to 30 years, as you elect. If payments under this option are paid on a variable annuity basis, the Annuitant may elect to receive in one sum the discounted value of the remaining payments, less any applicable withdrawal charge. The discount rate for a Variable Annuity will be the assumed interest rate in effect. If the Annuitant dies during the period selected, the remaining income payments are made as described under Annuity Option B. *ANNUITY OPTION E -- FIXED PAYMENTS We hold the portion of your Adjusted Account Value selected for this option at interest, and make fixed payments in such amounts and at such times as you and we may agree. We continue making payments until the amount we hold is exhausted. The final payment will be for the remaining balance and may be less than the previous installments. We will credit interest yearly on the amount remaining unpaid at a rate we determine from time to time, but never less than 3% per year (or a higher rate if specified in your Contract) compounded annually. We may change the rate at any time, but will not reduce it more frequently than once each calendar year. SELECTION OF ANNUITY OPTION You select one or more of the Annuity Options, which you may change from time to time during the Accumulation Phase, as long as we receive your selection or change in writing at least 30 days before the Annuity Commencement Date. If we have not received your written selection on the 30th day before the Annuity Commencement Date, you will receive Annuity Option B, for a life annuity with 120 monthly payments certain. You may specify the proportion of your Adjusted Account Value you wish to provide a Variable Annuity or a Fixed Annuity. Under a Variable Annuity, the dollar amount of payments will vary, while under a Fixed Annuity, the dollar amount of payments will remain the same. If you do not specify a Variable Annuity or a Fixed Annuity, your Adjusted Account Value will be divided between Variable Annuities and Fixed Annuities in the same proportions as your Account Value was divided between the Variable and Fixed Accounts on the Annuity Commencement Date. You may allocate your Adjusted Account Value applied to a Variable Annuity among the Sub-Accounts, or we will use your existing allocations. There may be additional limitations on the options you may elect under your particular retirement plan or applicable law. REMEMBER THAT THE ANNUITY OPTIONS MAY NOT BE CHANGED ONCE ANNUITY PAYMENTS BEGIN. AMOUNT OF ANNUITY PAYMENTS ADJUSTED ACCOUNT VALUE The Adjusted Account Value is the amount we apply to provide a Variable Annuity and/or a Fixed Annuity. We calculate Adjusted Account Value by taking your Account Value on the Business Day just before the Annuity Commencement Date and making the following adjustments: - We deduct a proportional amount of the Account Fee, based on the fraction of the current Account Year that has elapsed; - If applicable, we apply the Market Value Adjustment to your Account Value in the Fixed Account, which may result in a deduction, an addition, or no change; and - We deduct any applicable premium tax or similar tax if not previously deducted. - ------------------------ * The election of this Annuity Option may result in the imposition of a penalty tax. 26 VARIABLE ANNUITY PAYMENTS Variable Annuity payments may vary each month. We determine the dollar amount of the first payment using the portion of your Adjusted Account Value applied to a Variable Annuity and the Annuity Payment Rates in your Contract, which are based on an assumed interest rate of 3% per year, compounded annually. See "Annuity Payment Rates." To calculate the remaining payments, we convert the amount of the first payment into Annuity Units for each Sub-Account; we determine the number of those Annuity Units by dividing the portion of the first payment attributable to the Sub-Account by the Annuity Unit Value of that Sub-Account for the Valuation Period ending just before the Annuity Commencement Date. This number of Annuity Units for each Sub-Account will remain constant (unless the Annuitant requests an exchange of Annuity Units). However, the dollar amount of the next Variable Annuity payment -- which is the sum of the number of Annuity Units for each Sub-Account times its Annuity Unit Value for the Valuation Period ending just before the date of the payment -- will increase, decrease, or remain the same, depending on the net investment return of the Sub-Accounts. If the net investment return of the Sub-Accounts selected is the same as the assumed interest rate of 3%, compounded annually, the payments will remain level. If the net investment return exceeds the assumed interest rate, payments will increase and, conversely, if it is less than the assumed interest rate, payments will decrease. Please refer to the Statement of Additional Information for more information about calculating Variable Annuity Units and Variable Annuity payments, including examples of these calculations. FIXED ANNUITY PAYMENTS Fixed Annuity payments are the same each month. We determine the dollar amount of each Fixed Annuity payment using the fixed portion of your Adjusted Account Value and the applicable Annuity Payment Rates. These will be either (1) the rates in your Contract, which are based on a minimum guaranteed interest rate of 3% per year, compounded annually, or (2) new rates we have published and are using on the Annuity Commencement Date, if they are more favorable. See "Annuity Payment Rates." MINIMUM PAYMENTS If your Adjusted Account Value is less than $2,000, or the first annuity payment for any Annuity Option is less than $20, we will pay the Adjusted Account Value to the Annuitant in one payment. EXCHANGE OF VARIABLE ANNUITY UNITS During the Income Phase, the Annuitant may exchange Annuity Units from one Sub-Account to another, up to 12 times each Account Year. To make an exchange, the Annuitant sends us, at our Annuity Service Mailing Address, a written request stating the number of Annuity Units in the Sub-Account he or she wishes to exchange and the new Sub-Account for which Annuity Units are requested. The number of new Annuity Units will be calculated so the dollar amount of an annuity payment on the date of the exchange would not be affected. To calculate this number, we use Annuity Unit values for the Valuation Period during which we receive the exchange request. We permit only exchanges among Sub-Accounts. No exchanges to or from a Fixed Annuity are permitted. ACCOUNT FEE During the Income Phase, we deduct the annual Account Fee of $30 in equal amounts from each Variable Annuity Payment. We do not deduct the Account Fee from Fixed Annuity payments. 27 ANNUITY PAYMENT RATES The Contract contains Annuity Payment Rates for each Annuity Option described in this Prospectus. The rates show, for each $1,000 applied, the dollar amount of: (a) the first monthly Variable Annuity payment based on the assumed interest rate specified in the applicable Contract (at least 3% per year, compounded annually); and (b) the monthly Fixed Annuity payment, when this payment is based on the minimum guaranteed interest rate specified in the Contract (at least 3% per year, compounded annually). We may change these rates under Group Contracts for Accounts established after the effective date of such change (See "Other Contract Provisions -- Modification"). The Annuity Payment Rates may vary according to the Annuity Option elected and the adjusted age of the Annuitant. The Contract also describes the method of determining the adjusted age of the Annuitant. The mortality table used in determining the Annuity Payment Rates for Options A, B and C is the 1983 Individual Annuitant Mortality Table. ANNUITY OPTIONS AS METHOD OF PAYMENT FOR DEATH BENEFIT You or your Beneficiary may also select one or more Annuity Options to be used in the event of the Annuitant's death before the Income Phase, as described under the "Death Benefit" section of this Prospectus. In that case, your Beneficiary will be the Annuitant. The Annuity Commencement Date will be the first day of the second month beginning after the Death Benefit Date. OTHER CONTRACT PROVISIONS EXERCISE OF CONTRACT RIGHTS A Group Contract belongs to the Owner. In the case of a Group Contract, the Owner may expressly reserve all Contract rights and privileges; otherwise, each Participant will be entitled to exercise such rights and privileges. In any case, such rights and privileges can be exercised without the consent of the Beneficiary (other than an irrevocably designated Beneficiary) or any other person. Such rights and privileges may be exercised only during the lifetime of the Participant before the Annuity Commencement Date, except as the Contract otherwise provides. The Annuitant becomes the Payee on and after the Annuity Commencement Date. The Beneficiary becomes the Payee on the death of the Participant prior to the Annuity Commencement Date, or on the death of the Annuitant after the Annuity Commencement Date. Such Payee may thereafter exercise such rights and privileges, if any, of ownership which continue. CHANGE OF OWNERSHIP Ownership of a Qualified Contract may not be transferred except to: (1) the Annuitant; (2) a trustee or successor trustee of a pension or profit sharing trust which is qualified under Section 401 of the Internal Revenue Code; (3) the employer of the Annuitant, provided that the Qualified Contract after transfer is maintained under the terms of a retirement plan qualified under Section 403(a) of the Internal Revenue Code for the benefit of the Annuitant; (4) the trustee or custodian of an individual retirement account plan qualified under Section 408 of the Internal Revenue Code for the benefit of the Participants under a Group Contract; or (5) as otherwise permitted from time to time by laws and regulations governing the retirement or deferred compensation plans for which a Qualified Contract may be issued. Subject to the foregoing, a Qualified Contract may not be sold, assigned, transferred, discounted or pledged as collateral for a loan or as security for the performance of an obligation or for any other purpose to any person other than the Company. The Owner of a Non-Qualified Contract may change the ownership of the Contract prior to the last Annuity Commencement Date; and each Participant, in like manner, may change the ownership interest in a Contract. A change of ownership will not be binding on us until we receive written notification. When we receive such notification, the change will be effective as of the date on which the request for change was signed by the Owner or Participant, as appropriate, but the change will be without prejudice to us on account of any payment we make or any action we take before receiving the change. If you change the Owner of a Non-Qualified Contract, you will become immediately liable for 28 the payment of taxes on any gain realized under the Contract prior to the change of ownership, including possible liability for a 10% federal excise tax. DEATH OF PARTICIPANT If your Contract is a Non-Qualified Contract and you die prior to the Annuitant and before the Annuity Commencement Date, special distribution rules apply. In that case, your Account Value, plus or minus any Market Value Adjustment, must be distributed to your "designated beneficiary" within the meaning of Section 72(s) of the Internal Revenue Code, either (1) as a lump sum within 5 years after your death or (2) if in the form of an annuity, over a period not greater than the life or expected life of the designated beneficiary, with payments beginning no later than one year after your death. The person you have named as Beneficiary under your Contract, if any, will be the "designated beneficiary." If the named Beneficiary is not living, the Annuitant automatically becomes the designated beneficiary. If the designated beneficiary is your surviving spouse, your spouse may elect to continue the Contract in his or her own name as Participant. If you were the Annuitant as well as the Participant, your surviving spouse (if the designated beneficiary) may elect to be named as both Participant and Annuitant and continue the Contract; in that case, we will not pay a death benefit and the Account Value will not be increased to reflect the death benefit calculation. In all other cases where you are the Annuitant, the death benefit provisions of the Contract control, subject to the condition that any Annuity Option elected complies with the special distribution requirements described above. If your spouse elects to continue the Contract (either in the case where you are the Annuitant or in the case where you are not the Annuitant), your spouse must give us written notification within 60 days after we receive Due Proof of Death, and the special distributioon rules described above will apply on the death of your spouse. If you are the Annuitant and you die during the Income Phase, the remaining value of the Annuity Option in place must be distributed at least as rapidly as the method of distribution under the option. If the Participant is not a natural person, these distribution rules apply on a change in, or the death of, any Annuitant or Co-Annuitant. Payments made in contravention of these special rules would adversely affect the treatment of the Contracts as annuity contracts under the Internal Revenue Code. Neither you nor the Beneficiary may exercise rights that would have that effect. If yours is a Qualified Contract, any distributions upon your death will be subject to the laws and regulations governing the particular retirement or deferred compensation plan in connection with which the Qualified Contract was issued. VOTING OF SERIES FUND SHARES We will vote Series Fund shares held by the Sub-Accounts at meetings of shareholders of the Series Fund or in connection with similar solicitations, but will follow voting instructions received from persons having the right to give voting instructions. During the Accumulation Phase, you will have the right to give voting instructions, except where the Owner has reserved this right. During the Income Phase, the Payee -- that is the Annuitant or Beneficiary entitled to receive benefits -- is the person having such voting rights. We will vote any shares attributable to us and Series Fund shares for which no timely voting instructions are received in the same proportion as the shares for which we receive instructions from Owners, Participants and Payees, as applicable. Owners of Qualified Contracts issued on a group basis may be subject to other voting provisions of the particular plan and of the Investment Company Act of 1940. Employees who contribute to plans that are funded by the Contracts may be entitled to instruct the Owners as to how to instruct us to vote the Series Fund shares attributable to their contributions. Such plans may also provide the additional extent, if any, to which the Owners shall follow voting instructions of persons with rights under 29 the plans. If no voting instructions are received from any such person with respect to a particular Participant Account, the Owner may instruct the Company as to how to vote the number of Series Fund shares for which instructions may be given. Neither the Variable Account nor the Company is under any duty to provide information concerning the voting instruction rights of persons who may have such rights under plans, other than rights afforded by the Investment Company Act of 1940, or any duty to inquire as to the instructions received or the authority of Owners, Participants or others, as applicable, to instruct the voting of Series Fund shares. Except as the Variable Account or the Company has actual knowledge to the contrary, the instructions given by Owners under Group Contracts and Payees will be valid as they affect the Variable Account, the Company and any others having voting instruction rights with respect to the Variable Account. All Series Fund proxy material, together with an appropriate form to be used to give voting instructions, will be provided to each person having the right to give voting instructions at least 10 days prior to each meeting of the shareholders of the Series Fund. We will determine the number of Series Fund shares as to which each such person is entitled to give instructions as of the record date set by the Series Fund for such meeting, which is expected to be not more than 90 days prior to each such meeting. Prior to the Annuity Commencement Date, the number of Series Fund shares as to which voting instructions may be given to the Company is determined by dividing the value of all of the Variable Accumulation Units of the particular Sub-Account credited to the Participant Account by the net asset value of one Series Fund share as of the same date. On or after the Annuity Commencement Date, the number of Series Fund shares as to which such instructions may be given by a Payee is determined by dividing the reserve held by the Company in the Sub-Account with respect to the particular Payee by the net asset value of a Series Fund share as of the same date. After the Annuity Commencement Date, the number of Series Fund shares as to which a Payee is entitled to give voting instructions will generally decrease due to the decrease in the reserve. PERIODIC REPORTS During the Accumulation Period we will send you, or such other person having voting rights, at least once during each Account Year, a statement showing the number, type and value of Accumulation Units credited to your Account and the Fixed Accumulation Value of your Account, which statement shall be accurate as of a date not more than 2 months previous to the date of mailing. These periodic statements contain important information concerning your transactions with respect to a Contract. It is your obligation to review each such statement carefully and to report to us, at the address or telephone number provided on the statement, any errors or discrepancies in the information presented therein within 60 days of the date of such statement. Unless we receive notice of any such error or discrepancy from you within such period, we may not be responsible for correcting the error or discrepancy. In addition, every person having voting rights will receive such reports or prospectuses concerning the Variable Account and the Series Fund as may be required by the Investment Company Act of 1940 and the Securities Act of 1933. We will also send such statements reflecting transactions in your Account as may be required by applicable laws, rules and regulations. Upon request, we will provide you with information regarding fixed and variable accumulation values. SUBSTITUTION OF SECURITIES Shares of any or all Series of the Series Fund may not always be available for investment under the Contract. We may add or delete Series or other investment companies as variable investment options under the Contracts. We may also substitute for the shares held in any Sub-Account shares of another Series or shares of another registered open-end investment company or unit investment trust, provided that the substitution has been approved , if required, by the SEC. In the event of any substitution pursuant to this provision, we may make appropriate endorsement to the Contract to reflect the substitution. 30 CHANGE IN OPERATION OF VARIABLE ACCOUNT At our election and subject to any necessary vote by persons having the right to give instructions with respect to the voting of Series Fund shares held by the Sub-Accounts, the Variable Account may be operated as a management company under the Investment Company Act of 1940 or it may be deregistered under the Investment Company Act of 1940 in the event registration is no longer required. Deregistration of the Variable Account requires an order by the SEC. In the event of any change in the operation of the Variable Account pursuant to this provision, we may make appropriate endorsement to the Contract to reflect the change and take such other action as may be necessary and appropriate to effect the change. SPLITTING UNITS We reserve the right to split or combine the value of Variable Accumulation Units, Annuity Units or any of them. In effecting any such change of unit values, strict equity will be preserved and no change will have a material effect on the benefits or other provisions of the Contract. MODIFICATION Upon notice to the Owner and Participant(s), (or the Payee(s) during the Income Phase), we may modify the Contract if such modification: (i) is necessary to make the Contract or the Variable Account comply with any law or regulation issued by a governmental agency to which the Company or the Variable Account is subject; (ii) is necessary to assure continued qualification of the Contract under the Internal Revenue Code or other federal or state laws relating to retirement annuities or annuity contracts; (iii) is necessary to reflect a change in the operation of the Variable Account or the Sub-Account(s) (See "Change in Operation of Variable Account"); (iv) provides additional Variable Account and/or fixed accumulation options; or (v) as may otherwise be in the best interests of Owners, Participants, or Payees, as applicable. In the event of any such modification, we may make appropriate endorsement in the Contract to reflect such modification. In addition, upon notice to the Owner, we may modify a Group Contract to change the withdrawal charges, Account Fees, mortality and expense risk charges, administrative expense charges, the tables used in determining the amount of the first monthly variable annuity and fixed annuity payments and the formula used to calculate the Market Value Adjustment, provided that such modification applies only to Participant Accounts established after the effective date of such modification. In order to exercise our modification rights in these particular instances, we must notify the Owner of such modification in writing. The notice shall specify the effective date of such modification which must be at least 60 days following the date we mail notice of modification. All of the charges and the annuity tables which are provided in the Group Contract prior to any such modification will remain in effect permanently, unless improved by the Company, with respect to Participant Accounts established prior to the effective date of such modification. DISCONTINUANCE OF NEW PARTICIPANTS We may limit or discontinue the acceptance of new Applications and the issuance of new Certificates under a Group Contract by giving 30 days prior written notice to the Owner. This will not affect rights or benefits with respect to any Participant Accounts established under such Group Contract prior to the effective date of such limitation or discontinuance. RESERVATION OF RIGHTS We reserve the right, to the extent permitted by law, to: (1) combine any 2 or more variable accounts; (2) add or delete Series, sub-series thereof or other investment companies and corresponding Sub-Accounts; (3) add or remove Guarantee Periods available at any time for election by a Participant; and (4) restrict or eliminate any of the voting rights of Participants (or Owners) or other persons who have voting rights as to the Variable Account. Where required by law, we will obtain approval of changes from Participants or any appropriate regulatory authority. In the event of any change pursuant to this provision, we may make appropriate endorsement to the Contract to reflect the change. 31 RIGHT TO RETURN If you are not satisfied with your Contract, you may return it by mailing or delivering it to us at the Annuity Service Mailing Address on the cover of this Prospectus within 10 days after it was delivered to you. When we receive the returned Contract, it will be cancelled and we will refund to you your Account Value at the end of the Valuation Period during which we received it. However, if applicable state law requires, we will return the full amount of any Purchase Payment(s) we received. State law may also require us to give you a longer "free look" period or allow you to return the Contract to your sales representative. If you are establishing an Individual Retirement Account ("IRA"), the Internal Revenue Code requires that we give you a disclosure statement containing certain information about the Contract and applicable legal requirements. We must give you this statement on or before the date the IRA is established. If we give you the disclosure statement before the seventh day preceding the date the IRA is established, you will not have any right of revocation under the Code. If we give you the disclosure statement at a later date, then you may give us a notice of revocation at any time within 7 days after your Contract Date. Upon such revocation, we will refund your Purchase Payment(s). This right of revocation with respect to an IRA is in addition to the return privilege set forth in the preceding paragraph. We allow a Participant establishing an IRA a "ten day free-look," notwithstanding the provisions of the Internal Revenue Code. FEDERAL TAX STATUS INTRODUCTION This section describes general federal income tax consequences based upon our understanding of current federal tax laws. Actual federal tax consequences may vary depending on, among other things, the type of retirement plan with which you use a Contract and whether (depending on the site of Contract issuance) Puerto Rico tax law applies. Also, Congress has the power to enact legislation affecting the tax treatment of annuity contracts, and such legislation could apply retroactively to Contracts that you purchased before the date of enactment. We do not make any guarantee regarding the federal, state, or local tax status of any Contract or any transaction involving any Contract. You should consult a qualified tax professional for advice before purchasing a Contract or executing any other transaction (such as a rollover, distribution, withdrawal or payment) involving a Contract. DEDUCTIBILITY OF PURCHASE PAYMENTS For federal income tax purposes, Purchase Payments made under Non-Qualified Contracts are not deductible. PRE-DISTRIBUTION TAXATION OF CONTRACTS Generally, an increase in the value of a Contract will not give rise to tax, prior to distribution. However, corporate (or other non-natural person) Owners of, and Participants under, a Non-Qualified Contract incur current tax, regardless of distribution, on Contract value increases. Such current taxation does not apply, though, to (i) immediate annuities, which the Internal Revenue Code (the "Code") defines as a single premium contract with an annuity commencement date within one year of the date of purchase, or (ii) any Contract that the non-natural person holds as agent for a natural person (such as where a bank or other entity holds a Contract as trustee under a trust agreement). The Internal Revenue Service could assert that Owners or Participants under both Qualified Contracts and Non-Qualified Contracts annually receive a taxable deemed distribution equal to the cost of any life insurance benefit under the Contract. You should note that qualified retirement investments automatically provide tax deferral regardless of whether the underlying contract is an annuity. 32 DISTRIBUTIONS AND WITHDRAWALS FROM NON-QUALIFIED CONTRACTS The Account Value will include an amount attributable to Purchase Payments, the return of which is not taxable, and an amount attributable to investment earnings, the return of which is taxable at ordinary income rates. The relative portions of a distribution that derive from nontaxable Purchase Payments and taxable investment earnings depend upon the timing of the distribution. If you withdraw less than your entire Account Value under a Non-Qualified Contract before the Annuity Commencement Date, you must treat the withdrawal first as a return of investment earnings. You may treat only withdrawals in excess of the amount of the Account Value attributable to investment earnings as a return of Purchase Payments. Account Value amounts assigned or pledged as collateral for a loan will be treated as if withdrawn from the Contract. If a Payee receives annuity payments under a Non-Qualified Contract after the Annuity Commencement Date, however, the Payee treats a portion of each payment as a nontaxable return of Purchase Payments. In general, the nontaxable portion of such a payment bears the same ratio to the total payment as the Purchase Payments bear to the Payee's expected return under the Contract. The remainder of the payment constitutes a taxable return of investment earnings. Once the Payee has received nontaxable payments in an amount equal to total Purchase Payments, all future distributions constitute fully taxable ordinary income. If the Annuitant dies before the Payee recovers the full amount of Purchase Payments, the Payee may deduct an amount equal to unrecovered Purchase Payments. Upon the transfer of a Non-Qualified Contract by gift (other than to the Participant's spouse), the Participant must treat an amount equal to the Account Value minus the total amount paid for the Contract as income. A penalty tax of 10% may apply to taxable cash withdrawals and lump-sum payments from Non-Qualified Contracts. This penalty will not apply in certain circumstances, such as distributions pursuant to the death of the Participant or distributions under an immediate annuity (as defined above), or after age 59 1/2. DISTRIBUTIONS AND WITHDRAWALS FROM QUALIFIED CONTRACTS Generally, distributions from a Qualified Contract will constitute fully taxable ordinary income. Also, a 10% penalty tax will, except in certain circumstances, apply to distributions prior to age 59 1/2. Distributions from a Qualified Contract are not subject to current taxation or a 10% penalty, however, if: - the distribution is not a hardship distribution or part of a series of payments for life or for a specified period of 10 years or more (an "eligible rollover distribution"), and - the Participant or Payee rolls over the distribution (with or without actually receiving the distribution) into a qualified retirement plan eligible to receive the rollover. Only you or your spouse may elect to roll over a distribution to an eligible retirement plan. WITHHOLDING In the case of an eligible rollover distribution (as defined above) from a Qualified Contract (other than from a Contract issued for use with an individual retirement account), we (or the plan administrator) must withhold and remit to the U.S. Government 20% of the distribution, unless the Participant or Payee elects to make a direct rollover of the distribution to another qualified retirement plan that is eligible to receive the rollover; however, only you or your spouse may elect a direct rollover. In the case of a distribution from (i) a Non-Qualified Contract, (ii) a Qualified Contract issued for use with an individual retirement account, or (iii) a Qualified Contract where the distribution is not an eligible rollover distribution, we will withhold and remit to the U.S. Government a part of the taxable portion of each distribution unless, prior to the distribution, the Participant or Payee provides 33 us his or her taxpayer identification number and instructs us (in the manner prescribed) not to withhold. The Participant or Payee may credit against his or her federal income tax liability for the year of distribution any amounts that we (or the plan administrator) withhold. PURCHASE OF IMMEDIATE ANNUITY CONTRACT AND DEFERRED ANNUITY CONTRACT You should consider the following information only if you intend to purchase an immediate annuity contract and a deferred annuity contract together. We understand that the Treasury Department might reconsider the tax treatment of annuity payments under an immediate annuity contract (as defined above) purchased together with a deferred annuity contract. We believe that any adverse change in the existing tax treatment of such immediate annuity contracts would not apply to contracts issued before the Treasury Department announces the change. However, there can be no assurance that the Treasury Department will not apply any such change retroactively. INVESTMENT DIVERSIFICATION AND CONTROL The Treasury Department has issued regulations that prescribe investment diversification requirements for mutual fund series underlying nonqualified variable contracts. Contracts must comply with these regulations to qualify as annuities for federal income tax purposes. Contracts that do not meet the guidelines are subject to current taxation on annual increases in value. We believe that each series of the Series Fund complies with these regulations. The preamble to the regulations states that the Internal Revenue Service may promulgate guidelines under which an owner's excessive control over investments underlying the contract will preclude the contract from qualifying as an annuity for federal tax purposes. We cannot predict whether such guidelines, if in fact promulgated, will be retroactive. We will take any action (including modification of the Contract and/or the Variable Account) necessary to comply with any retroactive guidelines. TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT As a life insurance company under the Code, we will record and report operations of the Variable Account separately from other operations. The Variable Account will not, however, constitute a regulated investment company or any other type of taxable entity distinct from our other operations. We will not incur tax on the income of the Variable Account (consisting primarily of interest, dividends, and net capital gains) if we use this income to increase reserves under Contracts participating in the Variable Account. QUALIFIED RETIREMENT PLANS You may use Qualified Contracts with several types of qualified retirement plans. Because tax consequences will vary with the type of qualified retirement plan and the plan's specific terms and conditions, we provide below only brief, general descriptions of the consequences that follow from using Qualified Contracts in connection with various types of qualified retirement plans. We stress that the rights of any person to any benefits under these plans may be subject to the terms and conditions of the plans themselves, regardless of the terms of the Qualified Contracts that you are using. These terms and conditions may include restrictions on, among other things, ownership, transferability, assignability, contributions and distributions. Owners, Participants, Payees, Beneficiaries and administrators of qualified retirement plans should consider, with the guidance of a tax adviser, whether the death benefit payable under the Contract affects the qualified status of their retirement plan. PENSION AND PROFIT-SHARING PLANS Sections 401(a), 401(k) and 403(a) of the Code permit business employers and certain associations to establish various types of retirement plans for employees. The Tax Equity and Fiscal Responsibility Act of 1982 eliminated most differences between qualified retirement plans of corporations and those of self-employed individuals. Self-employed persons may therefore use Qualified Contracts as a funding vehicle for their retirement plans, as a general rule. 34 TAX-SHELTERED ANNUITIES Section 403(b) of the Code permits public school employees and employees of certain types of charitable, educational and scientific organizations specified in Section 501(c)(3) of the Code to purchase annuity contracts and, subject to certain limitations, exclude the amount of purchase payments from gross income for tax purposes. The Code imposes restrictions on cash withdrawals from Section 403(b) annuities. If the Contracts are to receive tax deferred treatment, cash withdrawals of amounts attributable to salary reduction contributions (other than withdrawals of accumulation account value as of December 31, 1988) may be made only when the Participant attains age 59 1/2, separates from service with the employer, dies or becomes disabled (within the meaning of Section 72(m)(7) of the Code). These restrictions apply to (i) any post-1988 salary reduction contributions, (ii) any growth or interest on post-1988 salary reduction contributions, and (iii) any growth or interest on pre-1989 salary reduction contributions that occurs on or after January 1, 1989. It is permissible, however, to withdraw post-1988 salary reduction contributions in cases of financial hardship. While the Internal Revenue Service has not issued specific rules defining financial hardship, we expect that to qualify for a hardship distribution, the Participant must have an immediate and heavy bona fide financial need and lack other resources reasonably available to satisfy the need. Hardship withdrawals (as well as certain other premature withdrawals) will be subject to a 10% tax penalty, in addition to any withdrawal charge applicable under the Contracts. Under certain circumstances the 10% tax penalty will not apply if the withdrawal is for medical expenses. Under the terms of a particular Section 403(b) plan, the Participant may be entitled to transfer all or a portion of the Account Value to one or more alternative funding options. Participants should consult the documents governing their plan and the person who administers the plan for information as to such investment alternatives. INDIVIDUAL RETIREMENT ACCOUNTS Sections 219 and 408 of the Code permit eligible individuals to contribute to an individual retirement program, including Simplified Employee Pension Plans, Employer/Association of Employees Established Individual Retirement Account Trusts, and Simple Retirement Accounts. Such IRAs are subject to limitations on contribution levels, the persons who may be eligible, and on the time when distributions may commence. In addition, certain distributions from some other types of retirement plans may be placed in an IRA on a tax-deferred basis. If we sell Contracts for use with IRAs, the Internal Revenue Service or other agency may impose supplementary information requirements. We will provide purchasers of the Contracts for such purposes with any necessary information. You will have the right to revoke the Contract under certain circumstances, as described in the section of this Prospectus entitled "Right to Return." ROTH IRAS Section 408A of the Code permits an individual to contribute to an individual retirement program called a Roth IRA. Unlike contributions to a traditional IRA under Section 408 of the Code, contributions to a Roth IRA are not tax-deductible. Provided certain conditions are satisfied, distributions are generally tax-free. Like traditional IRAs, Roth IRAs are subject to limitations on contribution amounts and the timing of distributions. If an individual converts a traditional IRA into a Roth IRA the full amount of the IRA is included in taxable income. The Internal Revenue Service and other agencies may impose special information requirements with respect to Roth IRAs. If and when we make Contracts available for use with Roth IRAs, we will provide any necessary information. ADMINISTRATION OF THE CONTRACTS We perform certain administrative functions relating to the Contracts, Participant Accounts, and the Variable Account. These functions include, but are not limited to, maintaining the books and records of the Variable Account and the Sub-Accounts; maintaining records of the name, address, taxpayer identification number, Contract number, Participant Account number and type, the status of 35 each Participant Account and other pertinent information necessary to the administration and operation of the Contracts; processing Applications, Purchase Payments, transfers and full and partial withdrawals; issuing Contracts and Certificates; administering annuity payments; furnishing accounting and valuation services; reconciling and depositing cash receipts; providing confirmations; providing toll-free customer service lines; and furnishing telephonic transfer services. DISTRIBUTION OF THE CONTRACTS We offer the Contracts on a continuous basis. The Contracts are sold by licensed insurance agents in those states where the Contracts may be lawfully sold. Such agents will be registered representatives of broker-dealers registered under the Securities Exchange Act of 1934 who are members of the National Association of Securities Dealers, Inc. and who have entered into distribution agreements with the Company and the general distributor, Clarendon Insurance Agency, Inc. ("Clarendon"), One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. Clarendon, a wholly-owned subsidiary of the Company, is registered with the SEC under the Securities Exchange Act of 1934 as a broker-dealer and is a member of the National Association of Securities Dealers, Inc. Commissions and other distribution compensation will be paid by the Company to the selling agents and will not be more than 7.34% of Purchase Payments. In addition, after the first Account Year, broker-dealers who have entered into distribution agreements with the Company may receive an annual renewal commission of no more than 1.00% of the Participant's Account Value. In addition to commissions, the Company may, from time to time, pay or allow additional promotional incentives, in the form of cash or other compensation. We reserve the right to offer these additional incentives only to certain broker-dealers that sell or are expected to sell during specified time periods certain minimum amounts of the Contracts or Certificates or other contracts offered by the Company. Promotional incentives may change at any time. Commissions will not be paid with respect to Accounts established for the personal account of employees of the Company or any of its affiliates, or of persons engaged in the distribution of the Contracts, or of immediate family members of such employees or persons. In addition, commissions may be waived or reduced in connection with certain transactions described in this Prospectus under the heading "Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest Rates." During 1996, 1997 and 1998, approximately $18,652,927, $16,576,365, and $12,076,614, respectively, was paid to and retained by Clarendon in connection with distribution of the Contracts. PERFORMANCE INFORMATION From time to time the Variable Account may publish reports to shareholders, sales literature and advertisements containing performance information relating to the Sub-Accounts. This information may include standardized and non-standardized "Average Annual Total Return," "Cumulative Growth Rate" and "Compound Growth Rate." The Government Securities Series Sub-Account and the High Yield Series Sub-Account may also advertise "yield." The Money Market Series Sub-Account may advertise "yield" and "effective yield." Average Annual Total Return measures the net income of the Sub-Account and any realized or unrealized gains or losses of the Series in which it invests, over the period stated. Average Annual Total Return figures are annualized and represent the average annual percentage change in the value of an investment in a Sub-Account over that period. Standardized Average Annual Total Return information covers the period after the Variable Account was estabilished or, if shorter, the life of the Series. Non-standardized Average Annual Return covers the life of each Series, which may predate the Variable Account. Cumulative Growth Rate represents the cumulative change in the value of an investment in the Sub-Account for the period stated, and is arrived at by calculating the change in the Accumulation Unit Value of a Sub-Account between the first and the last day of the period being measured. The difference is expressed as a percentage of the Accumulation Unit Value at the beginning of the base period. "Compound Growth Rate" is an annualized measure, calculated by applying a formula that determines the level of return which, if earned over the entire period, would produce the cumulative return. 36 Average Annual Total Return figures assume an initial purchase payment of $1,000 and reflect all applicable withdrawal and Contract charges. The Cumulative Growth Rate and Compound Growth Rate figures that we advertise do not reflect withdrawal charges or the Account Fee, although they reflect all recurring charges. Results calculated without withdrawal and/or certain Contract charges will be higher. We may also use other types of rates of return that do not reflect withdrawal and Contract charges. The performance figures used by the Variable Account are based on the actual historical performance of the Series Fund for the specified periods, and the figures are not intended to indicate future performance. For periods before the date the Contracts became available, we calculate the performance information for the Sub-Account on a hypothetical basis. To do this, we reflect deductions of the current Contract fees and charges from the historical performance of the corresponding series. Yield is a measure of the net dividend and interest income earned over a specific one month or 30-day period (7-day period for the Money Market Series Sub-Account), expressed as a percentage of the value of the Sub-Account's Accumulation Units. Yield is an annualized figure, which means that we assume that the Sub-Account generates the same level of net income over a one-year period and compound that income on a semi-annual basis. We calculate the effective yield for the Money Market Series Sub-Account similarly, but include the increase due to assumed compounding. The Money Market Sub-Account's effective yield will be slightly higher than its yield as a result of its compounding effect. The Variable Account may also from time to time compare its investment performance to various unmanaged indices or other variable annuities and may refer to certain rating and other organizations in its marketing materials. More information on performance and our computations is set forth in the Statement of Additional Information. The Company may also advertise the ratings and other information assigned to it by independent industry ratings organizations. Some of these organizations are A.M. Best, Moody's Investor's Service, Standard and Poor's Insurance Rating Services, and Duff and Phelps. Each year A.M. Best reviews the financial status of thousands of insurers, culminating in the assignment of Best's rating. These ratings reflect A.M. Best's current opinion of the relevant financial strength and operating performance of an insurance company in comparison to the norms of the life/health industry. Best's ratings range from A++ to F. Standard and Poor's and Duff and Phelps' ratings measure the ability of an insurance company to meet its obligations under insurance policies it issues. These two ratings do not measure the insurance company's ability to meet non-policy obligations. Ratings in general do not relate to the performance of the Sub-Accounts. We may also advertise endorsements from organizations, individuals or other parties that recommend the Company or the Contracts. We may occasionally include in advertisements (1) comparisons of currently taxable and tax deferred investment programs, based on selected tax brackets; or (2) discussions of alternative investment vehicles and general economic conditions. AVAILABLE INFORMATION The Company and the Variable Account have filed with the SEC registration statements under the Securities Act of 1933 relating to the Contracts. This Prospectus does not contain all of the information contained in the registration statements and their exhibits. For further information regarding the Variable Account, the Company and the Contracts, please refer to the registration statements and their exhibits. In addition, the Company is subject to the informational requirements of the Securities Exchange Act of 1934. We file reports and other information with the SEC to meet these requirements. You can inspect and copy this information and our registration statements at the SEC's public reference facilities at the following locations: WASHINGTON, D.C. -- 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; CHICAGO, ILLINOIS -- 500 West Madison Street, Chicago, IL 60661; NEW YORK, NEW YORK -- 7 World Trade Center, 13th Floor, New York, NY 10048. The Washington, D.C. office will 37 also provide copies by mail for a fee. You may also find these materials on the SEC's website (http:// www.sec.gov). INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company's Annual Report on Form 10-K for the year ended December 31, 1998 filed with the SEC is incorporated by reference in this Prospectus. Any statement contained in a document we incorporate by reference is deemed modified or superceded to the extent that a later filed document, including this Prospectus, shall modify or supercede that statement. Any statement so modified or superceded shall not be deemed, except as so modified or superceded, to constitute part of this Prospectus. The Company will furnish, without charge, to each person to whom a copy of this Prospectus is delivered, upon the written or oral request of such person, a copy of the document referred to above which has been incorporated by reference in this Prospectus, other than exhibits to such document (unless such exhibits are specifically incorporated by reference in this Prospectus). Requests for such document should be directed to the Secretary, Sun Life Assurance Company of Canada (U.S.), One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481, telephone (800) 225-3950. ADDITIONAL INFORMATION ABOUT THE COMPANY BUSINESS OF THE COMPANY We are engaged in the sale of individual variable life insurance and individual and group fixed and variable annuities. These contracts are sold in both the tax qualified and non-tax qualified markets. These products are distributed through individual insurance agents, insurance brokers and registered broker-dealers. The following table sets forth premiums and deposits by major product categories for each of the last three years. See notes to financial statements for industry segment information.
1998 1997 1996 ------------ ------------ ------------ (IN THOUSANDS) Individual insurance products $ 155,907 $ 204,671 $ 207,845 Retirement products $ 2,194,895 $ 2,204,693 $ 1,834,327 ------------ ------------ ------------ $ 2,350,802 $ 2,409,364 $ 2,042,172 ------------ ------------ ------------ ------------ ------------ ------------
We have obtained authorization to do business in 48 states, the District of Columbia and Puerto Rico, and anticipate that we will be authorized to do business in all states except New York. We have formed a wholly-owned subsidiary, Sun Life Insurance and Annuity Company of New York, which issues individual fixed and combination fixed/variable annuity contracts and group life and long-term disability insurance in New York. Our other active subsidiaries are Sun Capital Advisers, Inc., a registered investment adviser, Clarendon Insurance Agency, Inc., a registered broker-dealer that acts as the general distributor of the Contracts and other annuity and life insurance contracts that we and our affiliates issue, Sun Life of Canada (U.S.) Distributors, Inc., a registered broker-dealer and investment adviser, New London Trust, F.S.B., a federally chartered savings bank, Sun Life Financial Services Limited, which provides off-shore administrative services to us and our parent, Sun Life Assurance Company of Canada ("Sun Life (Canada)"), and Sun Life Information Services Ireland Limited, an offshore technology center. We are a wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). Life Holdco is a wholly-owned subsidiary of Sun Life Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("U.S. Holdco"). U.S. Holdco is a wholly-owned subsidiary of Sun Life (Canada), 150 King Street West, Toronto, Ontario, Canada. Sun Life (Canada) is a mutual life insurance company incorporated pursuant to Act of Parliament of Canada in 1865 and currently transacts business in all of the Canadian provinces and territories, in all U.S. states (except New York), and in the District of 38 Columbia, Puerto Rico, the Virgin Islands, Great Britain, Ireland, Hong Kong, Bermuda and the Philippines. SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31 --------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (IN $ THOUSANDS) Revenues Premiums, annuity deposits and other revenue $ 2,581,463 $ 2,623,629 $ 2,215,322 $ 1,883,901 $ 1,997,525 Net investment income and realized gains 187,208 298,121 310,172 315,966 312,583 ----------- ----------- ----------- ----------- ----------- 2,768,671 2,921,750 2,525,494 2,199,867 2,310,108 ----------- ----------- ----------- ----------- ----------- Benefits and expenses Policyholder benefits 2,416,950 2,579,104 2,232,528 1,995,208 2,102,290 Other expenses 214,607 206,065 175,342 150,937 186,892 ----------- ----------- ----------- ----------- ----------- 2,631,557 2,785,169 2,407,870 2,146,145 2,289,182 ----------- ----------- ----------- ----------- ----------- Operating gain 137,114 136,581 117,624 53,722 20,926 Federal income tax expense (benefit) 11,713 7,339 (5,400) 17,807 19,469 ----------- ----------- ----------- ----------- ----------- Net income $ 125,401 $ 129,242 $ 123,024 $ 35,915 $ 1,457 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Assets $16,902,621 $15,925,357 $13,621,952 $12,359,683 $10,117,822 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Surplus notes $ 565,000 $ 565,000 $ 315,000 $ 650,000 $ 335,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See Note 1 to financial statements for changes in accounting principles and reporting. See discussion in Management's Discussion and Analysis of Financial Condition and Results of Operations. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT This Prospectus includes forward looking statements by the Company under the Private Securities Litigation Reform Act of 1995. These statements are not matters of historical fact; they relate to such topics as future product sales, 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: - - The Company's ability to identify and address 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 their own Year 2000 issues in a timely manner. - - Heightened competition, particularly in terms of price, product features, and distribution capability, which could constrain the Company's growth and profitability. - - Changes in interest rates and market conditions. - - Regulatory and legislative developments. - - Developments in consumer preferences and behavior patterns. 39 RESULTS OF OPERATIONS NET INCOME Net income decreased by $3.8 million to $125.4 million in 1998, reflecting an increase of $22.5 million in income from operations and a decrease of $26.3 million in net realized capital gains. (In the following discussion, "income from operations" refers to the statutory statement of operations line item, net gain from operations after dividends to policyholders and federal income tax and before realized capital gains.) Income from operations increased from $102.5 million in 1997 to $125.0 million in 1998, mainly as a result of the following factors: - - A $16.7 million increase, to $31.4 million in 1998, in the income from operations from the Company's Retirement Products and Services segment. (This is discussed in the "Retirement Products and Services Segment" section below.) - - The effect of terminating certain reinsurance agreements with the Company's ultimate parent. The termination of these agreements was the predominant factor in the $71.1 million increase in income from operations for the Company's Individual Insurance segment. - - The effects of the Company's December 1997 reorganization (described in the "Corporate & Other Segment" section below), as a result of which MFS was no longer a subsidiary of the Company. As a result of this reorganization, dividends from subsidiaries were lower in 1998 than in 1997 and certain subsidiary tax benefits were no longer available to the Company. Also affecting income from operations for the Corporate segment in 1998 was that income earned on the proceeds of a December 1997 issuance of a $250 million surplus note was lower than the related interest expense. Net realized capital gains decreased from $26.7 million in 1997 to $0.4 million in 1998. This change also reflected the Company's reorganization, as a result of which the Company had a realized capital gain of $21.2 million in 1997. Net income increased by $6.2 million to $129.2 million in 1997, as compared to 1996 reflecting a decrease of $15.6 million in income from operations and an increase of $21.8 million in net realized capital gains. Income from operations decreased from $118.2 million in 1996 to $102.5 million in 1997, mainly as a result of the following factors: - - A $7.6 million decrease, to $14.7 million, in income from operations from the Company's Retirement Products and Services segment. (This is discussed in the "Retirement Products and Services Segment" section below.) - - An increase of $6.5 million, compared to 1996, in the effects of the reinsurance arrangements between the Company and its ultimate parent. - - A decrease, by approximately $9 million, in dividends from subsidiaries, as well as higher taxes and expenses in the Corporate segment. As noted above, the $21.9 million increase in net realized capital gains, from $4.8 million in 1996 to $26.7 million in 1997, was caused mainly by the December 1997 company reorganization, as a result of which the Company had a realized capital gain of $21.2 million in 1997. INCOME FROM OPERATIONS BY SEGMENT The Company's income from operations reflects the operations of its three business segments: the Retirement Products and Services segment, the Individual Insurance segment and the Corporate segment. The following table provides a summary. 40 INCOME FROM OPERATIONS BY SEGMENT* ($ IN MILLIONS)
% CHANGE ---------------------------- 1998 1997 1996 1998/1997 1997/1996 --------- --------- --------- ------------- ------------- Individual Insurance 89.1 18.0 11.5 395.0% 56.5% Retirement Products and Services 31.4 14.7 22.3 113.6% (34.1)% Corporate 4.5 69.8 84.4 (93.6)% (17.3)% --------- --------- --------- ----- ----- 125.0 102.5 118.2 22.0% (13.3)% --------- --------- --------- ----- ----- --------- --------- --------- ----- -----
*Before realized capital gains These results are discussed more fully below. RETIREMENT PRODUCTS AND SERVICES SEGMENT The Retirement Products and Services segment focuses on the savings and retirement needs of those preparing for retirement or those who have already retired. It primarily markets to upscale consumers in the U.S., selling individual and group fixed and variable annuities. Its major product lines, "Regatta" and "Futurity," are combination fixed/variable annuities. In these combination annuities, contract holders have the choice of allocating payments either to a fixed account, which provides a guaranteed rate of return, or to variable accounts. Withdrawals from the fixed account are subject to market value adjustment. In the variable accounts, the contract holder can choose from a range of investment options and styles. The return depends upon investment performance of the options selected. Investment funds available under Regatta are managed by 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 these 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 distributed through a dedicated wholesaler network, including Sun Life of Canada (US) Distributors, Inc., that services similar distribution channels. Although new pension products are not currently sold, there has been a substantial block of group retirement business in-force, including guaranteed investment contracts ("GICs"), pension plans and group annuities. A significant portion of these pension contracts are non-surrenderable, with the result that the Company's liquidity exposure is limited. GICs were marketed directly in the U.S. through independent managers. In 1997, the Company decided to no longer market group pension and GIC products. Following are the major factors affecting the Retirement Products and Services segment results compared to the prior year. 1998 COMPARED TO 1997: - - A SHIFTING PATTERN IN SALES. Annuity deposits declined by about $27 million, or 1%, to $2.2 billion in 1998. Fixed annuity account deposits were lower by approximately 7% in 1998, while deposits into variable annuity accounts have been increasing in total and as a proportion of total annuity deposits. These trends reflected market conditions and competitive factors. Deposits into the Dollar Cost Averaging (DCA) programs, a feature of the Company's combination fixed/variable annuity products, were a significant element of account deposits. Under these programs, which were redesigned in late 1996, deposits are made into the fixed portion of the annuity contract and receive a bonus rate of interest for the policy year. During the year, the fixed deposit is systematically transferred to the variable portion of the contract in equal periodic installments. DCA deposits overall were flat in 1998 compared to 1997. This pattern resulted, in part, from heightened competition, as other companies introduced similar DCA programs within the 41 past year. During the 4th quarter of 1998, the Company introduced a higher DCA rate and a new six-month DCA program. DCA deposits for that quarter were higher, compared to the preceding 1998 quarters. An increase in variable account deposits in 1998 reflected both the continuing strong growth in equity markets generally and the continuing strong performance of the investment funds underlying the Company's variable annuity products. The continuing strong equity markets, low interest rate environment, and demographic trends, among other factors, have increased the demand and market for wealth accumulation products in the U.S., particularly for variable annuities. These factors have contributed to the growth in the Company's variable account deposits in 1998, despite heightened competition. The Company introduced its Futurity line of products in February 1998. Related deposits represented about 6% of the total for the Retirement Products and Services segment in 1998, reflecting this recent introduction. The Company expects that sales for the Futurity product will continue to increase in the future, based on its 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 respond favorably to future introductions of new Futurity products and product enhancements. - - HIGHER FEE INCOME RESULTING FROM HIGHER VARIABLE ANNUITY ACCOUNT BALANCES. The main factors driving this growth in account balances have been market appreciation and net deposit activity. This growth has generated corresponding increases in fee income, since fees are determined based on the average assets held in these accounts. Fee income increased by approximately $43 million, or 39%, in 1998. - - WHILE THERE HAS BEEN A SHIFT TO VARIABLE ACCOUNTS FROM THE GENERAL ACCOUNT, NET INVESTMENT INCOME HAS DECLINED. Net investment income reflects only income earned on invested assets of the general account. In 1998, net investment income for the Retirement Products and Services segment decreased by about $40 million, or 20%, compared to 1997, mainly as a result of the decline in average invested assets in the Company's general account. This decline in average general account assets mainly reflected the shift in deposits in recent years from the fixed account to variable accounts. It also reflected the Company's decision in 1997 to no longer market group pension and GIC products. - - LOWER POLICYHOLDER BENEFITS, MAINLY REFLECTING LOWER SURRENDER ACTIVITY COMPARED TO 1997. During 1997 and into the first half of 1998, surrender and withdrawal activity was high. This activity primarily related to a block of separate account contracts that had been issued seven or more years previously and for which the surrender charge periods had expired. While variable account surrenders have continued to rise, general account surrenders have declined. As a result of this pattern of activity, policyholder benefits (of which surrenders and withdrawals, the related changes in the liability for premium and other deposit funds, and related separate account transfers are the major elements) increased in 1997 and were lower in 1998. The company expects that as the separate account block of business continues to grow, and as a higher proportion of it is no longer subject to surrender charges, surrenders will tend to increase. - - INVESTMENTS IN TECHNOLOGY AND INFRASTRUCTURE TO ENHANCE ANNUITY OPERATIONS. As a result of these investments, operational expenses increased by approximately $12 million, or 25%, in 1998 compared to 1997. These increases reflected three main factors: (1) Higher volumes of annuity business, requiring greater administrative support. The Company expects that increases in the volume of its annuity business will continue to have a similar effect on expenses in the near term. (2) Improvements to the computer systems and technology that support the annuity business. These improvements involved information systems supporting the growth of the Company's in-force business, particularly its combination fixed/variable annuities. The Company expects to continue to invest in its systems and technology in the future. The extent and nature of these investments will depend on the Company's assessments of the relative costs and benefits of given projects. 42 (3) Costs associated with the product design and implementation of the new Futurity multi-manager annuity product and the development of a new product within the Regatta product line. The Company expects to continue to invest in further product enhancements in the future. 1997 COMPARED TO 1996: - - STRONG FIXED ACCOUNT DEPOSITS. Fixed account deposits in 1997 were approximately $650 million, or 240%, higher than in 1996. This increase resulted mainly from the Company's redesign of its DCA programs in late 1996. The Company benefited at the time from the popularity of its DCA program features and from the absence of major competitors offering similar features. - - IN 1997, VARIABLE ANNUITY DEPOSITS WERE ABOUT $200 MILLION, OR 16%, LOWER THAN IN 1996. THIS TREND REFLECTED HEIGHTENED COMPETITION, UNCERTAINTIES IN THE MARKETPLACE REGARDING THE ATTRACTIVENESS OF VARIABLE ANNUITIES, AND CUSTOMER PREFERENCES FOR DEPOSITING INTO THE DCA PROGRAMS RATHER THAN DIRECTLY INTO THE VARIABLE ACCOUNTS. - - HIGHER FEE INCOME RESULTING FROM HIGHER VARIABLE ANNUITY ACCOUNT BALANCES. The main factors driving this growth in account balances were market appreciation and net deposit activity. This growth generated corresponding increases in fee income, since fees are determined based on the average assets held in these accounts. - - DECLINING GENERAL ACCOUNT BALANCES, RESULTING IN DECLINING NET INVESTMENT INCOME. In 1997, net investment income for the Retirement Products and Services segment decreased by about 16%, mainly as a result of a decline in average invested assets in the Company's general account. This decline in average general account assets mainly reflected the Company's decision in 1997 to no longer market group pension and GIC products. - - HIGHER POLICYHOLDER BENEFITS, MAINLY REFLECTING HIGH SURRENDER ACTIVITY IN 1997. As noted above, surrender and withdrawal activity was high in 1997. This activity primarily related to a block of separate account contracts that had been issued seven or more years previously and for which the surrender charge period had expired. As a result of this pattern of activity, policyholder benefits (of which surrenders and withdrawals, the related changes in the liability for premium and other deposit funds, and related separate account transfers are the major elements) were unusually high in 1997 compared to 1996. - - HIGHER COMMISSIONS. Commissions increased by approximately $22 million, or 20%, in 1997, directly reflecting higher sales of combination fixed/variable annuity products in 1997 compared to 1996. - - HIGHER OPERATIONAL EXPENSES. Operational expenses increased by approximately $5 million, or 13%, as a result of the additional staffing needed to administer higher volumes of business and because of non-recurring costs of moving the Retirement Products and Services operations to a new facility. INDIVIDUAL INSURANCE SEGMENT The Individual Insurance segment comprises two main elements, internal reinsurance and variable life products. INTERNAL REINSURANCE In recent years, the Company has had various reinsurance agreements with its ultimate parent, Sun Life (Canada). In some of these arrangements, Sun Life (Canada) has reinsured the mortality risks of individual life policies sold in prior years by the Company. In another agreement, which became effective January 1, 1991 and terminated October 1, 1998, the Company reinsured certain individual life insurance contracts issued by Sun Life (Canada). The latter agreement had a significant effect on net income in both 1997 and 1998. The former agreements, in the aggregate, also affected net income in those years, but to a much lesser extent. The effects of these agreements on the Company's net income are summarized in the following table. 43 INTERNAL REINSURANCE-EFFECT ON INCOME FROM OPERATIONS BEFORE INCOME TAXES ($ IN MILLIONS)
1998 1997 1996 --------- --------- --------- 1991 Agreement Effect on operations $ 24.6 $ 37.1 $ 35.2 Effect of termination 65.7 Other Agreements Effect on operations (2.1) (1.4) (1.6) --------- --------- --------- Total $ 88.2 $ 35.7 $ 33.6 --------- --------- --------- --------- --------- ---------
Because the 1991 agreement was in effect only through the first nine months of 1998, related net income was correspondingly lower in 1998 than in 1997. Also contributing to the lower 1998 net income from operations from this agreement were proportionately higher death claims in 1998. The effect of terminating this agreement was to further increase 1998 net income by $65.7 million. Neither the net income effect of this agreement's operations nor that of its termination will recur. The termination-related increase in 1998 represents a reasonable approximation of the value of the stream of future earnings that the agreement would have generated had it not been terminated. VARIABLE LIFE PRODUCTS This business includes the sale of individual variable life insurance products, primarily the Company's variable universal life product for the company-owned life insurance ("COLI") market. This product was introduced in late 1997. The Company expects the variable life business to grow and become more significant in the future. CORPORATE SEGMENT This segment includes the capital of the Company, its investments in subsidiaries and items not otherwise attributable to either the Retirement Products and Services and Individual Insurance segments. In 1998, income from operations decreased by $65.3 million to $4.5 million for this segment. This decrease reflected two main factors: - Dividends from subsidiaries were lower than in 1997 by $37.5 million. This decrease mainly resulted from a December 1997 reorganization, in which the Company transferred its ownership of MFS to its parent company. As a result of this reorganization, the Company received no dividends from MFS in 1998. By comparison, it received $33.1 million of MFS dividends in 1997. - Net investment income other than dividends from subsidiaries, was lower than in 1997 by $5.9, reflecting the effect of the Company's December 1997 issuance of a $250 million surplus note to its upstream holding company. Interest expense exceeded investment earnings on the related funds. In 1997, income from operations for this segment decreased by $14.6 million to $69.8 million. This decrease mainly reflected a decrease, by approximately $9 million, in dividends from subsidiaries. It also reflected higher taxes and expenses. FINANCIAL CONDITION AND LIQUIDITY ASSETS The Company's total assets comprise those held in its general account and those held in its separate accounts. General account assets support general account liabilities. Separate accounts and their assets are of two main types: - Those assets held in a "fixed" separate account, which the Company established for amounts that contract holders allocate to the fixed portion of their combination fixed/variable deferred annuity contracts. Fixed separate account assets are available to fund general account liabilities and general account assets are available to fund the liabilities of this fixed separate account. The 44 Company manages the assets of this fixed separate account according to general account investment policy guidelines. - Those assets held in a number of registered and non-registered "variable" separate accounts as investment vehicles for the Company's variable life and annuity contracts. Policyholders may choose from among various investment options offered under these contracts according to their individual needs and preferences. Policyholders assume the investment risks associated with these choices. General account and fixed separate account assets are not available to fund the liabilities of these variable accounts. The following table summarizes significant changes in asset balances during 1998 and 1997. The changes are discussed below.
ASSETS % CHANGE 1998 1997 1996 1998/1997 1997/1996 ---------- ---------- ---------- ------------ ------------ ($ IN MILLIONS) General account assets $ 2,932.2 $ 4,513.5 $ 4,593.9 (35.0)% (1.75)% Fixed separate account assets 2,195.6 2,343.9 2,108.8 (6.3)% 11.15% ---------- ---------- ---------- ------ ------ $ 5,127.8 $ 6,857.4 $ 6,702.7 (25.2)% 2.31% Variable separate account assets 11,774.8 9,068.0 6,919.2 29.9% 31.06% ---------- ---------- ---------- ------ ------ Total assets $ 16,902.6 $ 15,925.4 $ 13,621.9 6.1% 16.91% ---------- ---------- ---------- ------ ------ ---------- ---------- ---------- ------ ------
General account and fixed separate account assets, taken together, decreased by 25% in 1998; but variable separate account assets increased by 30% that year. In 1997, growth in the general account and fixed separate account was low; variable separate account assets increased by 31%. This growth in variable accounts relative to the general and fixed accounts reflects two main factors: appreciation of the funds held in the variable separate accounts has exceeded that of the funds held in the general and fixed separate accounts; and annuity deposits into variable accounts have increased, while annuity deposits into fixed accounts have slowed. The Company believes this pattern has reflected a shift in the preferences of policyholders, which is largely attributable to the strong performance of equity markets in general and of the Company's variable account funds in particular. The assets of the general account are available to support general account liabilities. For management purposes, it is the Company's practice to segment its general account to facilitate the matching of assets and liabilities. General account assets primarily comprise cash and invested assets, which represented 98.7% of general account assets at year-end 1998. Major types of invested asset holdings included bonds, mortgages, real estate and common stock. The Company's bond holdings comprised 60.9% of the Company's portfolio at year-end 1998. Bonds included both public and private issues. It is the Company's policy to acquire only investment-grade securities. As a result, the overall quality of the bond portfolio is high. At year-end 1998, only 5.3% were rated below-investment-grade; i.e., they had National Association of Insurance Commissioners ("NAIC") ratings lower than "1" or "2." The Company's mortgage holdings amounted to $535.0 million at year-end 1998, representing 18.5% of the total portfolio. All mortgage holdings at year-end 1998 were in good standing. The Company believes that the high quality of its mortgage portfolio is largely attributable to its stringent underwriting standards. At year-end 1998, investment real estate amounted to $78.0 million, representing about 2.7% of the total portfolio. The Company invests in real estate to enhance yields and, because of the long-term nature of these investments, the Company uses them for purposes of matching with products having long-term liability durations. Common stock holdings amounted to $128.4 million, representing about 4.4% of the portfolio. These holdings comprised the Company's ownership shares in subsidiaries. Other general account assets decreased by $1,021.4 million in 1998. This change primarily reflected the effect of terminating the internal reinsurance agreement with the Company's ultimate parent, discussed in "Internal Reinsurance," above. 45 LIABILITIES As with assets, the proportion of variable separate account liabilities to total liabilities has been increasing. Most of the Company's liabilities comprise reserves for life insurance and for annuity contracts and deposit funds. The Company expects the declining trend in general account liabilities to continue, because it believes that net maturities will continue to exceed sales for the fixed contracts associated with these liabilities. This trend stems mainly from the Company's 1997 decision to discontinue selling group pension and GIC contracts and to focus its marketing efforts on its combination fixed/variable annuity products. In December 1997, the Company borrowed $110.0 million from Sun Life Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("U.S. Holdco"), an upstream holding company. The Company repaid this note during the first quarter of 1998. The termination of the internal reinsurance agreement discussed above resulted in a $1.0 billion decrease in liabilities as compared to 1997. CAPITAL MARKETS RISK MANAGEMENT See "Quantitative and Qualitative Disclosures About Market Risk," below for a discussion of the Company's capital markets risk management. CAPITAL RESOURCES CAPITAL ADEQUACY The National Association of Insurance Commissioners ("NAIC") adopted regulations at the end of 1993 that established minimum capitalization requirements for insurance companies, based on risk-based capital ("RBC") formulas. These requirements are intended to identify undercapitalized companies, so that specific regulatory actions can be taken on a timely basis. The RBC formula for life insurance companies sets 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 1998. LIQUIDITY The Company's liquidity requirements are generally met by funds from operations. The Company's main uses of funds are to pay out death benefits and other maturing insurance and annuity contract obligations; to make pay-outs on contract terminations; to purchase new investments; to fund new business ventures; and to pay normal operating expenditures and taxes. The Company's main sources of funds are premiums and deposits on insurance and annuity products; proceeds from the sale of investments; income from investments; and repayments of investment principal. In managing its general account and fixed separate account assets in relation to its liabilities, the Company has segmented these assets by product or by groups of products. The Company manages each segment's assets based on an investment policy that it has established for that segment. Among other matters, this investment policy considers liquidity requirements and provides cash flow estimates. The Company reviews these policies quarterly. The Company's liquidity targets are intended to enable it to meet its day-to-day cash requirements. On a quarterly basis, the Company compares its total "liquifiable" assets to its total demand liabilities. Liquifiable assets comprise cash and assets that could quickly be converted to cash should the need arise. These assets include short-term investments and other current assets and investment-grade bonds. The Company's policy is to maintain a liquidity ratio in excess of 100%, and it did so throughout 1998. Based on its ongoing liquidity analyses, the Company believes that its available liquidity is more than sufficient to meet its liquidity needs. 46 DEMUTUALIZATION On January 27, 1998, SLOC announced that its Board of Directors requested management world-wide to develop a plan to convert from a mutual life insurance company into a publicly traded stock company through demutualization worldwide. Management has put in place a full time task force which, together with a worldwide team of actuarial, financial and legal advisers, has begun work. The Board will decide later this year whether to proceed with demutualization, following the completion of the plan. Demutualization would require regulatory and policyholder approval. Based on information known to date, the potential demutualization of SLOC is not expected to have any significant impact on the Company. YEAR 2000 COMPLIANCE During the fourth quarter of 1996, the Company, Sun Life (Canada) 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 works with dedicated personnel from all business units and with the legal and audit departments, reports directly to the Company's senior management on a monthly basis. In addition, the Company's Year 2000 project is periodically reviewed by internal and external auditors. To date, relevant systems have been identified and their components inventoried, needed resolutions have been documented, timelines and project plans have been developed, remediation and testing are in process. Over 90% of the components have been remediated and tested and are certified as Year 2000 compliant. The majority of the remaining components are in the testing phase and are expected to be certified over the course of 1999. In mid-1997, the project team contacted all key vendors to obtain either their certification for the products and services provided or their plan to make those products and services compliant. Approximately 95% of these vendors have responded, and the project team has reviewed the responses and validated and conducted tests with the vendors where appropriate. In addition, the project team continues to work with critical business partners, such as third-party administrators, investment property managers, investment mortgage correspondents, and others, with the goal that these partners will continue to be able to support the Company's objective of assuring Year 2000 compliance. Non-IT applications, including building security, HVAC systems, and other such systems will be tested. Compliant client server and mainframe environments have been built which 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 current production. Although the Company expects all critical systems to be Year 2000 compliant before the end of 1999, there can be no assurance that this result will be completely achieved. Factors giving rise to this uncertainty include possible loss of technical resources to perform the work, failure to identify all susceptible systems, non-compliance by third-parties whose systems and operations affect the Company, and other similar uncertainties. A possible worst-case scenario might include one or more of the Company's significant systems being non-compliant. Such a scenario could result in material disruption to the Company's operations. Consequences of such disruptions could include, among other possibilities, the inability to update customers' accounts, process payments and other financial transactions; and report accurate data to management, customers, 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 a material 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 failure to achieve planned Year 2000 compliance, the Company has established contingency planning at the business unit and corporate levels. Each business unit has ranked its applications as being of high, medium or low business risk to ensure that the most critical are addressed first. The 47 business units also have developed alternate plans of action where possible, and established dates for the alternate plans to be enacted. On the corporate level, the Company is in the process of enhancing its business continuation plan, by identifying minimum requirements for facilities, computing, staffing, and other factors; and it is developing a plan to support those requirements. As of December 31, 1998, the Company expended, cumulatively, approximately $4.2 million on its Year 2000 effort, and it expects to incur a further $1.3 million on this effort in 1999. SALE OF SUBSIDIARY In February 1999, the Company completed the sale of its wholly-owned subsidiary, Massachusetts Casualty Insurance Company (MCIC) to Centre Solutions (U.S) Limited, a wholly-owned subsidiary of Centre Reinsurance Holdings, Limited for approximately $34 million. MCIC sold individual disability insurance throughout the U.S. This transaction is not expected to have a significant effect on the operations of the Company QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This discussion covers market risks associated with investment portfolios that support the Company's general account liabilities. This discussion does not cover market risks associated with those investment portfolios that support separate account products. For these products, the policyholder, rather than the Company, assumes these market risks. GENERAL The assets of the general account are available to support general account liabilities. For purposes of managing these assets in relation to these liabilities, the company notionally segments these assets by product or by groups of products. The Company manages each segment's assets based on an investment policy that it has established for that segment. The policy covers the segment's liability characteristics and liquidity requirements, provides cash flow estimates, and sets targets for asset mix, duration, and quality. Each quarter, investment and business unit managers review these policies to ensure that the policies remain appropriate, taking into account each segment's liability characteristics. TYPES OF MARKET RISKS The Company's stringent underwriting standards and practices have resulted in high-quality portfolios and have the effect of limiting credit risk. It is the Company's policy, for example, not to purchase below-investment-grade securities. Also, as a matter of investment policy, the Company assumes no foreign currency or commodity risk; nor does it assume equity price risk except to the extent that it holds real estate in its portfolios. (At year-end 1998, investment real estate holdings represented approximately 3% of its total general account portfolio.) The management of interest rate risk exposure is discussed below. INTEREST RATE RISK MANAGEMENT The Company's fixed interest rate liabilities are primarily supported by well diversified portfolios of fixed interest investments. They are also supported by holdings of real estate and floating rate notes. All of these fixed interest investments are held for other than trading purposes and can include publicly issued and privately placed bonds and commercial mortgage loans. Public bonds can include Treasury bonds, corporate bonds, and money market instruments. The Company's fixed income portfolios also hold securitized assets, including mortgage-backed securities (MBS) and asset-backed securities. These securities are subject to the same standards applied to other portfolio investments, including relative value criteria and diversification guidelines. In portfolios backing interest-sensitive liabilities, the Company's policy is to limit MBS holdings to less than 10% of total portfolio assets. In all portfolios, the Company restricts MBS investments to pass-through securities issued by U.S. government agencies and to collateralized mortgage obligations, which are expected to exhibit relatively low volatility. The Company does not engage in 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. 48 Changes in the level of domestic interest rates affect the market value of fixed interest assets and liabilities. Segments whose liabilities mainly arise from the sale of products containing interest rate guarantees for certain terms are sensitive to changes in interest rates. In these segments, the Company uses "immunization" strategies, which are specifically designed to minimize the loss from wide fluctuations in interest rates. The Company supports these strategies using analytical and modeling software acquired from outside vendors. Significant features of the Company's immunization models include: - an economic or market value basis for both assets and liabilities; - an option pricing methodology; - the use of effective duration and convexity to measure interest rate sensitivity; - the use of "key rate durations" to estimate interest rate exposure at different parts of the yield curve and to estimate the exposure to non-parallel shifts in the yield curve. The Company's Interest Rate Risk Committee meets monthly. After reviewing duration analyses, market conditions and forecasts, the Committee develops specific asset management strategies for the interest-sensitive portfolios. These strategies may involve managing to achieve small intentional mismatches, either in terms of total effective duration or for certain key rate durations, between the liabilities and related assets of particular segments. The Company manages these mismatches to a tolerance range of plus or minus 0.5. Asset strategies may include the use of Treasury futures or interest rate swaps to adjust the duration profiles for particular portfolios. All derivative transactions are conducted under written operating guidelines and are marked to market. Total positions and exposures are reported to the Board of Directors on a monthly basis. The counterparties to hedging transactions are major highly rated financial institutions, with respect to which the risk of the Company's incurring losses related to credit exposures is considered remote. Liabilities categorized as financial instruments and held in the Company's general account at December 31, 1998 had a fair value of $1,538.3 million. Fixed income investments supporting those liabilities had a fair value of $2,710.1 million at that date. The Company performed a sensitivity analysis on these interest-sensitive liabilities and assets at December 31, 1998. The analysis showed that if there were an immediate increase of 100 basis points in interest rates, the fair value of the liabilities would show a net decrease of $46.3 million and the corresponding assets would show a net decrease of $113.2 million. By comparison, liabilities categorized as financial instruments and held in the Company's general account at December 31, 1997 had a fair value of $1,986.4 million. Fixed income investments supporting those liabilities had a fair value of $3,276.2 million at that date. The Company performed a sensitivity analysis on these interest-sensitive liabilities and assets at December 31, 1997. 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 $56.0 million and the corresponding assets would show a net decrease of $108.0 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. 49 Based on its processes for analyzing and managing interest rate risk, the Company believes its exposure to interest rate changes will not materially affect its near-term financial position, results of operations, or cash flows. REINSURANCE The Company has agreements with Sun Life (Canada) which provide that Sun Life (Canada) will reinsure the mortality risks of the individual life insurance contracts previously sold by the Company. Under these agreements, basic death benefits and supplementary benefits are reinsured on a yearly renewable term basis and coinsurance basis, respectively. Reinsurance transactions under these agreements in 1998 had the effect of decreasing net income from operations by $2,128,000. Effective January 1, 1991 the Company entered into an agreement with Sun Life (Canada) under which certain individual life insurance contracts issued by Sun Life (Canada) were reinsured by the Company on a 90% coinsurance basis. Also effective January 1, 1991 the Company entered into an agreement with Sun Life (Canada) which provides that Sun Life (Canada) will reinsure the mortality risks in excess of $500,000 per policy for the individual life insurance contracts assumed by the Company in the reinsurance agreement described above. Death benefits are reinsured on a yearly renewable term basis. The life reinsurance assumed agreement requires the reinsurer to withhold funds in an amount equal to the reserves assumed. The Company terminated these agreements, effective October 1, 1998, resulting in an increase in income from operations by approximately $65,679,000 which included a cash settlement. The Company has also executed reinsurance agreements with unaffiliated companies. These agreements provide reinsurance of certain individual life insurance contracts on a modified coinsurance basis under which all deficiency reserves are ceded; as well as reinsurance for variable universal life on a yearly renewable term basis for which the Company has a maximum retention of $2,000,000. RESERVES In accordance with the life insurance laws and regulations under which the Company operates, it is obligated to carry on its books, as liabilities, actuarially determined reserves to meet its obligations on its outstanding contracts. Reserves are based on mortality tables in general use in the United States and are computed to equal amounts that, with additions from premiums to be received, and with interest on such reserves compounded annually at certain assumed rates, will be sufficient to meet the Company's policy obligations at their maturities or in the event of an insured's death. In the accompanying Financial Statements, these reserves are determined in accordance with statutory regulations. INVESTMENTS Of the Company's total assets of $16.9 billion at December 31, 1998, 82.7% ($13.98 billion) consisted of unitized and non-unitized separate account assets, 10.4% ($1.76 billion) was invested in bonds and similar securities, 3.2% ($541 million) was invested in mortgages, 0.7% ($118.3 million) was invested in subsidiaries, 0.6% ($101.4 million) was invested in real estate, and the remaining 2.4% ($405.6 million) was invested in cash and other assets. COMPETITION The Company is engaged in a business that is highly competitive because of the large number of stock and mutual life insurance companies and other entities marketing insurance products. According to a 1998 statistical study published by A.M. Best, the Company ranked 37th among all life insurance companies in the United States based upon total assets as of December 31, 1997. Its ultimate parent company, Sun Life (Canada), ranked 21st. EMPLOYEES The Company and Sun Life (Canada) have entered into a service agreement which provides that the latter will furnish the Company, as required, with personnel as well as certain services and facilities 50 on a cost reimbursement basis. As of March 31, 1999, the Company had 392 direct employees who are employed at its Principal Executive Office in Wellesley Hills, Massachusetts and at its Retirement Products and Services Division in Boston, Massachusetts. PROPERTIES The Company occupies office space owned by it and leased to Sun Life (Canada), and certain unrelated parties for lease terms not exceeding five years. Rent received by the Company under the leases amounted to approximately $6,856,000 in 1998.The Company also occupies office space which it leases from unaffiliated parties for various lease terms. STATE REGULATION The Company is subject to the laws of the State of Delaware governing life insurance companies and to regulation by the Commissioner of Insurance of Delaware. An annual statement is filed with the Commissioner of Insurance on or before March lst in each year relating to the operations of the Company for the preceding year and its financial condition on December 31st of such year. Its books and records are subject to review or examination by the Commissioner or his agents at any time and a full examination of its operations is conducted at periodic intervals. The Company is also subject to the insurance laws and regulations of the other states and jurisdictions in which it is licensed to operate. The laws of the various jurisdictions establish supervisory agencies with broad administrative powers with respect to licensing to transact business, overseeing trade practices, licensing agents, approving policy forms, establishing reserve requirements, fixing maximum interest rates on life insurance policy loans and minimum rates for accumulation of surrender values, prescribing the form and content of required financial statements and regulating the type and amounts of investments permitted. Each insurance company is required to file detailed annual reports with supervisory agencies in each of the jurisdictions in which it does business and its operations and accounts are subject to examination by such agencies at regular intervals. In addition, many states regulate affiliated groups of insurers, such as the Company, its parent and its affiliates, under insurance holding company legislation. Under such laws, inter-company transfers of assets and dividend payments from insurance subsidiaries may be subject to prior notice or approval, depending on the size of such transfers and payments in relation to the financial positions of the companies involved. Under insurance guaranty fund laws in most states, insurers doing business therein can be assessed (up to prescribed limits) for policyholder losses incurred by insolvent companies. The amount of any future assessments of the Company under these laws cannot be reasonably estimated. However, most of these laws do provide that an assessment may be excused or deferred if it would threaten an insurer's own financial strength and many permit the deduction of all or a portion of any such assessment from any future premium or similar taxes payable. Although the federal government generally does not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures which may significantly affect the insurance business include employee benefit regulation, removal of barriers preventing banks from engaging in the insurance business, tax law changes affecting the taxation of insurance companies, the tax treatment of insurance products and its impact on the relative desirability of various personal investment vehicles. LEGAL PROCEEDINGS There are no pending legal proceedings affecting the Variable Account. We and our subsidiaries are engaged in various kinds of routine litigation which, in management's judgment, is not of material importance to our respective total assets or material with respect to the Variable Account. 51 ACCOUNTANTS The financial statements of the Variable Account for the year ended December 31, 1998 included in the Statement of Additional Information and the statutory financial statements of the Company for the years ended December 31, 1998, 1997 and 1996 included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. FINANCIAL STATEMENTS The financial statements of the Company which are included in this Prospectus should be considered only as bearing on the ability of the Company to meet its obligations with respect to amounts allocated to the Fixed Account and with respect to the death benefit and the Company's assumption of the mortality and expense risks. They should not be considered as bearing on the investment performance of the Series Fund shares held in the Sub-Accounts of the Variable Account. The financial statements of the Variable Account for the year ended December 31, 1998 are included in the Statement of Additional Information. ------------------------ 52 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, 1998 AND 1997 (IN THOUSANDS)
1998 1997 ------------- ------------- ADMITTED ASSETS Bonds $ 1,763,468 $ 1,910,699 Common stocks 128,445 117,229 Mortgage loans on real estate 535,003 684,035 Properties acquired in satisfaction of debt 17,207 22,475 Investment real estate 78,021 78,426 Policy loans 41,944 40,348 Cash and short-term investments 265,226 544,418 Other invested assets 64,177 55,716 Life insurance premiums and annuity considerations due and uncollected -- 9,203 Investment income due and accrued 35,706 39,279 Federal income tax recoverable and interest thereon 1,110 -- Receivable from parent, subsidiaries and affiliates -- 27,136 Funds withheld on reinsurance assumed -- 982,653 Other assets 1,928 1,842 ------------- ------------- General account assets 2,932,235 4,513,459 Separate account assets: Unitized 11,774,745 9,068,021 Non-unitized 2,195,641 2,343,877 ------------- ------------- Total Admitted Assets $ 16,902,621 $ 15,925,357 ------------- ------------- ------------- ------------- LIABILITIES Aggregate reserve for life policies and contracts $ 1,216,107 $ 2,188,243 Supplementary contracts 1,885 2,247 Policy and contract claims 369 2,460 Provision for policyholders' dividends and coupons payable -- 32,500 Liability for premium and other deposit funds 1,000,875 1,450,705 Surrender values on cancelled policies 5 215 Interest maintenance reserve 40,490 33,830 Commissions to agents due or accrued 2,615 2,826 General expenses due or accrued 5,932 6,238 Transfers from Separate Accounts due or accrued (361,863) (284,078) Taxes, licenses and fees due or accrued, excluding FIT 401 105 Federal income taxes due or accrued 25,019 56,384 Unearned investment income 23 34 Amounts withheld or retained by company as agent or trustee 529 47 Remittances and items not allocated 5,176 1,363 Borrowed money -- 110,142 Asset valuation reserve 44,392 47,605 Payable to parent, subsidiaries, and affiliates 30,381 -- Payable for securities 428 27,104 Other liabilities 9,770 2,924 ------------- ------------- General account liabilities 2,022,534 3,680,894 Separate account liabilities: Unitized 11,774,522 9,067,891 Non-unitized 2,195,641 2,343,877 ------------- ------------- Total liabilities 15,992,697 15,092,662 ------------- ------------- CAPITAL STOCK AND SURPLUS Common capital stock 5,900 5,900 ------------- ------------- Surplus notes 565,000 565,000 Gross paid in and contributed surplus 199,355 199,355 Unassigned funds 139,669 62,440 ------------- ------------- Surplus 904,024 826,795 ------------- ------------- Total common capital stock and surplus 909,924 832,695 ------------- ------------- Total Liabilities, Capital Stock and Surplus $ 16,902,621 $ 15,925,357 ------------- ------------- ------------- -------------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS. 53 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) STATUTORY STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN 000'S)
1998 1997 1996 ---------- ---------- ---------- INCOME: Premiums and annuity considerations $ 210,198 $ 254,066 $ 266,942 Deposit-type funds 2,140,604 2,155,297 1,775,230 Considerations for supplementary contracts without life contingencies and dividend accumulations 2,086 1,615 2,340 Net investment income 184,532 270,249 303,753 Amortization of interest maintenance reserve 2,282 1,166 1,557 Income from fees associated with investment management and administration and contract guarantees from Separate Account 141,211 109,757 83,278 Net gain from operations from Separate Account -- 5 -- Other income 87,364 102,889 87,532 ---------- ---------- ---------- Total 2,768,277 2,895,044 2,520,632 ---------- ---------- ---------- BENEFITS AND EXPENSES: Death benefits 15,335 17,284 12,394 Annuity benefits 153,636 148,135 146,654 Disability benefits and benefits under accident and health policies 104 132 105 Surrender benefits and other fund withdrawals 1,933,833 1,854,004 1,507,263 Interest on policy or contract funds (140) 699 2,205 Payments on supplementary contracts without life contingencies and dividend accumulations 2,528 1,687 2,120 Increase (decrease) in aggregate reserves for life and accident and health policies and contracts (972,135) 127,278 162,678 Decrease in liability for premium and other deposit funds (449,831) (447,603) (392,348) Increase (decrease) in reserve for supplementary contracts without life contingencies and for dividend and coupon accumulations (362) 42 327 ---------- ---------- ---------- Total 682,968 1,701,658 1,441,398 Commissions on premiums and annuity considerations (direct business only) 137,718 132,700 109,894 Commissions and expense allowances on reinsurance assumed 13,032 17,951 18,910 General insurance expenses 58,132 46,624 37,206 Insurance taxes, licenses and fees, excluding federal income taxes 7,388 8,267 8,431 Increase (decrease) in loading on and cost of collection in excess of loading on deferred and uncollected premiums (1,663) 523 901 Net transfers to Separate Accounts 722,851 844,130 761,941 Reserve and fund adjustments on reinsurance terminated 1,017,112 -- -- ---------- ---------- ---------- Total 2,637,538 2,751,853 2,378,681 ---------- ---------- ---------- Net gain from operations before dividends to policyholders and Federal Income Taxes 130,739 143,191 141,951 Dividends to policyholders (5,981) 33,316 29,189 ---------- ---------- ---------- Net gain from operations after dividends to policyholders and before Federal Income Taxes 136,720 109,875 112,762 Federal income tax expense (benefit), (excluding tax on capital gains) 11,713 7,339 (5,400) ---------- ---------- ---------- Net gain from operations after dividends to policyholders and federal income taxes and before realized capital gains 125,007 102,536 118,162 Net realized capital gains less capital gains tax and transferred to the IMR 394 26,706 4,862 ---------- ---------- ---------- NET INCOME $ 125,401 $ 129,242 $ 123,024 ---------- ---------- ---------- ---------- ---------- ----------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS. 54 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN 000'S)
1998 1997 1996 ---------- ----------- ----------- Capital and surplus, Beginning of year $ 832,695 $ 567,143 $ 792,452 ---------- ----------- ----------- Net income 125,401 129,242 123,024 Change in net unrealized capital gains (losses) (384) 1,152 (1,715) Change in non-admitted assets and related items (1,086) (463) 67 Change in reserve on account of change in valuation basis -- 39,016 -- Change in asset valuation reserve 3,213 6,307 (11,812) Surplus (contributed to) withdrawn from Separate Accounts during period 82 -- 100 Other changes in surplus in Separate Accounts Statements 10 -- -- Change in surplus notes -- 250,000 (335,000) Dividends to stockholders (50,000) (159,722) -- Aggregate write-ins for gains and losses in surplus (7) 20 27 ---------- ----------- ----------- Net change in capital and surplus for the year 77,229 265,552 (225,309) ---------- ----------- ----------- Capital and surplus, End of year $ 909,924 $ 832,695 $ 567,143 ---------- ----------- ----------- ---------- ----------- -----------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS. 55 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) STATUTORY STATEMENTS OF CASH FLOW YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
1998 1997 1996 ----------- ----------- ----------- Cash Provided by Operations: Premiums, annuity considerations and deposit funds received $ 2,361,669 $ 2,410,919 $ 2,059,577 Considerations for supplementary contracts and dividend accumulations received 2,086 1,615 2,340 Net investment income received 236,944 345,279 324,914 Other income received 253,147 208,223 88,295 ----------- ----------- ----------- Total receipts 2,853,846 2,966,036 2,475,126 ----------- ----------- ----------- Benefits paid (other than dividends) 2,107,736 2,020,747 1,671,483 Insurance expenses and taxes paid (other than federal income and capital gains taxes) 217,023 203,650 172,015 Net cash transferred to Separate Accounts 800,636 895,465 755,605 Dividends paid to policyholders 26,519 28,316 22,689 Federal income tax payments (recoveries),(excluding tax on capital gains) 46,965 1,397 (15,363) Other--net (138) 698 2,205 ----------- ----------- ----------- Total payments 3,198,741 3,150,273 2,608,634 ----------- ----------- ----------- Net cash used in operations (344,895) (184,237) (133,508) ----------- ----------- ----------- Proceeds from long-term investments sold, matured or repaid (after deducting taxes on capital gains of $2,038 for 1998, $750 for 1997 and $1,555 for 1996) 1,261,396 1,343,803 1,768,147 Issuance (repayment) of surplus notes -- 250,000 (335,000) Other cash provided (used) (40,529) 71,095 147,956 ----------- ----------- ----------- Total cash provided 1,220,867 1,664,898 1,581,103 ----------- ----------- ----------- Cash Applied: Cost of long-term investments acquired (967,901) (773,783) (1,318,880) Other cash applied (187,263) (310,519) (177,982) ----------- ----------- ----------- Total cash applied (1,155,164) (1,084,302) (1,496,862) Net change in cash and short-term investments (279,192) 396,359 (49,267) Cash and short-term investments: Beginning of year 544,418 148,059 197,326 ----------- ----------- ----------- End of year $ 265,226 $ 544,418 $ 148,059 ----------- ----------- ----------- ----------- ----------- -----------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS. 56 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL Sun Life Assurance Company of Canada (U.S.) (the "Company") is incorporated as a life insurance company and is currently engaged in the sale of individual variable life insurance, individual fixed and variable annuities, group fixed and variable annuities and group pension contracts. Effective May 1, 1997, the Company became a wholly-owned subsidiary of the newly established Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On December 18, 1997, Life Holdco became a wholly-owned subsidiary of the Sun Life Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("US Holdco"). US Holdco is a wholly-owned subsidiary of Sun Life Assurance Company of Canada ("SLOC"). Prior to December 18, 1997, Life Holdco was a direct wholly-owned subsidiary of SLOC. The Company, which is domiciled in the State of Delaware, prepares its financial statements in accordance with statutory accounting practices prescribed or permitted by the State of Delaware Insurance Department. Prescribed accounting practices include practices described in a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations and general administrative rules. Permitted accounting practices encompass all accounting practices not so prescribed. The permitted accounting practices adopted by the Company are not material to the financial statements. Prior to 1996, statutory accounting practices were recognized by the insurance industry and the accounting profession as generally accepted accounting principles for mutual life insurance companies and stock life insurance companies wholly-owned by mutual life insurance companies. In April 1993, the Financial Accounting Standards Board ("FASB") issued an interpretation (the "Interpretation"), that became effective in 1996, which changed the previous practice of mutual life insurance companies (and stock life insurance companies that are wholly-owned subsidiaries of mutual life insurance companies) with respect to utilizing statutory basis financial statements for general purposes, in that it will no longer allow such financial statements to be described as having been prepared in conformity with generally accepted accounting principles ("GAAP"). Consequently, these financial statements prepared in conformity with statutory accounting practices, as described above, vary from and are not intended to present the Company's financial position, results of operations or cash flow in conformity with generally accepted accounting principles. (See Note 20 for further discussion relative to the Company's basis of financial statement presentation.) The effects on the financial statements of the variances between the statutory basis of accounting and GAAP, although not reasonably determinable, are presumed to be material. INVESTED ASSETS Bonds are carried at cost, adjusted for amortization of premium or accrual of discount. Investments in non-insurance subsidiaries are carried on the equity basis. Investments in mortgage backed securities are generally carried at amortized cost. Changes in prepayment assumptions and resulting cash flows are evaluated periodically. The adjusted yield is used to calculate investment income in future periods. If current book value exceeds future undiscounted cash flows, a realized capital loss is recorded and amortized through IMR. Investments in insurance subsidiaries are carried at their statutory surplus values. Mortgage loans acquired at a premium or discount are carried at amortized values and other mortgage loans are carried at the amounts of the unpaid balances. Real estate investments are carried at the lower of cost, adjusted for accumulated depreciation or appraised value, less encumbrances. Short-term investments are carried at amortized cost, which approximates fair value. Depreciation of buildings and improvements is calculated using the straight-line method over the estimated useful life of the property, generally 40 to 50 years. 57 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) POLICY AND CONTRACT RESERVES The reserves for life insurance and annuity contracts, developed by accepted actuarial methods, have been established and maintained on the basis of published mortality tables using assumed interest rates and valuation methods that will provide reserves at least as great as those required by law and contract provisions. INCOME AND EXPENSES For life and annuity contracts, premiums are recognized as revenues over the premium paying period, whereas commissions and other costs applicable to the acquisition of new business are charged to operations as incurred. SEPARATE ACCOUNTS The Company has established unitized separate accounts applicable to various classes of contracts providing for variable benefits. Contracts for which funds are invested in separate accounts include variable life insurance and individual and group qualified and non-qualified variable annuity contracts. Assets and liabilities of the separate accounts, representing net deposits and accumulated net investment earnings less fees, held primarily for the benefit of contract holders, are shown as separate captions in the financial statements. Assets held in the separate accounts are carried at market value as determined by quoted market prices of the underlying investments. The Company has also established a non-unitized separate account for amounts allocated to the fixed portion of certain combination fixed/variable deferred annuity contracts. The assets of this account are available to fund general account liabilities, and general account assets are available to fund liabilities of this account. Gains (losses) from mortality experience and investment experience of the separate accounts, not applicable to contract owners, are transferred to (from) the general account. Accumulated gains (losses) that have not been transferred are recorded as a payable (receivable) to (from) the general account. Amounts payable to the general account of the Company were $361,863,000 in 1998 and $284,078,000 in 1997. CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING As described more fully in Note 10, during 1997 the Company changed certain assumptions used in determining actuarial reserves. In March 1998, the National Association of Insurance Commissioners adopted the Codification of Statutory Accounting Principles ("Codification"). The Codification, which is intended to standardize regulatory accounting and reporting for the insurance industry, is proposed to be effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices and it is uncertain when, or if, the state of Delaware will require adoption of Codification for the preparation of statutory financial statements. The Company has not finalized the quantification of the effects of Codification on its statutory financial statements. OTHER Preparation of the financial statements requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to amounts as presented in the current year. 58 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 2. INVESTMENTS IN SUBSIDIARIES The Company owns all of the outstanding shares of Sun Life Insurance and Annuity Company of New York ("Sun Life (N.Y.)"), Massachusetts Casualty Insurance Company ("MCIC"), Sun Life of Canada (U.S.) Distributors, Inc. (formerly Sun Investment Services Company) ("Sundisco"), New London Trust, F.S.B. ("NLT"), 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 Ltd. ("SLISL"). On February 5, 1999, the Company finalized the sale of MCIC, a disability insurance company which issues primarily individual disability income policies, to Centre Solutions (U.S.) Limited, a wholly-owned subsidiary of Centre Reinsurance Holdings Limited for approximately $34 million. The impact of this sale to the ongoing operations of the Company is not expected to be material. On September 28, 1998, the Company formed SLISL as an offshore technology center for the purpose of completing systems projects for affiliates. On October 30, 1997, the Company established a wholly-owned special purpose corporation, SPE 97-1, for the purpose of engaging in activities incidental to securitizing mortgage loans. On December 31, 1997, the Company purchased from Massachusetts Financial Services ("MFS") all of the outstanding shares of Clarendon, a registered broker-dealer that acts as the general distributor of certain annuity and life insurance contracts issued by the Company and its affiliates. Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares of MFS. On December 24, 1997, the Company transferred all of its shares of MFS to Life Holdco in the form of a dividend valued at $159,722,000. As a result of this transaction, the Company realized a gain of $21,195,000 of undistributed earnings. MFS, a registered investment adviser, serves as investment adviser to the mutual funds in the MFS family of funds as well as certain mutual funds and separate accounts established by the Company. The MFS Asset Management Group provides investment advice to substantial private clients. Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity contracts and group life and disability insurance contracts in the State of New York. Sundisco is a registered investment adviser and broker-dealer. NLT is a federally chartered savings bank. SLFSL serves as the marketing administrator for the distribution of the offshore products of Sun Life Assurance Company of Canada (Bermuda), an affiliate. Sun Capital is a registered investment adviser. Sunfinco and Sunbesco are currently inactive. On September 28, 1998 a $500,000 note was issued by SLISL to the Company at a rate of 6.0%, maturing on September 28, 2002. A $110,000,000 note was issued to the Company by MFS on February 11, 1998 at an interest rate of 6.0% due February 11, 1999. Another $110,000,000 note was issued to the Company by MFS on December 22, 1998 at an interest rate of 5.55% due February 11, 1999. 59 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 2. INVESTMENTS IN SUBSIDIARIES (CONTINUED) On December 23, 1997, the Company issued a $110,000,000 note to US Holdco at an interest rate of 5.80%, which was repaid on March 1, 1998. A $110,000,000 note was also issued to the Company by MFS on December 23, 1997 at an interest rate of 5.85% and was repaid on February 11, 1998. On December 31, 1996, the Company issued a $58,000,000 note to SLOC at an interest rate of 5.70% which was repaid on February 10, 1997. Also on December 31, 1996, the Company was issued a $58,000,000 note by MFS at an interest rate of 5.76%. This note was repaid to the Company on February 10, 1997. On December 31, 1998, 1997 and 1996, the Company had an additional $20,000,000 in notes issued by MFS, scheduled to mature in 2000. During 1998, 1997, and 1996, the Company contributed capital in the following amounts to its subsidiaries:
1998 1997 1996 --------- --------- --------- (IN THOUSANDS) MCIC -- $ 2,000 $ 10,000 SLFSL $ 750 1,000 1,500 SPE 97-1 -- 20,377 -- Sundisco 10,000 -- -- Sun Capital 500 -- -- Clarendon 10 -- -- SLISL 502 -- --
Summarized combined financial information of the Company's subsidiaries as of December 31, 1998, 1997 and 1996 and for the years then ended, follows:
1998 1997 1996 ------------- ------------- ------------- (IN THOUSANDS) Intangible assets $ -- $ -- $ 9,646 Other assets 1,315,317 1,190,951 1,376,014 Liabilities (1,186,872) (1,073,966) (1,241,617) ------------- ------------- ------------- Total net assets $ 128,445 $ 116,985 $ 144,043 ------------- ------------- ------------- ------------- ------------- ------------- Total revenues $ 222,853 $ 750,364 $ 717,280 Operating expenses (221,933) (646,896) (624,199) Income tax expense (1,222) (43,987) (42,820) ------------- ------------- ------------- Net income (loss) $ (302) $ 59,481 $ 50,261 ------------- ------------- ------------- ------------- ------------- -------------
On December 24, 1997, the Company transferred all of its shares of MFS to its parent, Life Holdco. 60 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 3. BONDS Investments in debt securities are as follows:
DECEMBER 31, 1998 ---------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS (LOSSES) VALUE ------------ ----------- ----------- ------------ (IN THOUSANDS) Long-term bonds: United States government and government agencies and authorities $ 140,417 $ 7,635 $ (177) $ 147,875 States, provinces and political subdivisions 16,632 2,219 -- 18,851 Public utilities 397,670 38,740 (238) 436,172 Transportation 197,207 22,481 (18) 219,670 Finance 144,958 12,542 (494) 157,006 All other corporate bonds 866,584 50,814 (6,419) 910,979 ------------ ----------- ----------- ------------ Total long-term bonds 1,763,468 134,431 (7,346) 1,890,553 ------------ ----------- ----------- ------------ Short-term bonds: U.S. Treasury Bills, bankers acceptances and commercial paper 43,400 -- -- 43,400 Affiliates 220,000 -- -- 220,000 ------------ ----------- ----------- ------------ Total short-term bonds 263,400 -- -- 263,400 ------------ ----------- ----------- ------------ Total bonds $ 2,026,868 $ 134,431 $ (7,346) $ 2,153,953 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
DECEMBER 31, 1997 ---------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS (LOSSES) VALUE ------------ ----------- ----------- ------------ (IN THOUSANDS) Long-term bonds: United States government and government agencies and authorities $ 126,923 $ 5,529 $ -- $ 132,452 States, provinces and political subdivisions 22,361 2,095 -- 24,456 Public utilities 398,939 35,338 (91) 434,186 Transportation 214,130 22,000 (390) 235,740 Finance 157,891 5,885 (120) 163,656 All other corporate bonds 990,455 52,678 (5,456) 1,037,677 ------------ ----------- ----------- ------------ Total long-term bonds 1,910,699 123,525 (6,057) 2,028,167 ------------ ----------- ----------- ------------ Short-term bonds: U.S. Treasury Bills, bankers acceptances and commercial paper 431,032 -- -- 431,032 Affiliates 110,000 -- -- 110,000 ------------ ----------- ----------- ------------ Total short-term bonds 541,032 -- -- 541,032 ------------ ----------- ----------- ------------ Total bonds $ 2,451,731 $ 123,525 $ (6,057) $ 2,569,199 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
61 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 3. BONDS (CONTINUED) The amortized cost and estimated fair value of bonds at December 31, 1998 are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call and/or prepayment penalties.
DECEMBER 31, 1998 -------------------------- AMORTIZED ESTIMATED COST FAIR VALUE ------------ ------------ (IN THOUSANDS) Maturities: Due in one year or less $ 459,631 $ 460,787 Due after one year through five years 329,625 336,516 Due after five years through ten years 264,372 283,840 Due after ten years 703,341 781,253 ------------ ------------ 1,756,969 1,862,396 Mortgage-backed securities 269,899 291,557 ------------ ------------ Total bonds $ 2,026,868 $ 2,153,953 ------------ ------------ ------------ ------------
Proceeds from sales and maturities of investments in debt securities during 1998, 1997, and 1996 were $1,016,811,000, $980,264,000, and $1,554,016,000, gross gains were $17,025,000, $10,732,000, and $16,975,000 and gross losses were $866,000, $2,446,000, and $10,885,000, respectively. Bonds included above with an amortized cost of approximately $2,572,000, $2,578,000 and $2,060,000 at December 31, 1998, 1997 and 1996, respectively, were on deposit with governmental authorities as required by law. Excluding investments in U.S. government and agencies securities, the Company is not exposed to significant concentration of credit risk in its portfolio. 4. SECURITIES LENDING The Company has a securities lending program operated on its behalf by the Company's primary custodian, Chase Manhattan Bank of New York. The custodian has indemnified the Company against losses arising from this program. There were no securities out on loan as of December 31, 1998 and 1997. Income resulting from this program was $94,000, $200,000 and $137,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 5. MORTGAGE LOANS The Company invests in commercial first mortgage loans throughout the United States. The Company monitors the condition of the mortgage loans in its portfolio. In those cases where mortgages have been restructured, appropriate allowances for losses have been made. In those cases where, in management's judgment, the mortgage loans' values are impaired, appropriate losses are recorded. 62 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 5. MORTGAGE LOANS (CONTINUED) The following table shows the geographical distribution of the mortgage loan portfolio.
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- (IN THOUSANDS) California $ 82,397 $ 119,122 Massachusetts 53,528 58,981 Michigan 34,357 42,912 New York 21,190 45,696 Ohio 36,171 51,862 Pennsylvania 93,587 97,949 Washington 36,548 54,948 All other 177,225 212,565 ---------- ---------- $ 535,003 $ 684,035 ---------- ---------- ---------- ----------
The Company has restructured mortgage loans totaling $30,743,000 and $26,284,000 at December 31, 1998 and 1997, respectively, against which there are allowances for losses of $2,120,000 and $3,026,000, respectively. The Company has made commitments of mortgage loans on real estate into the future.The outstanding commitments for these mortgages amount to $18,005,000 and $12,300,000 at December 31, 1998 and 1997, respectively. 6. INVESTMENT GAINS AND LOSSES
YEARS ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 ---------- ---------- --------- (IN THOUSANDS) Net realized gains (losses): Bonds $ 5,659 $ 2,882 $ 5,631 Common stock of affiliates -- 21,195 -- Common stocks 48 Mortgage loans 2,374 3,837 763 Real estate 955 2,912 599 Other invested assets (3,827) (717) 567 ---------- ---------- --------- Subtotal 5,209 30,109 7,560 Capital gains tax expense 4,815 3,403 2,698 ---------- ---------- --------- Total $ 394 $ 26,706 $ 4,862 ---------- ---------- --------- ---------- ---------- --------- Changes in unrealized gains (losses): Common stock of affiliates $ (302) $ (2,894) $ (5,739) Mortgage loans (1,312) 1,524 (600) Real estate 403 3,377 4,624 Other invested assets 827 (855) -- ---------- ---------- --------- Total $ (384) $ 1,152 $ (1,715) ---------- ---------- --------- ---------- ---------- ---------
63 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 6. INVESTMENT GAINS AND LOSSES (CONTINUED) Realized capital gains and losses on bonds and mortgages and interest rate swaps which relate to changes in levels of interest rates are charged or credited to an interest maintenance reserve ("IMR") and amortized into income over the remaining contractual life of the security sold. The net realized capital gains credited to the interest maintenance reserve were $8,943,000 in 1998, $6,321,000 in 1997, and $7,710,000 in 1996. All gains and losses are transferred net of applicable income taxes. 7. NET INVESTMENT INCOME Net investment income consisted of:
YEARS ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- (IN THOUSANDS) Interest income from bonds $ 167,436 $ 188,924 $ 178,695 Income from investment in common stock of affiliates 3,675 41,181 50,408 Interest income from mortgage loans 53,269 76,073 92,591 Real estate investment income 15,932 17,161 16,249 Interest income from policy loans 2,881 3,582 2,790 Other investment income (loss) (641) (193) 1,710 ---------- ---------- ---------- Gross investment income 242,552 326,728 342,443 ---------- ---------- ---------- Interest on surplus notes and notes payable (44,903) (42,481) (23,061) Investment expenses (13,117) (13,998) (15,629) ---------- ---------- ---------- Net investment income $ 184,532 $ 270,249 $ 303,753 ---------- ---------- ---------- ---------- ---------- ----------
8. DERIVATIVES The Company uses derivative instruments for interest rate risk management purposes, including hedges against specific interest rate risk and to minimize the Company's exposure to fluctuations in interest rates. The Company's use of derivatives has included U.S. Treasury futures, conventional interest rate swaps, and forward spread lock interest rate swaps. In the case of interest rate futures, gains or losses on contracts that qualify as hedges are deferred until the earliest of the completion of the hedging transaction, determination that the transaction will no longer take place, or determination that the hedge is no longer effective. Upon completion of the hedge, where it is impractical to allocate gains or losses to specific hedged assets or liabilities, gains or losses are deferred in IMR and amortized over the remaining life of the hedged assets. At December 31, 1998 and 1997 there were no futures contracts outstanding. In the case of interest rate and foreign currency swap agreements and forward spread lock interest rate swap agreements, gains or losses on terminated swaps are deferred in the IMR and amortized over the shorter of the remaining life of the hedged asset sold or the remaining term of the swap contract. The net differential to be paid or received on interest rate swaps is recorded monthly as interest rates change. 64 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 8. DERIVATIVES (CONTINUED) Options are used to hedge the stock market interest exposure in the mortality and expense risk charges and guaranteed minimum death benefit features of the Company's variable annuities. The Company's open positions are as follows:
SWAPS OUTSTANDING AT DECEMBER 31, 1998 --------------------------------- NOTIONAL MARKET VALUE PRINCIPAL AMOUNTS OF POSITIONS ------------------ ------------- (IN THOUSANDS) Conventional interest rate swaps $ 45,000 $ 508 Foreign currency swap 1,178 263
SWAPS OUTSTANDING AT DECEMBER 31, 1997 --------------------------------- NOTIONAL MARKET VALUE PRINCIPAL AMOUNTS OF POSITIONS ------------------ ------------- (IN THOUSANDS) Conventional interest rate swaps $ 80,000 $ (2,891) Foreign currency swap 1,700 208 Forward spread lock swaps 50,000 274 Asian Put Option S & P 500 75,000 693
The market value of swaps is the estimated amount that the Company would receive or pay on termination or sale, taking into account current interest rates and the current credit worthiness of the counterparties. The Company is exposed to potential credit loss in the event of nonperformance by counterparties. The counterparties are major financial institutions and management believes that the risk of incurring losses related to credit risk is remote. 9. LEVERAGED LEASES The Company is a lessor in a leveraged lease agreement entered into on October 21, 1994, under which equipment having an estimated economic life of 25-40 years was leased for a term of 9.75 years. The Company's equity investment represented 22.9% of the purchase price of the equipment. The balance of the purchase price was furnished by third-party long-term debt financing, collateralized by the equipment and non-recourse to the Company. At the end of the lease term, the Master Lessee may exercise a fixed price purchase option to purchase the equipment. 65 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 9. LEVERAGED LEASES (CONTINUED) The Company's net investment in leveraged leases is composed of the following elements:
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- (IN THOUSANDS) Lease contracts receivable $ 78,937 $ 92,605 Less non-recourse debt (78,920) (92,589) ---------- ---------- 17 16 Estimated residual value of leased assets 41,150 41,150 Less unearned and deferred income (8,932) (10,324) ---------- ---------- Investment in leveraged leases 32,235 30,842 Less fees (138) (163) ---------- ---------- Net investment in leveraged leases $ 32,097 $ 30,679 ---------- ---------- ---------- ----------
The net investment is included in "other invested assets" on the balance sheet. 10. REINSURANCE The Company has agreements with SLOC which provide that SLOC will reinsure the mortality risks of the individual life insurance contracts sold by the Company. Under these agreements basic death benefits and supplementary benefits are reinsured on a yearly renewable term basis and coinsurance basis, respectively. Reinsurance transactions under these agreements had the effect of decreasing income from operations by approximately $2,128,000, $1,381,000 and $1,603,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Effective January 1, 1991, the Company entered into an agreement with SLOC under which certain individual life insurance contracts issued by SLOC were reinsured by the Company on a 90% coinsurance basis. During 1997 SLOC changed certain assumptions used in determining the gross and the ceded reserve balance. The Company reflected the effect of the changes in assumptions to its assumed reserves as a direct credit to surplus. The effect of the change was a $39,016,000 decrease in reserves. Also, the agreement required SLOC to reinsure the mortality risks in excess of $500,000 per policy for the individual life insurance contracts assumed by the Company. Such death benefits are reinsured on a yearly renewable term basis. The life reinsurance assumed agreement required the reinsurer to withhold funds in amounts equal to the reserves assumed. These agreements had the effect of increasing income from operations by approximately $24,579,000, $37,050,000 and $35,161,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company terminated this agreement effective October 1, 1998, resulting in an increase in income from operations of $65,679,000 which included a cash settlement. 66 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 10. REINSURANCE (CONTINUED) The following are summarized pro-forma results of operations of the Company for the years ended December 31, 1998, 1997 and 1996 before the effect of reinsurance transactions with SLOC:
YEARS ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ (IN THOUSANDS) Income: Premiums, annuity deposits and other revenues $ 2,377,364 $ 2,340,733 $ 1,941,423 Net investment income and realized gains 187,208 298,120 310,172 ------------ ------------ ------------ Subtotal 2,564,572 2,638,853 2,251,595 ------------ ------------ ------------ Benefits and Expenses: Policyholder benefits 2,312,247 2,350,354 2,011,998 Other expenses 203,238 187,591 155,531 ------------ ------------ ------------ Subtotal 2,515,485 2,537,945 2,167,529 ------------ ------------ ------------ Income from operations $ 49,087 $ 100,908 $ 84,066 ------------ ------------ ------------ ------------ ------------ ------------
The Company has an agreement with an unrelated company which provides reinsurance of certain individual life insurance contracts on a modified coinsurance basis and under which all deficiency reserves related to these contracts are reinsured. Reinsurance transactions under this agreement had the effect of increasing income from operations by $3,008,000 in 1998, and decreasing income from operations by $2,658,000 in 1997 and $46,000 in 1996. 67 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT LIABILITIES The withdrawal characteristics of general account and separate account annuity reserves and deposits are as follows:
DECEMBER 31, 1998 ----------------------------- AMOUNT % OF TOTAL ------------- -------------- (IN THOUSANDS) Subject to discretionary withdrawal-with adjustment: With market value adjustment $ 2,896,529 19 At book value less surrender charges (surrender charge >5%) 10,227,212 66 At book value (minimal or no charge or adjustment) 1,264,453 8 Not subject to discretionary withdrawal provision 1,106,197 7 ------------- --- Total annuity actuarial reserves and deposit liabilities $ 15,494,391 100 ------------- --- ------------- ---
DECEMBER 31, 1997 ----------------------------- AMOUNT % OF TOTAL ------------- -------------- (IN THOUSANDS) Subject to discretionary withdrawal-with adjustment: With market value adjustment $ 3,415,394 25 At book value less surrender charges (surrender charge >5%) 7,672,211 57 At book value (minimal or no charge or adjustment) 1,259,698 9 Not subject to discretionary withdrawal provision 1,164,651 9 ------------- --- Total annuity actuarial reserves and deposit liabilities $ 13,511,954 100 ------------- --- ------------- ---
12. SEGMENT INFORMATION The Company offers financial products and services such as fixed and variable annuities, retirement plan services and life insurance on an individual basis. Within these areas, the Company conducts business principally in two operating segments and maintains a corporate segment to provide for the capital needs of the various operating segments and to engage in other financing related activities. The Individual Insurance 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 Retirement Products and Services ("RPS") 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. 68 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 12. SEGMENT INFORMATION (CONTINUED) The following amounts pertain to the various business segments:
FEDERAL TOTAL TOTAL PRETAX INCOME TOTAL (IN THOUSANDS) REVENUES EXPENDITURES* INCOME TAXES ASSETS - ----------------------------------------------------- ------------ -------------- ---------- ---------- ------------- 1998 Individual Insurance $ 229,710 $ 144,800 $ 84,910 $ (4,148) $ 199,683 RPS 2,527,608 2,483,715 43,893 12,486 16,123,905 Corporate 10,959 3,042 7,917 3,375 579,033 ------------ -------------- ---------- ---------- ------------- Total $ 2,768,277 $ 2,631,557 $ 136,720 $ 11,713 $ 16,902,621 ------------ -------------- ---------- ---------- ------------- 1997 Individual Insurance 304,141 272,333 31,808 13,825 1,143,697 RPS 2,533,006 2,507,591 25,414 10,667 14,043,221 Corporate 57,897 5,244 52,653 (17,153) 738,439 ------------ -------------- ---------- ---------- ------------- Total $ 2,895,044 $ 2,785,169 $ 109,875 $ 7,339 $ 15,925,357 ------------ -------------- ---------- ---------- ------------- 1996 Individual Insurance 281,309 255,846 25,463 13,931 817,115 RPS 2,174,602 2,151,126 23,476 1,203 12,057,572 Corporate 64,721 898 63,823 (20,534) 689,266 ------------ -------------- ---------- ---------- ------------- Total $ 2,520,632 $ 2,407,870 $ 112,762 $ (5,400) $ 13,563,953 ------------ -------------- ---------- ---------- -------------
- ------------------------ * Total expenditures include dividends to policyholders of $(5,981) for 1998, $33,316 for 1997 and $29,189 for 1996. 13. RETIREMENT PLANS The Company participates with SLOC in a noncontributory defined benefit pension plan covering essentially all employees. The benefits are based on years of service and compensation. The funding policy for the pension plan is to contribute an amount which at least satisfies the minimum amount required by ERISA; currently, the plan is fully funded. The Company is charged for its share of the pension cost based upon its covered participants. Pension plan assets consist principally of separate accounts of SLOC. The Company's share of the group's accrued pension cost was $1,178,000 and $593,000 at December 31, 1998 and 1997, respectively. The Company's share of net periodic pension cost was $586,000, $146,000 and $27,000, for 1998, 1997 and 1996, respectively. The Company also participates with SLOC and certain affiliates in a 401(k) savings plan for which substantially all employees are eligible. The Company matches, up to specified amounts, employees' contributions to the plan. Company contributions were $231,000, $259,000 and $233,000 for the years ended December 31, 1998, 1997 and 1996, respectively. OTHER POST-RETIREMENT BENEFIT PLANS In addition to pension benefits the Company provides certain health, dental, and life insurance benefits ("post-retirement benefits") for retired employees and dependents. Substantially all employees may become eligible for these benefits if they reach normal retirement age while working for the Company, or retire early upon satisfying an alternate age plus service condition. Life insurance benefits are generally set at a fixed amount. 69 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 13. RETIREMENT PLANS (CONTINUED) Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106 requires an accrual of the estimated cost of retiree benefit payments during the years the employee provides services. SFAS No. 106 allows recognition of the cumulative effect of the liability in the year of adoption or the amortization of the obligation over a period of up to 20 years. The obligation of approximately $455,000 is recognized over a period of ten years. The Company's cash flows are not affected by implementation of this standard, but implementation decreased net income by $95,000, $117,000, and $8,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The Company's post retirement health, dental and life insurance benefits currently are not funded. OTHER POST-RETIREMENT BENEFIT PLANS CONTINUED The following table sets forth the change in the pension and other postretirement benefit plans' benefit obligations and assets as well as the plans' funded status reconciled with the amount shown in the Company's financial statements at December 31:
PENSION BENEFITS OTHER BENEFITS 1998 1997 1998 1997 ---------- ---------- ---------- --------- (IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of year $ 79,684 $ 70,848 $ 9,845 $ 9,899 Service cost 4,506 4,251 240 306 Interest cost 6,452 5,266 673 725 Amendments -- 1,000 -- -- Actuarial loss (gain) 21,975 -- 308 (801) Benefits paid (1,825) (1,681) (647) (284) ---------- ---------- ---------- --------- Benefit obligation at end of year $ 110,792 $ 79,684 $ 10,419 $ 9,845 ---------- ---------- ---------- --------- ---------- ---------- ---------- --------- The Company's share: Benefit obligation at beginning of year $ 5,094 $ 4,529 $ 385 $ 384 Benefit obligation at end of year $ 9,125 $ 5,094 $ 416 $ 385 Change in plan assets: Fair value of plan assets at beginning of year $ 136,610 $ 122,807 $ -- $ -- Actual return on plan assets 16,790 15,484 -- -- Employer contribution -- -- 647 284 Benefits paid (1,825) (1,681) (647) (284) ---------- ---------- ---------- --------- Fair value of plan assets at end of year $ 151,575 $ 136,610 $ -- $ -- ---------- ---------- ---------- --------- ---------- ---------- ---------- --------- Funded status $ 40,783 $ 56,926 $ (10,419) $ (9,845) Unrecognized net actuarial gain (loss) (2,113) (18,147) 586 257 Unrecognized transition obligation (asset) (24,674) (26,730) 185 230 Unrecognized prior service cost 7,661 8,241 -- -- ---------- ---------- ---------- --------- Prepaid (accrued) benefit cost $ 21,657 $ 20,290 $ (9,648) $ (9,358) ---------- ---------- ---------- --------- ---------- ---------- ---------- --------- The Company's share of accrued benefit cost $ (1,178) $ (593) $ (195) $ (102) Weighted-average assumptions as of December 31: Discount rate 6.75% 7.50% 6.75% 7.50% Expected return on plan assets 8.00% 7.50% N/A N/A Rate of compensation increase 4.50% 4.50% N/A N/A
70 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 13. RETIREMENT PLANS (CONTINUED) For measurement purposes, a 10.1% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998 (5.7% for dental benefits). The rates were assumed to decrease gradually to 5% for 2005 and remain at that level thereafter.
1998 1997 1998 1997 ---------- --------- --------- --------- Components of net periodic benefit cost: Service cost $ 4,506 $ 4,251 $ 240 $ 306 Interest cost 6,452 5,266 673 725 Expected return on plan assets (10,172) (9,163) -- -- Amortization of transition obligation (asset) (2,056) (2,056) 45 45 Amortization of prior service cost 580 517 -- -- Recognized net actuarial (gain) loss (677) (789) (20) 71 ---------- --------- --------- --------- Net periodic benefit cost $ (1,367) $ (1,974) $ 938 $ 1,147 ---------- --------- --------- --------- ---------- --------- --------- --------- The Company's share of net periodic benefit cost $ 586 $ 146 $ 95 $ 117 ---------- --------- --------- --------- ---------- --------- --------- ---------
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT INCREASE DECREASE ------------------- ------------------- (IN THOUSANDS) Effect on total of service and interest cost components $ 210 $ (170) Effect on postretirement benefit obligation 2,026 (1,697)
71 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1998 and 1997:
DECEMBER 31, 1998 --------------------------------------- CARRYING AMOUNT ESTIMATED FAIR VALUE ----------------- -------------------- (IN THOUSANDS) ASSETS: Bonds $ 2,026,868 $ 2,153,953 Mortgages 535,003 556,143 Derivatives -- 771 LIABILITIES: Insurance reserves $ 121,100 $ 121,100 Individual annuities 274,448 271,849 Pension products 1,104,489 1,145,351 DECEMBER 31, 1997 --------------------------------------- CARRYING AMOUNT ESTIMATED FAIR VALUE ----------------- -------------------- (IN THOUSANDS) ASSETS: Bonds $ 2,451,731 $ 2,569,199 Mortgages 684,035 706,975 LIABILITIES: Insurance reserves $ 123,128 $ 123,128 Individual annuities 307,668 302,165 Pension products 1,527,433 1,561,108 Derivatives -- (1,716)
The major methods and assumptions used in estimating the fair values of financial instruments are as follows: The fair values of short-term bonds are estimated to be the amortized cost. The fair values of long-term bonds which are publicly traded are based upon market prices or dealer quotes. For privately placed bonds, fair values are estimated by taking into account prices for publicly traded bonds of similar credit risk and maturity and repayment and liquidity characteristics. The fair values of the Company's general account insurance reserves and liabilities under investment-type contracts (insurance, annuity and pension contracts that do not involve mortality or morbidity risks) are estimated using discounted cash flow analyses or surrender values. Those contracts that are deemed to have short-term guarantees have a carrying amount equal to the estimated market value. The fair values of mortgages are estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair values of derivative financial instruments are estimated using the process described in Note 8. 72 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 15. STATUTORY INVESTMENT VALUATION RESERVES The asset valuation reserve ("AVR") provides a reserve for losses from investments in bonds, stocks, mortgage loans, real estate and other invested assets with related increases or decreases being recorded directly to surplus. Realized capital gains and losses on bonds and mortgages which relate to changes in levels of interest rates are charged or credited to an interest maintenance reserve ("IMR") and amortized into income over the remaining contractual life of the security sold. The table shown below presents changes in the major elements of the AVR and IMR.
YEARS ENDED DECEMBER 31, 1998 1997 -------------------- -------------------- AVR IMR AVR IMR --------- --------- --------- --------- (IN THOUSANDS) Balance, beginning of year $ 47,605 $ 33,830 $ 53,911 $ 28,675 Net realized investment gains, net of tax 256 8,942 17,400 6,321 Amortization of net investment gains -- (2,282) -- (1,166) Unrealized investment losses (6,550) -- (2,340) -- Required by formula 3,081 -- (21,366) -- --------- --------- --------- --------- Balance, end of year $ 44,392 $ 40,490 $ 47,605 $ 33,830 --------- --------- --------- --------- --------- --------- --------- ---------
16. FEDERAL INCOME TAXES The Company and its subsidiaries file a consolidated federal income tax return. Federal income taxes are calculated for the consolidated group based upon amounts determined to be payable as a result of operations within the current year. No provision is recognized for timing differences which may exist between financial statement and taxable income. Such timing differences include reserves, depreciation and accrual of market discount on bonds. Cash payments for federal income taxes were approximately $48,144,000, $31,000,000 and $19,264,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company is currently undergoing an audit by the Internal Revenue Service. The Company believes that there will be no material audit adjustments for the periods under examination. 17. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE) On December 22, 1997, the Company issued a $250,000,000 surplus note to Life Holdco. This note has an interest rate of 8.625% and is due on or after November 6, 2027. On May 9, 1997, the Company issued a short-term note of $600,000,000 to Life Holdco at an interest rate of 5.10%, which was extended at various interest rates. This note was repaid on December 22, 1997. On December 19, 1995, the Company issued surplus notes totaling $315,000,000 to an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and 7.25%. Of these notes, $157,500,000 will mature in the year 2007 and $157,500,000 will mature in the year 2015. Interest on these notes is payable semiannually. Principal and interest on surplus notes are payable only to the extent that the Company meets specified requirements regarding free surplus exclusive of the principal amount and accrued interest, if any, on these notes and with the consent of the Delaware Insurance Commissioner. 73 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 17. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE) (CONTINUED) The Company accrued $4,259,000 and $ 964,000 for interest on surplus notes for the years ended December 31, 1998 and 1997, respectively. The Company accrued $4,259,000 and $964,000 for interest on surplus notes for the years ended December 31, 1998 and 1997, respectively. The Company expensed $44,903,000, $42,481,000 and $23,061,000 for interest on surplus notes and notes payable for the years ended December 31, 1998, 1997 and 1996, respectively. 18. 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 $16,344,000 in 1998, $15,997,000 in 1997, and $20,192,000 in 1996. The Company leases office space to SLOC under lease agreements with terms expiring in September, 1999 and options to extend the terms for each of thirteen successive five-year terms at fair market rental not to exceed 125% of the fixed rent for the term which is ending. Rent received by the Company under the leases for 1998 amounted to approximately $6,856,000. 19. RISK-BASED CAPITAL Effective December 31, 1993, the NAIC adopted risk-based capital requirements for life insurance companies. The risk-based capital requirements provide a method for measuring the minimum acceptable amount of adjusted capital that a life insurer should have, as determined under statutory accounting practices, taking into account the risk characteristics of its investments and products. The Company has met the minimum risk-based capital requirements at December 31, 1998, 1997 and 1996. 20. ACCOUNTING POLICIES AND PRINCIPLES The financial statements of the Company have been prepared on the basis of statutory accounting practices which, prior to 1996, were considered by the insurance industry and the accounting profession to be in accordance with GAAP for mutual life insurance companies. The primary differences between statutory accounting practices and GAAP are described as follows. Under statutory accounting practices, financial statements are not consolidated and investments in subsidiaries are shown at net equity value. Accordingly, the assets, liabilities and results of operations of the Company's subsidiaries are not consolidated with the assets, liabilities and results of operations, respectively, of the Company. Changes in net equity value of the common stock of the Company's United States life insurance subsidiaries are directly reflected in the Company's surplus. Changes in the net equity value of the common stock of all other subsidiaries are directly reflected in the Company's Asset Valuation Reserve. Dividends paid by subsidiaries to the Company are included in the Company's net investment income. Other differences between statutory accounting practices and GAAP include the following: statutory accounting practices do not recognize the following assets or liabilities which are reflected under GAAP: deferred policy acquisition costs, deferred federal income taxes and statutory nonadmitted assets. Asset Valuation Reserves and Interest Maintenance Reserves are established under statutory accounting practices but not under GAAP. Methods for calculating real estate depreciation and investment valuation allowances differ under statutory accounting practices and GAAP. Actuarial assumptions and reserving methods differ under statutory accounting practices and GAAP. Premiums for universal 74 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 20. ACCOUNTING POLICIES AND PRINCIPLES (CONTINUED) life and investment-type products are recognized as income for statutory purposes and as deposits to policyholders' accounts for GAAP. Because the Company's management uses financial information prepared in conformity with accounting principles generally accepted in Canada in the normal course of business, the management of Sun Life Assurance Company of Canada (U.S.) has determined that the cost of complying with Statement No. 120, "Accounting and Reporting by Mutual Insurance Enterprises and by Insurance Enterprises for Certain Long Duration Participating Contracts", exceeds the benefits that the Company, or the users of its financial statements, would experience. Consequently, the Company has elected not to apply such standards in the preparation of these financial statements. 75 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) We have audited the accompanying statutory statements of admitted assets, liabilities and capital stock and surplus of Sun Life Assurance Company of Canada (U.S.) (the "Company") as of December 31, 1998 and 1997, and the related statutory statements of operations, changes in capital stock and surplus, and cash flow for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described more fully in Notes 1 and 20 to the financial statements, the Company prepared these financial statements using accounting practices prescribed or permitted by the Insurance Department of the State of Delaware, which is a comprehensive basis of accounting other than generally accepted accounting principles. The effects on the financial statements of the differences between the statutory basis of accounting and generally accepted accounting principles, although not reasonably determinable, are presumed to be material. In our opinion, the statutory financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities, and capital stock and surplus of Sun Life Assurance Company of Canada (U.S.) as of December 31, 1998 and 1997, and the results of its operations and its cash flow for each of the three years in the period ended December 31, 1998 on the basis of accounting described in Notes 1 and 20. However, because of the differences between the two bases of accounting referred to in the second preceding paragraph, in our opinion, the statutory financial statements referred to above do not present fairly, in conformity with generally accepted accounting principles, the financial position of Sun Life Assurance Company of Canada (U.S.) as of December 31, 1998 and 1997 or the results of its operations or its cash flow for each of the three years in the period ended December 31, 1998. As management has stated in Note 20, because the Company's management uses financial information prepared in accordance with accounting principles generally accepted in Canada in the normal course of business, the management of Sun Life Assurance Company of Canada (U.S.) has determined that the cost of complying with Statement No. 120, ACCOUNTING AND REPORTING BY MUTUAL LIFE INSURANCE ENTERPRISES AND BY INSURANCE ENTERPRISES FOR CERTAIN LONG-DURATION PARTICIPATING CONTRACTS, would exceed the benefits that the Company, or the users of its financial statements, would experience. Consequently, the Company has elected not to apply such standards in the preparation of these financial statements. DELOITTE & TOUCHE LLP Boston, Massachusetts February 5, 1999 76 TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION Calculation of Performance Data -- Average Annual Total Return....................... Non-Standardized Investment Performance.............................................. Advertising and Sales Literature..................................................... Calculations......................................................................... Example of Variable Accumulation Unit Value Calculation............................ Example of Variable Annuity Unit Calculation....................................... Example of Variable Annuity Payment Calculation.................................... Calculation of Annuity Unit Values................................................. Distribution of the Contracts........................................................ Designation and Change of Beneficiary................................................ Custodian............................................................................ Financial Statements.................................................................
77 This Prospectus sets forth information about the Contracts and the Variable Account that a prospective purchaser should know before investing. Additional information about the Contracts and the Variable Account has been filed with the Securities and Exchange Commission in a Statement of Additional Information dated May 1, 1999 which is incorporated herein by reference. The Statement of Additional Information is available upon request and without charge from Sun Life Assurance Company of Canada (U.S.). To receive a copy, return this request form to the address shown below or telephone (617) 348-9600 or (800) 752-7215. - -------------------------------------------------------------------------------- To: Sun Life Assurance Company of Canada (U.S.) Annuity Service Mailing Address: c/o Retirement Products and Services P.O. Box 1024 Boston, Massachusetts 02103 Please send me a Statement of Additional Information for MFS Regatta Gold Variable and Fixed Annuity Sun Life of Canada (U.S.) Variable Account F. Name - -------------------------------------------------------------- Address - -------------------------------------------------------------- ------------------------------------------------------------------------- City - ------------------------------------ State - -------------- Zip - ------- Telephone - ---------------------------------------------------------------- 78 APPENDIX A GLOSSARY The following terms as used in this Prospectus have the indicated meanings: ACCOUNT OR PARTICIPANT ACCOUNT: An account established for each Participant to which Net Purchase Payments are credited. ACCOUNT VALUE: The Variable Accumulation Value, if any, plus the Fixed Accumulation Value, if any, of your Account for any Valuation Period. ACCOUNT YEAR AND ACCOUNT ANNIVERSARY: Your first Account Year is the period of (a) 12 full calendar months plus (b) the part of the calendar month in which we issue your Contract (if not on the first day of the month), beginning with the Contract Date. Your Account Anniversary is the first day immediately after the end of an Account Year. Each Account Year after the first is the 12 calendar month period that begins on your Account Anniversary. If, for example, the Contract Date is in March, the first Account Year will be determined from the Contract Date but will end on the last day of March in the following year; your Account Anniversary is April 1 and all Account Years after the first will be measured from April 1. ACCUMULATION PHASE: The period before the Annuity Commencement Date and during the lifetime of the Annuitant during which you make Purchase Payments under the Contract. This is called the "Accumulation Period" in the Contract. ANNUITANT: The person or persons named in the Application and whose life the first annuity payment is to be made. In a Non-Qualified Contract, if you name someone other than yourself as Annuitant, you may also name a co-annuitant. If you do, all provisions of the Contract based on the death of the Annuitant will be based on the date of death of the last surviving of the persons named. By example, if the Annuitant dies prior to the Annuity Commencement Date, the co-annuitant will become the new annuitant. The death benefit will become due only on the death before the Annuity Commencement Date of the last surviving annuitant and co-annuitant named. These persons are referred to collectively in the Contract as "Annuitants." If you have not named a sole Annuitant on the 30th day before the Annuity Commencement Date and both the Annuitant and Co-Annuitant are living, the Co-Annuitant will be the sole Annuitant during the Income Phase. *ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment under each Contract is to be made. *ANNUITY OPTION: The method you choose for making annuity payments. ANNUITY UNIT: A unit of measure used in the calculation of the amount of the second and each subsequent variable annuity payment from the Variable Account. APPLICATION: The document signed by you or other evidence acceptable to us that serves as your application for participation under a Group Contract. *BENEFICIARY: The person or entity having the right to receive the death benefit and, for Non-Qualified Contracts, who is the "designated beneficiary" for purposes of Section 72(s) of the Internal Revenue Code. BUSINESS DAY: Any day the New York Stock Exchange is open for trading. CERTIFICATE: The document for each Participant which evidences the coverage of the Participant under a Group Contract. COMPANY: Sun Life Assurance Company of Canada (U.S.). CONTRACT DATE: The date on which we issue your Contract. This is called the "Date of Coverage" in the Contract. * You specify these items on the Contract Specifications page or Certificate Specifications page, and may change them, as we describe in this Prospectus. 79 DEATH BENEFIT DATE: If you have elected a death benefit payment option before the Annuitant's death that remains in effect, the date on which we receive Due Proof of Death. If your Beneficiary elects the death benefit payment option, the later of (a) the date on which we receive the Beneficiary's election and (b) the date on which we receive Due Proof of Death. If we do not receive the Beneficiary's election within 60 days after we receive Due Proof of Death, the Death Benefit Date will be the last day of the 60 day period and we will pay the death benefit in cash. DUE PROOF OF DEATH: An original certified copy of an official death certificate, an original certified copy of a decree of a court of competent jurisdiction as to the finding of death, or any other proof satisfactory to the Company. EXPIRATION DATE: The last day of Guarantee Period. FIXED ACCOUNT: The general account of the Company, consisting of all assets of the Company other than those allocated to a separate account of the Company. FIXED ACCOUNT VALUE: The value of that portion of your Account allocated to the Fixed Account. FIXED ANNUITY: An annuity with payments which do not vary as to dollar amount. GROUP CONTRACT: A Contract issued by the Company on a group basis. GUARANTEE AMOUNT: Each separate allocation of Account Value to a particular Guarantee Period (including interest earned thereon). GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is credited. GUARANTEED INTEREST RATE: The rate of interest we credit on a compound annual basis during any Guarantee Period. INCOME PHASE: The period on and after the Annuity Commencement Date and during the lifetime of the Annuitant during which we make annuity payments under the Contract. NET INVESTMENT FACTOR: An index applied to measure the investment performance of a Sun-Account from one Valuation Period to the next. The Net Investment Factor may be greater or less than or equal to one. NET PURCHASE PAYMENT: The portion of a Purchase Payment which remains after the deduction of any applicable premium tax or similar tax. NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement plan that does not receive favorable federal income tax treatment under Sections 401, 403, 408, or 408A of the Internal Revenue Code. The Participant's interest in the Contract must be owned by a natural person or agent for a natural person for the Contract to receive income tax treatment as an annuity. OWNER: The person, persons or entity entitled to the ownership rights stated in a Group Contract and in whose name or names the Group Contract is issued. The Owner may designate a trustee or custodian of a retirement plan which meets the requirements of Section 401, Section 408(c), Section 408(k), Section 408(p) or Section 408A of the Internal Revenue Code to serve as legal owner of assets of a retirement plan, but the term "Owner," as used herein, shall refer to the organization entering into the Group Contract. PARTICIPANT: The person named in the Certificate who is entitled to exercise all rights and privileges of ownership under the Certificate, except as reserved by the Owner. PAYEE: A recipient of payments under a Contract. The term includes an Annuitant or a Beneficiary who becomes entitled to benefits upon the death of the Participant. PURCHASE PAYMENT (PAYMENT): An amount paid to the Company as consideration for the benefits provided by a Contract. 80 QUALIFIED CONTRACT: A Contract used in connection with a retirement plan which may receive favorable federal income tax treatment under Sections 401, 403, 408 or 408A of the Internal Revenue Code of 1986, as amended. SEVEN-YEAR ANNIVERSARY: The seventh Account Anniversary and each succeeding Account Anniversary occurring at any seven year interval thereafter; for example, the 14th, 21st and 28th Account Anniversaries. SUB-ACCOUNT: That portion of the Variable Account which invests in shares of a specific series of the Series Fund. VALUATION PERIOD: The period of time from one determination of Variable Accumulation Unit or Annuity Unit values to the next subsequent determination of these values. Value determinations are made as of the close of the New York Stock Exchange on each day that the Exchange is open for trading. VARIABLE ACCOUNT: Variable Account F of the Company, which is a separate account of the Company consisting of assets set aside by the Company, the investment performance of which is kept separate from that of the general assets of the Company. VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of Variable Account Value. VARIABLE ACCOUNT VALUE: The value of that portion of your Account allocated to the Variable Account. VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount in relation to the investment performance of the Variable Account. 81 APPENDIX B CONDENSED FINANCIAL INFORMATION--ACCUMULATION UNIT VALUES The following information should be read in conjunction with the Variable Account's financial statements appearing elsewhere in this Prospectus, all of which has been audited by Deloitte & Touche LLP, independent certified public accountants.
YEAR ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------------------------------------------ 1991* 1992 1993 1994 1995 1996 1997 ------------ ---------- ------------- ----------- ------------- ------------- ----------- BOND SERIES Unit Value: Beginning of Period............. -- -- -- -- -- -- -- End of Period........ -- -- -- -- -- -- -- Units outstanding end of period............ -- -- -- -- -- -- -- CAPITAL APPRECIATION SERIES Unit Value: Beginning of period............. $10.0000 $ 11.5021 $ 12.8402 $ 14.9429 $ 14.2064 $ 18.8932 $ 22.5700 End of period........ $11.5021 $ 12.8402 $ 14.9429 $ 14.2064 $ 18.8392 $ 22.5700 $ 27.4057 Units outstanding end of period............ 124,454 5,131,355 13,245,142 19,909,649 27,782,739 32,796,793 35,528,897 CAPITAL OPPORTUNITIES SERIES Unit Value: Beginning of period............. -- -- -- -- -- $ 10.0000** $ 10.9234 End of period........ -- -- -- -- -- $ 10.9234 $ 13.7450 Units outstanding end of period............ -- -- -- -- -- 1,520,787 6,175,224 EMERGING GROWTH SERIES Unit Value: Beginning of period -- -- -- -- $ 10.0000** $ 12.5675 $ 14.5136 End of period........ -- -- -- -- $ 12.5675 $ 14.5136 $ 17.4544 Units outstanding end of period............ -- -- -- -- 5,346,104 16,998,044 25,039,986 EQUITY INCOME SERIES Unit Value: Beginning of Period............. -- -- -- -- -- -- -- End of Period........ -- -- -- -- -- -- -- Units outstanding end of period............ -- -- -- -- -- -- -- GLOBAL ASSET ALLOCATION SERIES Unit Value: Beginning of period............. -- -- -- $ 10.0000** $ 10.0367 $ 12.0393 $ 13.7702 End of period........ -- -- -- $ 10.0367 $ 12.0393 $ 13.7702 $ 15.0565 Units outstanding end of period............ -- -- -- 299,210 2,141,041 5,539,010 7,928,833 GLOBAL GOVERNMENTS SERIES Unit Value: Beginning of period............. $10.0000 $ 10.6125 $ 10.5161 $ 12.3309 $ 11.6151 $ 13.2523 $ 13.6780 End of period........ $10.6125 $ 10.5161 $ 12.3309 $ 11.6151 $ 13.2523 $ 13.6780 $ 13.3854 Units outstanding end of period............ 44,190 3,405,280 7,008,613 8,334,019 8,272,858 7,510,766 6,127,641 GLOBAL GROWTH SERIES Unit Value: Beginning of period............. -- -- $ 10.0000** $ 10.6200 $ 10.7803 $ 12.3321 $ 13.7523 End of period........ -- -- $ 10.6200 $ 10.7803 $ 12.3321 $ 13.7523 $ 15.6398 Units outstanding end of period............ -- -- 1,778,644 9,182,555 11,421,691 13,989,946 15,058,757 GLOBAL TOTAL RETURN SERIES Unit Value: Beginning of period............. -- -- -- $ 10.0000** $ 10.0195 $ 11.6516 $ 13.1290 End of period........ -- -- -- $ 10.0195 $ 11.6516 $ 13.1290 $ 14.7153 Units outstanding end of period............ -- -- -- 138,126 1,170,586 2,836,079 4,676,853 GOVERNMENT SECURITIES SERIES Unit Value: Beginning of period............. $10.0000 $ 10.3731 $ 10.9166 $ 11.6996 $ 11.2891 $ 13.0981 $ 13.1252 End of period........ $10.3731 $ 10.9166 $ 11.6996 $ 11.2891 $ 13.0981 $ 13.1252 $ 14.0763 Units outstanding end of period............ 256,848 5,447,047 13,661,303 18,784,262 18,082,586 19,714,114 20,508,844 HIGH YIELD SERIES Unit Value: Beginning of period............. $10.0000 $ 10.0378 $ 11.3864 $ 13.2209 $ 12.7475 $ 14.7137 $ 16.2674 End of period........ $10.0378 $ 11.3864 $ 13.2209 $ 12.7475 $ 14.7137 $ 16.2674 $ 18.1622 Units outstanding end of period............ 6,734 1,380,530 3,599,473 4,605,818 6,880,080 8,424,289 11,699,195 INTERNATIONAL GROWTH SERIES Unit Value: Beginning of period............. -- -- -- -- -- $ 10.0000** $ 9.7480 End of period........ -- -- -- -- -- $ 9.7460 $ 9.4566 Units outstanding end of period............ -- -- -- -- -- 564,742 2,390,056 INTERNATIONAL GROWTH AND INCOME SERIES Unit Value: Beginning of period............. -- -- -- -- $ 10.0000** $ 10.0942 $ 10.4404 End of period........ -- -- -- -- $ 10.0942 $ 10.4404 $ 10.9674 Units outstanding end of period............ -- -- -- -- 711,179 3,360,596 4,441,911 MANAGED SECTORS SERIES Unit Value: Beginning of period............. $10.0000 $ 11.7627 $ 12.3521 $ 12.6760 $ 12.2606 $ 15.9925 $ 18.5452 End of period........ $11.7627 $ 12.3521 $ 12.6760 $ 12.2606 $ 15.9925 $ 18,5452 $ 22.9770 Units outstanding end of period............ 51,219 2,614,510 4,525,423 6,351,641 8,542,869 10,541,726 11,326,719 MASSACHUSETTS INVESTORS GROWTH STOCK SERIES Unit Value: Beginning of Period............. -- -- -- -- -- -- -- End of Period........ -- -- -- -- -- -- -- Units outstanding end of period............ -- -- -- -- -- -- -- MASSACHUSETTS INVESTORS SERIES Unit Value: Beginning of period............. $10.0000 $ 10.9605 $ 11.4156 $ 12.2052 $ 11.9036 $ 16.1344 $ 19.9527 End of period........ $10.9605 $ 11.4156 $ 12.2052 $ 11.9036 $ 16.1344 $ 19.9527 $ 25.9656 Units outstanding end of period............ 85,141 2,557,065 6,412,270 10,979,711 16,712,586 26,199,975 40,709,531 1998 ----------- BOND SERIES Unit Value: Beginning of Period............. $ 10.0000** End of Period........ $ 10.5921 Units outstanding end of period............ 1,182,239 CAPITAL APPRECIATION SERI Unit Value: Beginning of period............. $ 27,4057 End of period........ $ 34.7871 Units outstanding end of period............ 37,500,481 CAPITAL OPPORTUNITIES SER Unit Value: Beginning of period............. $ 13.7450 End of period........ $ 17.2085 Units outstanding end of period............ 10,262,282 EMERGING GROWTH SERIES Unit Value: Beginning of period $ 17.4544 End of period........ $ 23.0408 Units outstanding end of period............ 28,900,957 EQUITY INCOME SERIES Unit Value: Beginning of Period............. $ 10.0000** End of Period........ $ 10.4065 Units outstanding end of period............ 528,238 GLOBAL ASSET ALLOCATION S Unit Value: Beginning of period............. $ 15.0565 End of period........ $ 15.8203 Units outstanding end of period............ 7,576,691 GLOBAL GOVERNMENTS SERIES Unit Value: Beginning of period............. $ 13.3854 End of period........ $ 15.2422 Units outstanding end of period............ 5,048,219 GLOBAL GROWTH SERIES Unit Value: Beginning of period............. $ 15.6398 End of period........ $ 17.6676 Units outstanding end of period............ 14,522,129 GLOBAL TOTAL RETURN SERIE Unit Value: Beginning of period............. $ 14.7153 End of period........ $ 17.1741 Units outstanding end of period............ 5,354,633 GOVERNMENT SECURITIES SER Unit Value: Beginning of period............. $ 14.0763 End of period........ $ 15.0941 Units outstanding end of period............ 23,218,234 HIGH YIELD SERIES Unit Value: Beginning of period............. $ 18.1622 End of period........ $ 18.0207 Units outstanding end of period............ 14,190,817 INTERNATIONAL GROWTH SERI Unit Value: Beginning of period............. $ 9.4566 End of period........ $ 9.5047 Units outstanding end of period............ 3,290,043 INTERNATIONAL GROWTH AND Unit Value: Beginning of period............. $ 10.9674 End of period........ $ 13.1538 Units outstanding end of period............ 5,214,558 MANAGED SECTORS SERIES Unit Value: Beginning of period............. $ 22.9770 End of period........ $ 25.4406 Units outstanding end of period............ 11,245,144 MASSACHUSETTS INVESTORS G Unit Value: Beginning of Period............. $ 10.0000** End of Period........ $ 11.9635 Units outstanding end of period............ 4,121,518 MASSACHUSETTS INVESTORS S Unit Value: Beginning of period............. $ 25.9656 End of period........ $ 31.7109 Units outstanding end of period............ 51,880,765
82
YEAR ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------------------------------------------ 1991* 1992 1993 1994 1995 1996 1997 ------------ ---------- ------------- ----------- ------------- ------------- ----------- MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES Unit Value: Beginning of period............. -- -- -- -- -- $ 10.0000** $ 9.9199 End of period........ -- -- -- -- -- $ 9.9199 $ 10.8010 Units outstanding end of period............ -- -- -- -- -- 329,630 2,159,228 MONEY MARKET SERIES Unit Value: Beginning of period............. $10.0000 $ 10.0370 $ 10.2288 $ 10.3527 $ 10.5878 $ 11.0111 $ 11.3932 End of period........ $10.0370 $ 10.2288 $ 10.3527 $ 10.5878 $ 11.0111 $ 11.3932 $ 11.8058 Units outstanding end of period............ 417,559 4,101,024 6,055,673 14,774,386 17,186,041 27,275,583 21,463,139 NEW DISCOVERY SERIES Unit Value: Beginning of Period............. -- -- -- -- -- -- -- End of Period........ -- -- -- -- -- -- -- Units outstanding end of period............ -- -- -- -- -- -- -- RESEARCH SERIES Unit Value: Beginning of period............. -- -- -- $ 10.0000** $ 9.8615 $ 13.3663 $ 16.3209 End of period........ -- -- -- $ 9.8615 $ 13.3663 $ 16.3209 $ 19.4490 Units outstanding end of period............ -- -- -- 392,528 5,341,160 19,577,745 35,654,917 RESEARCH GROWTH AND INCOME Unit Value: Beginning of period............. -- -- -- -- -- -- $ 10.0000** End of period........ -- -- -- -- -- -- $ 10.9235 Units outstanding end of period............ -- -- -- -- -- -- 535,928 RESEARCH INTERNATIONAL SERIES Unit Value: Beginning of Period............. -- -- -- -- -- -- -- End of Period........ -- -- -- -- -- -- -- Units outstanding end of period............ -- -- -- -- -- -- -- STRATEGIC INCOME SERIES Unit Value: Beginning of Period............. -- -- -- -- -- -- -- End of Period........ -- -- -- -- -- -- -- Units outstanding end of period............ -- -- -- -- -- -- -- TOTAL RETURN SERIES Unit Value: Beginning of period............. $10.0000 $ 10.3042 $ 11.0125 $ 12.3142 $ 11.8694 $ 14.8406 $ 16.6932 End of period........ $10.3042 $ 11.0125 $ 12.3142 $ 11.8694 $ 14.8406 $ 16.6932 $ 20.0793 Units outstanding end of period............ 280,202 12,952,314 32,979,812 48,270,556 53,091,748 59,508,016 66,303,467 UTILITIES SERIES Unit Value: Beginning of period............. -- -- $ 10.0000** $ 10.0000 $ 9.3739 $ 12.2403 $ 14.5260 End of period........ -- -- $ 10.0000 $ 9.3739 $ 12.2403 $ 14.5260 $ 19.0140 Units outstanding end of period............ -- -- 279,796 2,273,439 3,410,047 4,671,192 6,101.638 1998 ----------- MFS/FOREIGN & COLONIAL EM MARKETS EQUITY SERIES Unit Value: Beginning of period............. $ 10.8010 End of period........ $ 7.4615 Units outstanding end of period............ 2,147,348 MONEY MARKET SERIES Unit Value: Beginning of period............. $ 11.8058 End of period........ $ 12.2282 Units outstanding end of period............ 29,387,086 NEW DISCOVERY SERIES Unit Value: Beginning of Period............. $ 10.0000** End of Period........ $ 10.5258 Units outstanding end of period............ 794,859 RESEARCH SERIES Unit Value: Beginning of period............. $ 19.4490 End of period........ $ 23.7119 Units outstanding end of period............ 38,553,986 RESEARCH GROWTH AND INCOM Unit Value: Beginning of period............. $ 10.9235 End of period........ $ 13.1605 Units outstanding end of period............ 2,408,676 RESEARCH INTERNATIONAL SE Unit Value: Beginning of Period............. $ 10.0000** End of Period........ $ 9.3330 Units outstanding end of period............ 190,267 STRATEGIC INCOME SERIES Unit Value: Beginning of Period............. $ 10.0000** End of Period........ $ 9.9530 Units outstanding end of period............ 622,914 TOTAL RETURN SERIES Unit Value: Beginning of period............. $ 20.0793 End of period........ $ 22.1273 Units outstanding end of period............ 71,102,020 UTILITIES SERIES Unit Value: Beginning of period............. $ 19.0140 End of period........ $ 22.0489 Units outstanding end of period............ 9,023,102
- ---------------------------------- * From November 18, 1991 (date of commencement of issuance of the Contracts) to December 31, 1991. ** Unit value on date of commencement of operations of the respective Sub-Account. 83 APPENDIX C WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT PART 1: VARIABLE ACCOUNT (THE MARKET VALUE ADJUSTMENT DOES NOT APPLY TO THE VARIABLE ACCOUNT) WITHDRAWAL CHARGE CALCULATION FOR CERTIFICATES WITH DATE OF COVERAGE ON OR AFTER NOVEMBER 1, 1994 WHICH CONTAIN THE CUMULATIVE WITHDRAWAL PROVISION: FULL SURRENDER: Assume a Purchase Payment of $40,000 is made on the Date of Coverage, no additional Purchase Payments are made and there are no partial withdrawals. The table below presents four examples of the withdrawal charge resulting from a full surrender of the Participant's Account, based on hypothetical Account Values.
HYPOTHETICAL FREE PURCHASE WITHDRAWAL WITHDRAWAL ACCOUNT ACCOUNT WITHDRAWAL PAYMENTS CHARGE CHARGE YEAR VALUE AMOUNT LIQUIDATED PERCENTAGE AMOUNT ------- ------------ ---------- ---------- ---------- ---------- 1 $41,000 $ 4,000(a) $37,000 6.00% $2,220 3 $52,000 $12,000(b) $40,000 5.00% $2,000 7 $80,000 $28,000(c) $40,000 3.00% $1,200 9 $98,000 $36,000(d) $40,000 0.00% $ 0
- ------------------------ (a) The free withdrawal amount during an account year is equal to 10% of new payments (those payments made in current account year or in the six immediately preceding account years) less any prior partial withdrawals in that account year. Any portion of the free withdrawal amount that is not used in the current Account Year is carried forward into future years. In the first account year 10% of new payments is $4,000. Therefore, on full surrender $4,000 is withdrawn free of the withdrawal charge and the purchase payment liquidated is $37,000 (account value less free withdrawal amount). The withdrawal charge amount is determined by applying the withdrawal charge percentage to the purchase payment liquidated. (b) In the third account year, the free withdrawal amount is equal to $12,000 ($4,000 for the current account year, plus an additional $8,000 for account years 1 & 2 because no partial withdrawals were taken and the unused free withdrawal amount is carried forward into future account years). The withdrawal charge percentage is applied to the liquidated purchase payment (account value less free withdrawal amount). (c) In the seventh account year, the free withdrawal amount is equal to $28,000 ($4,000 for the current account year, plus an additional $24,000 for account years 1-6, $4,000 for each account year because no partial withdrawals were taken and the unused free withdrawal amount is carried forward into future account years). The withdrawal charge percentage is applied to the liquidated purchase payment (account value less free withdrawal amount, but not greater than actual purchase payments). (d) There is no withdrawal charge on any purchase payment liquidated that has been in the participant's account for at least seven years. PARTIAL WITHDRAWAL: Assume a single purchase payment of $40,000 is deposited at issue, no additional purchase payments are made, no partial withdrawals have been taken prior to the fifth account year, and there 84 are a series of three partial withdrawals made during the fifth account year of $9,000, $12,000, and $15,000.
HYPOTHETICAL PARTIAL FREE PURCHASE WITHDRAWAL WITHDRAWAL ACCOUNT WITHDRAWAL WITHDRAWAL PAYMENTS CHARGE CHARGE VALUE AMOUNT AMOUNT LIQUIDATED PERCENTAGE AMOUNT ------------ ---------- ---------- ---------- ---------- ---------- (a) $64,000 $ 9,000 $20,000 $ 0 4.00% $ 0 (b) $56,000 $12,000 $11,000 $ 1,000 4.00% $ 40 (c) $40,000 $15,000 $ 0 $15,000 4.00% $600
- ------------------------ (a) The free withdrawal amount during an account year is equal to 10% of new payments (those payments made in current account year or in the six immediately preceding account years) less any prior partial withdrawals in that account year. Any portion of the free withdrawal amount that is not used in the current account year is carried forward into future years. In the fifth account year, the free withdrawal amount is equal to $20,000 ($4,000 for the current account year, plus an additional $16,000 for account years 1-4, $4,000 for each account year because no partial withdrawals were taken). The partial withdrawal amount ($9,000) is less than the free withdrawal amount so no purchase payments are liquidated and no withdrawal charge applies. (b) Since a partial withdrawal of $9,000 was taken, the remaining free withdrawal amount is equal to $11,000. The $12,000 partial withdrawal will first be applied against the $11,000 free withdrawal amount, and then will liquidate purchase payments of $1,000, incurring a withdrawal charge of $40. (c) The free withdrawal amount is zero since the previous partial withdrawals have already used the free withdrawal amount. The entire partial withdrawal amount will result in purchase payments being liquidated and will incur a withdrawal charge. At the beginning of the next account year, 10% of purchase payments would be available for withdrawal requests during that account year. WITHDRAWAL CHARGE CALCULATION FOR CERTIFICATES WITH DATE OF COVERAGE BEFORE NOVEMBER 1, 1994 AND CERTIFICATES ISSUED AFTER THAT DATE WHICH DO NOT CONTAIN THE CUMULATIVE WITHDRAWAL PROVISION. This example assumes that the date of the full surrender or partial withdrawal is during the 9th Account Year.
1 2 3 4 5 6 --- ------------ ---------- ---------- --- ---------- 1 $ 1,000 $ 1,000 $ 0 0% $ 0 2 1,200 1,200 0 0 0 3 1,400 1,280 120 3 3.60 4 1,600 0 1,600 4 64.00 5 1,800 0 1,800 4 72.00 6 2,000 0 2,000 5 100.00 7 2,000 0 2,000 5 100.00 8 2,000 0 2,000 6 120.00 9 2,000 0 2,000 6 120.00 -- ------------ ---------- ---------- ---------- $ 15,000 $ 3,480 $ 11,520 $ 579.60 ------------ ---------- ---------- ---------- ------------ ---------- ---------- ----------
EXPLANATION OF COLUMNS IN TABLE COLUMNS 1 AND 2: Represent Purchase Payments ("Payments") and amounts of Payments. Each Payment was made on the first day of each Account Year. 85 COLUMN 3: Represents the amounts that may be withdrawn without the imposition of withdrawal charges, as follows: a) Payments 1 and 2, $1,000 and $1,200, respectively, have been credited to the Certificate for more than seven years. b) $1,280 of Payment 3 represents 10% of Payments that have been credited to the Certificate for less than seven years. The 10% amount is applied to the oldest unliquidated Payment, then the next oldest and so forth. COLUMN 4: Represents the amount of each Payment that is subject to a withdrawal charge. It is determined by subtracting the amount in Column 3 from the Payment in Column 2. COLUMN 5: Represents the withdrawal charge percentages imposed on the amounts in Column 4. COLUMN 6: Represents the withdrawal charge imposed on each Payment. It is determined by multiplying the amount in Column 4 by the percentage in Column 5. For example, the withdrawal charge imposed on Payment 8 = Payment 8 Column 4 X Payment 8 Column 5 = $2,000 X 6% = $120 FULL SURRENDER: The total of Column 6, $579.60, represents the total amount of withdrawal charges imposed on Payments in this example. PARTIAL WITHDRAWAL: The sum of amounts in Column 6 for as many Payments as are liquidated reflects the withdrawal charges imposed in the case of a partial withdrawal. For example, if $7,000 of Payments (Payments 1, 2, 3, 4, and 5) were withdrawn, the amount of the withdrawal charges imposed would be the sum of amounts in Column 6 for Payments 1, 2, 3, 4 and 5 which is $139.60. PART 2--FIXED ACCOUNT--EXAMPLES OF THE MARKET VALUE ADJUSTMENT (MVA) The MVA factor is: N/12 1 + I ( ----- ) -1 1 + J
These examples assume the following: 1) the Guarantee Amount was allocated to a five year Guarantee Period with a Guaranteed Interest Rate of 6% or .06 (l). 2) the date of surrender is two years from the Expiration Date (N = 24). 3) the value of the Guarantee Amount on the date of surrender is $11,910.16. 4) the interest earned in the current Account Year is $674.16. 5) no transfers or partial withdrawals affecting this Guarantee Amount have been made 86 6) withdrawal charges, if any, are calculated in the same manner as shown in the examples in Part 1. EXAMPLE OF A NEGATIVE MVA: Assume that on the date of surrender, the current rate (J) is 8% or .08. N/12 1 + l The MVA factor = ( ------ ) -1 1 + J 24/12 1 + .06 = ( ------ ) -1 1 + .08 = (.981)2 -1 = .963 -1 = - .037
The value of the Guarantee Amount less interest credited to the Guarantee Amount in the current Account Year is multiplied by the MVA factor to determine the MVA ($11,910.16 - $674.16) X (-.037) = -$415.73 -$415.73 represents the MVA that will be deducted from the value of the Guarantee Amount before the deduction of any withdrawal charge. For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA would be ($2,000.00 - $674.16) X (-.037) = -$49.06. -$49.06 represents the MVA that will be deducted from the partial withdrawal amount before the deduction of any withdrawal charge. EXAMPLE OF A POSITIVE MVA: Assume that on the date of surrender, the current rate (J) is 5% or .05. N/12 1 + l The MVA factor = ( ------ ) -1 1 + J 24/12 1 + .06 = ( ------ ) -1 1 + .05 = (1.010)2 -1 = 1.019 -1 = .019 The value of the Guarantee Amount less interested credited to the Guarantee Amount in the current Account Year is multiplied by the MVA factor to determine the MVA ($11,910.16 - $674.16) X .019 = $213.48 $213.48 represents the MVA that would be added to the value of the Guarantee Amount before the deduction of any withdrawal charge. For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA would be ($2,000.00 - $674.16) X .019 = $25.19. $25.19 represents the MVA that would be added to the value of the partial withdrawal amount before the deduction of any withdrawal charge. 87 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) ANNUITY SERVICE MAILING ADDRESS: C/O RETIREMENT PRODUCTS AND SERVICES P.O. BOX 1024 BOSTON, MASSACHUSETTS 02103 TELEPHONE: Toll Free (800) 752-7215 In Massachusetts (617) 348-9600 GENERAL DISTRIBUTOR Clarendon Insurance Agency, Inc. One Sun Life Executive Park Wellesley Hills, Massachusetts 02481 AUDITORS Deloitte Touche LLP 125 Summer Street Boston, Massachusetts 02110 GOLD-1 5/99
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) MAY 1, 1999 PROFILE FUTURITY II VARIABLE AND FIXED ANNUITY THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU SHOULD KNOW AND CONSIDER BEFORE PURCHASING THE CONTRACT. THE CONTRACT IS MORE FULLY DESCRIBED IN THE FULL PROSPECTUS WHICH ACCOMPANIES THIS PROFILE. PLEASE READ THE PROSPECTUS CAREFULLY. 1. THE FUTURITY II ANNUITY The Futurity II Annuity is a flexible payment deferred annuity contract ("Contract") designed for use in connection with retirement and deferred compensation plans, some of which may qualify for favorable federal income tax treatment. The Contract is intended to help you achieve your retirement savings or other long-term investment goals. The Contract has two phases: an Accumulation Phase and an Income Phase. During the Accumulation Phase you make payments into the Contract; any investment earnings under your Contract accumulate on a tax-deferred basis and are taxed as income only when withdrawn. During the Income Phase, we make annuity payments in amounts determined in part by the amount of money you have accumulated under your Contract during the Accumulation Phase. You choose when the Income Phase begins. You may choose among 36 variable investment options and a range of fixed interest options. For a variable investment return you choose one or more Sub-Accounts in our Variable Account, each of which invests in shares of a corresponding mutual fund or series thereof (collectively, the "Funds") listed in Section 4. The value of any portion of your Contract allocated to the Sub-Accounts will fluctuate up or down depending on the performance of the Funds you select, and you may experience losses. For a fixed interest rate, you may choose one or more Guarantee Periods offered in our Fixed Account, each of which earns its own Guaranteed Interest Rate if you keep your money in that Guarantee Period for the specified length of time. The Contract is designed to meet your need for investment flexibility. At any time you may have amounts allocated among up to 18 of the available variable and fixed options. Until we begin making annuity payments under your Contract, you can, subject to certain limitations, transfer money between options up to 12 times each year without a transfer charge or adverse tax consequences. 2. ANNUITY PAYMENTS (THE INCOME PHASE) Just as you can elect to have your Contract value accumulate on either a variable or fixed basis, or a combination of both, you can elect to receive annuity payments on either a variable or fixed basis or both. If you choose to have any part of your annuity payments come from the Sub-Accounts, the dollar amount of your annuity payments may fluctuate. The Contract offers a variety of annuity options. You can select from among the following methods of receiving either variable or fixed annuity payments under your Contract: (1) monthly payments continuing for your lifetime (assuming you are the annuitant); (2) monthly payments for your lifetime, but with payments continuing to your chosen beneficiary for 5, 10, 15 or 20 years if you die before the end of the period you have selected; (3) monthly payments for your lifetime and the life of another person (usually your spouse) you have chosen; and (4) monthly payments for a specified number of years (between 5 and 30), with a cash-out option for variable payments. We may also agree to other annuity options in our discretion. Once the Income Phase begins, you cannot change your choice of annuity payment method. 3. PURCHASING A CONTRACT You may purchase a Contract for $10,000 or more, under most circumstances. You may increase the value of your investment by adding $1,000 or more at any time during the Accumulation Phase. We will not accept a Purchase Payment if your Account Value is over $1 million, or if the Purchase Payment would cause your Account Value to exceed $1 million, unless we have approved the Payment in advance. 4. ALLOCATION OPTIONS You can allocate your money among Sub-Accounts investing in the following Funds: AIM VARIABLE INSURANCE FUNDS, INC. MFS/SUN LIFE SERIES TRUST V.I. Capital Appreciation Fund Capital Appreciation Series V.I. Growth Fund Emerging Growth Series V.I. Growth and Income Fund Government Securities Series V.I. International Equity Fund High Yield Series THE ALGER AMERICAN FUND Massachusetts Investors Growth Stock Series Growth Portfolio Massachusetts Investors Trust Series Income and Growth Portfolio New Discovery Series Small Capitalization Portfolio Total Return Series GOLDMAN SACHS VARIABLE INSURANCE TRUST Utilities Series CORE Large Cap Growth Fund OCC ACCUMULATION TRUST CORE Small Cap Equity Fund Equity Portfolio CORE U.S. Equity Fund Managed Portfolio Growth and Income Fund Mid Cap Portfolio International Equity Fund Small Cap Portfolio J.P. MORGAN SERIES TRUST II SUN CAPITAL ADVISERS TRUST Equity Portfolio Sun Capital Investment Grade Bond Fund International Opportunities Portfolio Sun Capital Money Market Fund Small Company Portfolio Sun Capital Real Estate Fund LORD ABBETT SERIES FUND, INC. WARBURG PINCUS TRUST Growth and Income Portfolio Emerging Markets Portfolio International Equity Portfolio Post-Venture Capital Portfolio Small Company Growth Portfolio
Market conditions will determine the value of an investment in any Fund. Each Fund is described in the relevant Fund Prospectus. In addition to these variable options, you may also allocate your money to one or more of the Guarantee Periods we make available. For each Guarantee Period, we offer a Guaranteed Interest Rate for the specified length of time. 5. EXPENSES The charges under the Contracts are as follows: During the first 5 years of a Contract, we impose an annual Account Fee equal to the lesser of $35 or 2% of the value of your Contract. After the fifth year, we may change this fee annually, but it will never exceed the lesser of $50 or 2% of the value of your Contract. During the Income Phase, the annual Account Fee is $35. We also deduct insurance charges (which include an administrative expense charge) equal to 1.40% per year of the average daily value of the Contract allocated among the Sub-Accounts. There are no sales charges when you purchase your Futurity II Annuity. However, if you withdraw money from your Contract, we will, with certain exceptions, impose a withdrawal charge. Your Contract allows a "free withdrawal amount," which you may withdraw before you incur the withdrawal charge. The rest of your withdrawal is subject to a withdrawal charge equal to a percentage of each 2 purchase payment you withdraw and is determined in accordance with the table below. The percentage varies according to the number of Contract years the purchase payment has been held in your account, including the year in which you made the Payment, but not the year in which you withdrew it.
NUMBER OF YEARS IN ACCOUNT WITHDRAWAL CHARGE - ----------------- ----------------------- 0-1 6% 2-3 5% 4-5 4% 6 3% 7 or more 0%
If you withdraw, transfer, or annuitize money allocated to a Guarantee Period more than 30 days before the expiration date of the Guarantee Period, the amount will be subject to a Market Value Adjustment. This adjustment reflects the relationship between our current Guaranteed Interest Rates and the Guaranteed Interest Rate applicable to the amount being withdrawn. Generally, if your Guaranteed Interest Rate is lower than the relevant current rate, then the adjustment will decrease your Contract value. Conversely, if your Guaranteed Interest Rate is higher than the relevant current rate, the adjustment will increase your Contract value. The Market Value Adjustment will not apply to the withdrawal of interest credited during the current year, or to transfers as part of our dollar cost averaging program. In addition to the charges we impose under the Contracts, there are charges (which include management fees and operating expenses) imposed by each Fund, which range from 0.59% to 1.40% of the average net assets of the Fund, depending upon which Fund you have selected. The investment advisers to some of the Funds have agreed to waive or reimburse a portion of Fund expenses; without this agreement, Fund expenses could be higher. Some of these arrangements may be terminated at any time. The following chart is designed to help you understand the expenses you will incur under your Contract, if you invest in one or more of the Sub-Accounts. The column "Total Annual Expenses" shows the sum of the "Total Annual Insurance Charges," as defined just above the chart, and the total expenses (net of any applicable expense reimbursement or fee waiver) for each Fund. The next two columns show two examples of the expenses, in dollars, you would pay under a Contract. The examples assume that you invested $1,000 in a Contract which earns 5% annually and that you withdraw your money (1) at the end of one year or (2) at the end of 10 years. For the first year, the Total Annual Expenses are deducted, as well as withdrawal charges. For year 10, the example shows the aggregate of all of the annual expenses deducted for the 10 years, but there is no withdrawal charge. "Total Annual Insurance Charges" include the insurance charges of 1.40%, plus an additional 0.10%, which is used to represent the $35 annual Account Fee based on an assumed Contract value of $35,000. The actual impact of the Account Fee may be greater or less than 0.10%, depending upon the value of your Contract.
EXAMPLES: TOTAL TOTAL ANNUAL TOTAL ANNUAL TOTAL EXPENSES INSURANCE SERIES ANNUAL AT END SUB-ACCOUNT CHARGES EXPENSES EXPENSES 1 YEAR - ----------------------------------------------------------- ---------------- --------------- ----------- ----------- AIM V.I. Capital Appreciation Fund 1.50% 0.67% 2.17% $ 78 (1.40% + 0.10%) AIM V.I. Growth Fund 1.50% 0.72% 2.22% $ 78 (1.40% + 0.10%) AIM V.I. Growth and Income Fund 1.50% 0.65% 2.15% $ 78 (1.40% + 0.10%) AIM V.I. International Equity Fund 1.50% 0.91% 2.41% $ 80 (1.40% + 0.10%) Alger American Growth Portfolio 1.50% 0.79% 2.29% $ 79 (1.40% + 0.10%) Alger American Income and Growth Portfolio 1.50% 0.70% 2.20% $ 78 (1.40% + 0.10%) Alger American Small Capitalization Portfolio 1.50% 0.89% 2.39% $ 80 (1.40% + 0.10%) SUB-ACCOUNT 10 YEARS - ----------------------------------------------------------- ------------- AIM V.I. Capital Appreciation Fund $ 250 AIM V.I. Growth Fund $ 255 AIM V.I. Growth and Income Fund $ 248 AIM V.I. International Equity Fund $ 275 Alger American Growth Portfolio $ 263 Alger American Income and Growth Portfolio $ 257 Alger American Small Capitalization Portfolio $ 273
3
EXAMPLES: TOTAL TOTAL ANNUAL TOTAL ANNUAL TOTAL EXPENSES INSURANCE SERIES ANNUAL AT END SUB-ACCOUNT CHARGES EXPENSES EXPENSES 1 YEAR - ----------------------------------------------------------- ---------------- --------------- ----------- ----------- Goldman Sachs VIT CORE Large Cap Growth Fund 1.50% 0.80% 2.30% $ 79 (1.40% + 0.10%) Goldman Sachs VIT CORE Small Cap Equity Fund 1.50% 0.90% 2.40% $ 80 (1.40% + 0.10%) Goldman Sachs VIT CORE U.S. Equity Fund 1.50% 0.80% 2.30% $ 79 (1.40% + 0.10%) Goldman Sachs VIT Growth and Income Fund 1.50% 0.90% 2.40% $ 80 (1.40% + 0.10%) Goldman Sachs VIT International Equity Fund 1.50% 1.25% 2.75% $ 83 (1.40% + 0.10%) J.P. Morgan Equity Portfolio 1.50% 0.90% 2.40% $ 80 (1.40% + 0.10%) J.P. Morgan International Opportunities Portfolio 1.50% 1.20% 2.70% $ 83 (1.40% + 0.10%) J.P. Morgan Small Company Portfolio 1.50% 1.15% 2.65% $ 82 (1.40% + 0.10%) Lord Abbett Growth and Income Portfolio 1.50% 0.51% 2.01% $ 76 (1.40% + 0.10%) MFS/Sun Life Capital Appreciation Series 1.50% 0.77% 2.27% $ 79 (1.40% + 0.10%) MFS/Sun Life Emerging Growth Series 1.50% 0.78% 2.28% $ 79 (1.40% + 0.10%) MFS/Sun Life Government Securities Series 1.50% 0.62% 2.12% $ 77 (1.40% + 0.10%) MFS/Sun Life High Yield Series 1.50% 0.82% 2.32% $ 79 (1.40% + 0.10%) MFS/Sun Life Massachusetts Investors Growth Stock Series 1.50% 0.97% 2.47% $ 81 (1.40% + 0.10%) MFS/Sun Life Massachusetts Investors Trust Series 1.50% 0.59% 2.09% $ 77 (1.40% + 0.10%) MFS/Sun Life New Discovery Series 1.50% 1.28% 2.78% $ 83 (1.40% + 0.10%) MFS/Sun Life Total Return Series 1.50% 0.70% 2.20% $ 78 (1.40% + 0.10%) MFS/Sun Life Utilities Series 1.50% 0.86% 2.36% $ 79 (1.40% + 0.10%) OCC Equity Portfolio 1.50% 0.94% 2.44% $ 80 (1.40% + 0.10%) OCC Managed Portfolio 1.50% 0.82% 2.32% $ 79 (1.40% + 0.10%) OCC Mid Cap Portfolio 1.50% 1.05% 2.55% $ 81 (1.40% + 0.10%) OCC Small Cap Portfolio 1.50% 0.88% 2.38% $ 80 (1.40% + 0.10%) Sun Capital Investment Grade Bond Fund 1.50% 0.75% 2.25% $ 78 (1.40% + 0.10%) Sun Capital Money Market Fund 1.50% 0.65% 2.15% $ 78 (1.40% + 0.10%) Sun Capital Real Estate Fund 1.50% 1.25% 2.75% $ 83 (1.40% + 0.10%) Warburg Pincus Emerging Markets Portfolio 1.50% 1.40% 2.90% $ 85 (1.40% + 0.10%) Warburg Pincus International Equity Portfolio 1.50% 1.33% 2.83% $ 84 (1.40% + 0.10%) Warburg Pincus Post-Venture Capital Portfolio 1.50% 1.40% 2.90% $ 85 (1.40% + 0.10%) Warburg Pincus Small Company Growth Portfolio 1.50% 1.14% 2.64% $ 82 (1.40% + 0.10%) SUB-ACCOUNT 10 YEARS - ----------------------------------------------------------- ------------- Goldman Sachs VIT CORE Large Cap Growth Fund $ 264 Goldman Sachs VIT CORE Small Cap Equity Fund $ 274 Goldman Sachs VIT CORE U.S. Equity Fund $ 264 Goldman Sachs VIT Growth and Income Fund $ 274 Goldman Sachs VIT International Equity Fund $ 308 J.P. Morgan Equity Portfolio $ 274 J.P. Morgan International Opportunities Portfolio $ 303 J.P. Morgan Small Company Portfolio $ 298 Lord Abbett Growth and Income Portfolio $ 234 MFS/Sun Life Capital Appreciation Series $ 262 MFS/Sun Life Emerging Growth Series $ 265 MFS/Sun Life Government Securities Series $ 246 MFS/Sun Life High Yield Series $ 268 MFS/Sun Life Massachusetts Investors Growth Stock Series $ 281 MFS/Sun Life Massachusetts Investors Trust Series $ 242 MFS/Sun Life New Discovery Series $ 311 MFS/Sun Life Total Return Series $ 253 MFS/Sun Life Utilities Series $ 270 OCC Equity Portfolio $ 278 OCC Managed Portfolio $ 266 OCC Mid Cap Portfolio $ 289 OCC Small Cap Portfolio $ 272 Sun Capital Investment Grade Bond Fund $ 258 Sun Capital Money Market Fund $ 248 Sun Capital Real Estate Fund $ 308 Warburg Pincus Emerging Markets Portfolio $ 322 Warburg Pincus International Equity Portfolio $ 319 Warburg Pincus Post-Venture Capital Portfolio $ 322 Warburg Pincus Small Company Growth Portfolio $ 298
For more detailed information about Contract fees and expenses, please refer to the fee table and discussion of Contract charges contained in the full Prospectus which accompanies this Profile. 4 6. TAXES Your earnings are not taxed until you take them out of your Contract. If you take money out, earnings come out first and are taxed as income. If your Contract is funded with pre-tax or tax deductible dollars (such as with a pension or IRA contribution) -- we call this a Qualified Contract -- your entire withdrawal will be taxable. If you are younger than 59 1/2 when you take money out, you may be charged a 10% federal penalty tax on the earnings. Annuity payments during the Income Phase are considered in part a return of your original investment. That portion of each payment is not taxable, except under a Qualified Contract, in which case the entire payment will be taxable. In all cases, you should consult with your tax adviser for specific tax information. 7. ACCESS TO YOUR MONEY You can withdraw money from your Contract at any time during the Accumulation Phase. You may withdraw a portion of the value of your Contract in each year without the imposition of the withdrawal charge -- 10% of all payments you have made in the last 7 years, plus any payment we have held for at least 7 years. All other purchase payments you withdraw will be subject to a withdrawal charge ranging from 6% to 0%. You may also be required to pay income tax and possible tax penalties on any money you withdraw. We do not assess a withdrawal charge upon annuitization or transfers. In certain circumstances, we will waive the withdrawal charges for a full withdrawal when you are confined to an eligible nursing home. In addition, there may be other circumstances under which we may waive the withdrawal charge. In addition to the withdrawal charge, amounts you withdraw, transfer or annuitize from the Fixed Account before your Guarantee Period has ended may be subject to a Market Value Adjustment. 8. PERFORMANCE If you invest in the Variable Account, the value of your Contract will increase or decrease depending upon the investment performance of the Fund you choose. The Sub-Accounts have not been in operation for a full calendar year; therefore no performance information is provided in this Profile. 9. DEATH BENEFIT If you die before the Contract reaches the Income Phase, the beneficiary will receive a death benefit. To calculate the death benefit, we use a "Death Benefit Date", which is the earliest date we have both due proof of death and a written request specifying the manner of payment. If you were 85 or younger when we issued your Contract, the death benefit is the greatest of: (1) the value of the Contract on the Death Benefit Date; (2) the amount we would pay in the event of a full surrender of the Contract on the Death Benefit Date; (3) the value of the Contract on the most recent 7 year anniversary of the Contract, plus any purchase payments made and adjusted for any partial withdrawals and charges made after that anniversary; (4) your highest Contract Value on any Account Anniversary before your 81st birthday, adjusted for subsequent purchase payments and partial withdrawals and charges made between that Account Anniversary and the Death Benefit Date; and (5) your total Purchase Payments, plus interest on Purchase Payments allocated to and transfers to the Variable Account -- while they remain in the Variable Account -- at 5% per year until the first day of the month following your 80th birthday, or until the Purchase Payment or amount transferred has doubled in amount, whichever is earlier; this amount is adjusted for partial withdrawals. 5 If you were 86 or older when we issued your Contract, the death benefit is equal to the amount set forth in (2) above, in this Section 9. 10. OTHER INFORMATION FREE LOOK. Depending upon applicable state law, if you cancel your Contract within 10 days after receiving it we will send you the value of your Contract as of the day we received your cancellation request (this may be more or less than the original purchase payment) and we will not deduct a withdrawal charge. However, if applicable state or federal law requires, we will refund the full amount of any purchase payment(s) we receive and the "free look" period may be greater than 10 days. NO PROBATE. In most cases, when you die, the beneficiary will receive the death benefit without going through probate. However, avoiding probate does not mean that the beneficiary will not have tax liability as a result of receiving the death benefit. WHO SHOULD PURCHASE A CONTRACT? The Contract is designed for those seeking long-term tax deferred accumulation of assets and annuity features, generally for retirement or other long-term purposes. The tax-deferred feature is most attractive to purchasers in high federal and state income tax brackets. You should note that qualified retirement investments automatically provide tax deferral regardless of whether the underlying contract is an annuity. You should not buy a Contract if you are looking for a short-term investment or if you cannot risk a decrease in the value of your investment. CONFIRMATIONS AND QUARTERLY STATEMENTS. You will receive a confirmation of each transaction within your Contract. On a quarterly basis, you will receive a complete statement of your transactions over the past quarter and a summary of your account values during that period. ADDITIONAL FEATURES. The Futurity II Annuity offers the following additional convenient features, which you may choose at no extra charge. Dollar Cost Averaging -- This program lets you invest gradually in up to 12 Sub-Accounts. Asset Allocation -- One or more asset allocation programs may be available in connection with the Contract. Systematic Withdrawal Program -- This program allows you to receive quarterly, semi-annual or annual payments during the Accumulation Phase. Portfolio Rebalancing Programs -- Under this program, we automatically reallocate your investments in the Sub-Accounts to maintain the proportions you select. You can elect rebalancing on a quarterly, semi-annual or annual basis. 11. INQUIRIES If you would like more information about buying a Contract, please contact your broker or registered representative. If you have any other questions, please contact us at: SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) ANNUITY SERVICE MAILING ADDRESS C/O RETIREMENT PRODUCTS AND SERVICES P.O. BOX 9133 BOSTON, MASSACHUSETTS 02117 TEL: TOLL FREE (888) 786-2435 IN MASSACHUSETTS (617) 348-9600 6 PROSPECTUS MAY 1, 1999 FUTURITY II Sun Life Assurance Company of Canada (U.S.) and Sun Life of Canada (U.S.) Variable Account F offer the flexible payment deferred annuity contracts and certificates described in this Prospectus to groups and individuals. You may choose among 36 variable investment options and a range of fixed options. The variable options are Sub-Accounts in the Variable Account, each of which invests in shares of one of the following mutual funds or a series thereof (the "Funds"). AIM VARIABLE INSURANCE FUNDS, INC. MFS/SUN LIFE SERIES TRUST V.I. Capital Appreciation Fund Capital Appreciation Series V.I. Growth Fund Emerging Growth Series V.I. Growth and Income Fund Government Securities Series V.I. International Equity Fund High Yield Series THE ALGER AMERICAN FUND Massachusetts Investors Growth Stock Series Growth Portfolio Massachusetts Investors Trust Series Income and Growth Portfolio New Discovery Series Small Capitalization Portfolio Total Return Series GOLDMAN SACHS VARIABLE INSURANCE TRUST Utilities Series CORE Large Cap Growth Fund OCC ACCUMULATION TRUST CORE Small Cap Equity Fund Equity Portfolio CORE U.S. Equity Fund Managed Portfolio Growth and Income Fund Mid Cap Portfolio International Equity Fund Small Cap Portfolio J.P. MORGAN SERIES TRUST II SUN CAPITAL ADVISERS TRUST Equity Portfolio Sun Capital Investment Grade Bond Fund International Opportunities Portfolio Sun Capital Money Market Fund Small Company Portfolio Sun Capital Real Estate Fund LORD ABBETT SERIES FUND, INC. WARBURG PINCUS TRUST Growth and Income Portfolio Emerging Markets Portfolio International Equity Portfolio Post-Venture Capital Portfolio Small Company Growth Portfolio
The fixed account options are available for specified time periods, called Guarantee Periods, and pay interest at a guaranteed rate for each period. PLEASE READ THIS PROSPECTUS AND THE FUND PROSPECTUSES CAREFULLY BEFORE INVESTING AND KEEP THEM FOR FUTURE REFERENCE. THEY CONTAIN IMPORTANT INFORMATION ABOUT THE FUTURITY II ANNUITY AND THE FUNDS. We have filed a Statement of Additional Information dated May 1, 1999 (the "SAI") with the Securities and Exchange Commission (the "SEC"), which is incorporated by reference in this Prospectus. The table of contents for the SAI is on page 78 of this Prospectus. You may obtain a copy without charge by writing to our Annuity Service Mailing Address or by telephoning (800) 752-7215 or (617) 348-9600. In addition, the SEC maintains a website (http://www.sec.gov) that contains the SAI, material incorporated by reference, and other information regarding companies that file with the SEC. THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY US MEANS RECEIPT AT THE FOLLOWING ADDRESS: ANNUITY SERVICE MAILING ADDRESS, C/O SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) RETIREMENT PRODUCTS AND SERVICES, P.O. BOX 9133, BOSTON, MASSACHUSETTS 02117 1 TABLE OF CONTENTS
PAGE Special Terms Expense Summary Summary of Contract Expenses Underlying Fund Annual Expenses Examples Condensed Financial Information The Futurity II Annuity Communicating To Us About Your Contract Sun Life Assurance Company of Canada (U.S.) The Variable Account Variable Account Options: The Funds The Fixed Account The Fixed Account Options: The Guarantee Periods The Accumulation Phase Issuing Your Contract Amount and Frequency of Purchase Payments Allocation of Net Purchase Payments Your Account Your Account Value Variable Account Value Fixed Account Value Transfer Privilege Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest Rates Optional Programs Withdrawals, Withdrawal Charge and Market Value Adjustment Cash Withdrawals Withdrawal Charge Market Value Adjustment Contract Charges Account Fee Administrative Expense Charge Mortality and Expense Risk Charge Premium Taxes Fund Expenses Modification in the Case of Group Contracts Death Benefit Amount of Death Benefit Method of Paying Death Benefit Non-Qualified Contracts Selection and Change of Beneficiary Payment of Death Benefit Due Proof of Death The Income Phase -- Annuity Provisions Selection of the Annuitant or Co-Annuitant Selection of the Annuity Commencement Date Annuity Options Selection of Annuity Option Amount of Annuity Payments Exchange of Variable Annuity Units Account Fee Annuity Payment Rates Annuity Options as Method of Payment for Death Benefit
2 Other Contract Provisions Exercise of Contract Rights Change of Ownership Voting of Fund Shares Periodic Reports Substitution of Securities Change in Operation of Variable Account Splitting Units Modification Discontinuance of New Participants Reservation of Rights Right to Return Federal Tax Status Introduction Deductibility of Purchase Payments Pre-Distribution Taxation of Contracts Distributions and Withdrawals from Non-Qualified Contracts Distribution and Withdrawals from Qualified Contracts Withholding Purchase of Immediate Annuity Contract and Deferred Annuity Contract Investment Diversification and Control Tax Treatment of the Company and the Variable Account Qualified Retirement Plans Pension and Profit-Sharing Plans Tax-Sheltered Annuities Individual Retirement Accounts Roth IRAs Administration of the Contracts Distribution of the Contracts Performance Information Available Information Incorporation of Certain Documents by Reference Additional Information About the Company Business of the Company Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Demutualization Year 2000 Compliance Sale of Subsidiary Quantitative and Qualitative Disclosures About Market Risk Reinsurance Reserves Investments Competition Employees Properties State Regulation Legal Proceedings Accountants Financial Statements Table of Contents of Statement of Additional Information Appendix A -- Glossary Appendix B -- Condensed Financial Information-- Accumulation Unit Values Appendix C -- Withdrawals, Withdrawal Charges and the Market Value Adjustment
3 SPECIAL TERMS Your Contract is a legal document that uses a number of specially defined terms. We explain most of the terms that we use in this Prospectus in the context where they arise, and some are self-explanatory. In addition, for convenient reference, we have compiled a list of these terms in the Glossary included at the back of this Prospectus as Appendix A. If, while you are reading this Prospectus, you come across a term that you do not understand, please refer to the Glossary for an explanation. EXPENSE SUMMARY The purpose of the following table is to help you understand the costs and expenses that you will bear directly and indirectly under a Contract WHEN YOU ALLOCATE MONEY TO THE VARIABLE ACCOUNT. The table reflects expenses of the Variable Account as well as of each Fund. The table should be considered together with the narrative provided under the heading "Contract Fees" in this Prospectus, and with the Funds' prospectuses. In addition to the expenses listed below, we may deduct premium taxes. SUMMARY OF CONTRACT EXPENSES TRANSACTION EXPENSES Sales Load Imposed on Purchase Payments............................................ $ 0 Deferred Sales Load (as a percentage of Purchase Payments withdrawn) (1) Number of Account Years Purchase Payment in Account 0-1............................................................................ 6% 2-3............................................................................ 5% 4-5............................................................................ 4% 6.............................................................................. 3% 7 or more...................................................................... 0% Transfer Fee (2)................................................................... $ 0 ANNUAL ACCOUNT FEE per Contract or Certificate (3) $ 35 VARIABLE ACCOUNT ANNUAL EXPENSES (as a percentage of average Variable Account assets) Mortality and Expense Risk Charge................................................ 1.25% Administrative Expense Charge.................................................... 0.15% Other Fees and Expenses of the Variable Account.................................. 0.00% ----- Total Variable Account Annual Expenses............................................. 1.40%
- ------------------------ (1) A portion of your Account may be withdrawn each year without imposition of any withdrawal charge, and after a Purchase Payment has been in your Account for 7 Account Years it may be withdrawn free of the withdrawal charge. (2) A Market Value Adjustment may be imposed on amounts transferred from or within the Fixed Account. (3) The Annual Account Fee is the lesser of $35 and 2% of your Account Value in Account Years 1 through 5; thereafter, the fee may be changed annually, but it may not exceed the lesser of $50 and 2% of your Account Value. 4 UNDERLYING FUND ANNUAL EXPENSES (1) (AS A PERCENTAGE OF FUND NET ASSETS)
TOTAL FUND MANAGEMENT OTHER ANNUAL FEES (AFTER EXPENSES (AFTER EXPENSES (AFTER REIMBURSEMENT)(2) REIMBURSEMENT)(2) REIMBURSEMENT)(2) ------------------- ------------------- ------------------- AIM V.I. Capital Appreciation Fund....................... 0.62% 0.05% 0.67% AIM V.I. Growth Fund..................................... 0.64% 0.08% 0.72% AIM V.I. Growth and Income Fund.......................... 0.61% 0.04% 0.65% AIM V.I. International Equity Fund....................... 0.75% 0.16% 0.91% Alger American Growth Portfolio.......................... 0.75% 0.04% 0.79% Alger American Income and Growth Portfolio............... 0.62% 0.08% 0.70% Alger American Small Capitalization Portfolio............ 0.85% 0.04% 0.89% Goldman Sachs VIT CORE Large Cap Growth Fund(3).......... 0.70% 0.10% 0.80% Goldman Sachs VIT CORE Small Cap Equity Fund(3).......... 0.75% 0.15% 0.90% Goldman Sachs VIT CORE U.S. Equity Fund(3)............... 0.70% 0.10% 0.80% Goldman Sachs VIT Growth and Income Fund(3).............. 0.75% 0.15% 0.90% Goldman Sachs VIT International Equity Fund(3)........... 1.00% 0.25% 1.25% J.P. Morgan Equity Portfolio(4).......................... 0.40% 0.50% 0.90% J.P. Morgan International Opportunities Portfolio(4)..... 0.60% 0.60% 1.20% J.P. Morgan Small Company Portfolio(4)................... 0.60% 0.55% 1.15% Lord Abbett Growth and Income Portfolio.................. 0.50% 0.01% 0.51% MFS/Sun Life Capital Appreciation Series................. 0.73% 0.04% 0.77% MFS/Sun Life Emerging Growth Series...................... 0.72% 0.06% 0.78% MFS/Sun Life Government Securities Series................ 0.55% 0.07% 0.62% MFS/Sun Life High Yield Series........................... 0.75% 0.07% 0.82% MFS/Sun Life Massachusetts Investors Growth Stock Series.................................................. 0.75% 0.22% 0.97% MFS/Sun Life Massachusetts Investors Trust Series........ 0.55% 0.04% 0.59% MFS/Sun Life New Discovery Series(5)..................... 0.90% 0.38% 1.28% MFS/Sun Life Total Return Series......................... 0.65% 0.05% 0.70% MFS/Sun Life Utilities Series............................ 0.75% 0.11% 0.86% OCC Equity Portfolio(6).................................. 0.80% 0.14% 0.94% OCC Managed Portfolio(6)................................. 0.78% 0.04% 0.82% OCC Mid Cap Portfolio(6)................................. 0.00% 1.05% 1.05% OCC Small Cap Portfolio(6)............................... 0.80% 0.08% 0.88% Sun Capital Investment Grade Bond Fund(3)(7)............. 0.60% 0.15% 0.75% Sun Capital Money Market Fund(3)(7)...................... 0.50% 0.15% 0.65% Sun Capital Real Estate Fund(3)(7)....................... 0.95% 0.30% 1.25% Warburg Pincus Emerging Markets Portfolio(3)............. 0.20% 1.20% 1.40% Warburg Pincus International Equity Portfolio............ 1.00% 0.33% 1.33% Warburg Pincus Post-Venture Capital Portfolio(3)......... 1.08% 0.32% 1.40% Warburg Pincus Small Company Growth Portfolio............ 0.90% 0.24% 1.14%
5 - ------------------------ (1) The information relating to Fund expenses was provided by the Funds and we have not independently verified it. You should consult the Fund prospectuses for more information about Fund expenses (2) "Management Fees," "Other Expenses" and "Total Fund Annual Expenses" are based on actual expenses for the fiscal year ended December 31, 1998, net of any applicable expense reimbursement or waiver. (3) The investment advisers for the indicated Funds have voluntarily agreed to waive or reimburse a portion of the management fees and/or operating expenses resulting in a reduction of the total expenses. Absent any such waiver or reimbursement, "Management Fees," "Other Expenses" and "Total Fund Annual Expenses" were: 0.70%, 2.17%, and 2.87% for the Goldman Sachs VIT CORE Large Cap Growth Fund; 0.75%, 3.17%, and 3.92% for the Goldman Sachs VIT CORE Small Cap Equity Fund; 0.70%, 2.13%, and 2.83% for the Goldman Sachs VIT CORE U.S. Equity Fund; 0.75%, 1.94%, and 2.69% for the Goldman Sachs VIT Growth and Income Fund; 1.00%, 1.97%, and 2.97% for the Goldman Sachs VIT International Equity Fund; 0.60%, 3.50% and 4.10% for the Sun Capital Investment Grade Bond Fund; 0.50%, 11.79% and 12.29% for the Sun Capital Money Market Fund; 0.95%, 6.49% and 7.44% for the Sun Capital Real Estate Fund; 1.25%, 6.96%, and 8.21% for the Warburg Pincus Emerging Markets Portfolio; and 1.25%, 0.45%, and 1.70% for the Warburg Pincus Post-Venture Capital Portfolio. Fee waivers and expense reimbursements for the Warburg Pincus Emerging Markets Portfolio and the Warburg Pincus Post-Venture Capital Portfolio, the Sun Capital Funds, and the Goldman Sachs Funds may be discontinued at any time. (4) An affiliate of the adviser has agreed to reimburse the Funds, to the extent certain expenses exceed the following percentages of the Fund's daily net assets during fiscal year 1999: 0.90% for the J.P. Morgan Equity Portfolio, 1.20% for the J.P. Morgan International Opportunities Portfolio, and 1.15% for the J.P. Morgan Small Company Portfolio. Absent this reimbursement, "Total Fund Annual Expenses" would have been 1.48% for the J.P. Morgan Equity Portfolio, 3.26% for the J.P. Morgan International Opportunities Portfolio, and 3.43% for the J.P. Morgan Small Company Portfolio. (5) The Fund's adviser has agreed to bear the Fund's expenses, excluding management fees, taxes, extraordinary expenses and brokerage and transaction costs, in excess of 0.35% of the annual percentage of the Fund's average daily net assets. Absent the fee waiver and/or expense reimbursement, Other Expenses would have been 0.70% and Total Fund Annual Expenses would have been 1.60%. These arrangements will remain in effect until at least May 1, 2000, absent an earlier modification by the Fund's Board of Trustees. (6) Total Fund Annual Expenses for the OCC Equity Portfolio, the OCC Small Cap Portfolio, the OCC Managed Portfolio and the OCC Mid Cap Portfolio are limited contractually by OpCap Advisers so that the Funds' respective annualized operating expenses (net of expense offsets) do not exceed 1% of average daily net assets. Absent this limit, "Management Fees", "Other Expenses" and "Total Expenses" were 0.80%, 3.48%, and 4.28% for the OCC Mid Cap Portfolio. "Other Expenses" are shown gross of expense offsets afforded the portfolio, which effectively lowered custody expenses. (7) To the extent that the expense ratio of any Fund in the Sun Capital Advisers Trust falls below the Fund's expense limit, the Fund's adviser reserves the right to be reimbursed for management fees waived and Fund expenses paid by it during the prior two years. 6 EXAMPLES If you surrender your Contract at the end of the applicable time period, you would pay the following expenses on a $1,000 investment, assuming a 5% annual return:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------- ----------- ----------- ----------- AIM V.I. Capital Appreciation Fund........................................ $ 78 $ 107 $ 142 $ 250 AIM V.I. Growth Fund...................................................... $ 78 $ 109 $ 145 $ 255 AIM V.I. Growth and Income Fund........................................... $ 78 $ 107 $ 141 $ 248 AIM V.I. International Equity Fund........................................ $ 80 $ 114 $ 154 $ 275 Alger American Growth Portfolio........................................... $ 79 $ 111 $ 148 $ 263 Alger American Income and Growth Portfolio................................ $ 78 $ 109 $ 146 $ 257 Alger American Small Capitalization Portfolio............................. $ 80 $ 114 $ 153 $ 273 Goldman Sachs VIT CORE Large Cap Growth Fund.............................. $ 79 $ 111 $ 149 $ 264 Goldman Sachs VIT CORE Small Cap Equity Fund.............................. $ 80 $ 114 $ 154 $ 274 Goldman Sachs VIT CORE U.S. Equity Fund................................... $ 79 $ 111 $ 149 $ 264 Goldman Sachs VIT Growth and Income Fund.................................. $ 80 $ 114 $ 154 $ 274 Goldman Sachs VIT International Equity Fund............................... $ 83 $ 124 $ 170 $ 308 J.P. Morgan Equity Portfolio.............................................. $ 80 $ 114 $ 154 $ 274 J.P. Morgan International Opportunities Portfolio......................... $ 83 $ 122 $ 168 $ 303 J.P. Morgan Small Company Portfolio....................................... $ 82 $ 121 $ 165 $ 298 Lord Abbett Growth and Income Portfolio................................... $ 78 $ 107 $ 142 $ 250 MFS/Sun Life Capital Appreciation Series.................................. $ 79 $ 110 $ 148 $ 262 MFS/Sun Life Emerging Growth Series....................................... $ 79 $ 111 $ 149 $ 265 MFS/Sun Life Government Securities Series................................. $ 77 $ 106 $ 140 $ 246 MFS/Sun Life High Yield Series............................................ $ 79 $ 112 $ 151 $ 268 MFS/Sun Life Massachusetts Investors Growth Stock Series.................. $ 81 $ 116 $ 157 $ 281 MFS/Sun Life Massachusetts Investors Trust Series......................... $ 77 $ 105 $ 139 $ 242 MFS/Sun Life New Discovery Series......................................... $ 83 $ 125 $ 172 $ 311 MFS/Sun Life Total Return Series.......................................... $ 78 $ 108 $ 144 $ 253 MFS/Sun Life Utilities Series............................................. $ 79 $ 113 $ 152 $ 270 OCC Equity Portfolio...................................................... $ 80 $ 115 $ 155 $ 278 OCC Managed Portfolio..................................................... $ 76 $ 99 $ 125 $ 207 OCC Mid Cap Portfolio..................................................... $ 81 $ 118 $ 161 $ 289 OCC Small Cap Portfolio................................................... $ 80 $ 113 $ 153 $ 272 Sun Capital Investment Grade Bond Fund.................................... $ 78 $ 110 $ 146 $ 258 Sun Capital Money Market Fund............................................. $ 78 $ 107 $ 141 $ 248 Sun Capital Real Estate Fund.............................................. $ 83 $ 124 $ 170 $ 308 Warburg Pincus Emerging Markets Portfolio................................. $ 85 $ 128 $ 177 $ 322 Warburg Pincus International Equity Portfolio............................. $ 84 $ 127 $ 175 $ 319 Warburg Pincus Post-Venture Capital Portfolio............................. $ 85 $ 128 $ 177 $ 322 Warburg Pincus Small Company Growth Portfolio............................. $ 82 $ 121 $ 165 $ 298
7 If you do NOT surrender your Contract, or if you annuitize at the end of the applicable time period, you would pay the following expenses on a $1,000 investment, assuming a 5% annual return:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------- ----------- ----------- ----------- AIM V.I. Capital Appreciation Fund........................................ $ 22 $ 68 $ 116 $ 250 AIM V.I. Growth Fund...................................................... $ 23 $ 69 $ 119 $ 255 AIM V.I. Growth and Income Fund........................................... $ 22 $ 67 $ 115 $ 248 AIM V.I. International Equity Fund........................................ $ 24 $ 75 $ 129 $ 275 Alger American Growth Portfolio........................................... $ 23 $ 72 $ 123 $ 263 Alger American Income and Growth Portfolio................................ $ 23 $ 70 $ 120 $ 257 Alger American Small Capitalization Portfolio............................. $ 24 $ 75 $ 128 $ 273 Goldman Sachs VIT CORE Large Cap Growth Fund.............................. $ 23 $ 72 $ 123 $ 264 Goldman Sachs VIT CORE Small Cap Equity Fund.............................. $ 24 $ 75 $ 128 $ 274 Goldman Sachs VIT CORE U.S. Equity Fund................................... $ 23 $ 72 $ 123 $ 264 Goldman Sachs VIT Growth and Income Fund.................................. $ 24 $ 75 $ 128 $ 274 Goldman Sachs VIT International Equity Fund............................... $ 28 $ 85 $ 145 $ 308 J.P. Morgan Equity Portfolio.............................................. $ 24 $ 75 $ 128 $ 274 J.P. Morgan International Opportunities Portfolio......................... $ 27 $ 84 $ 143 $ 303 J.P. Morgan Small Company Portfolio....................................... $ 27 $ 82 $ 141 $ 298 Lord Abbett Growth and Income Portfolio................................... $ 22 $ 68 $ 116 $ 250 MFS/Sun Life Capital Appreciation Series.................................. $ 23 $ 71 $ 122 $ 262 MFS/Sun Life Emerging Growth Series....................................... $ 23 $ 72 $ 124 $ 265 MFS/Sun Life Government Securities Series................................. $ 22 $ 67 $ 114 $ 246 MFS/Sun Life High Yield Series............................................ $ 24 $ 73 $ 125 $ 268 MFS/Sun Life Massachusetts Investors Growth Stock Series.................. $ 25 $ 77 $ 132 $ 281 MFS/Sun Life Massachusetts Investors Trust Series......................... $ 21 $ 65 $ 112 $ 242 MFS/Sun Life New Discovery Series......................................... $ 28 $ 86 $ 147 $ 311 MFS/Sun Life Total Return Series.......................................... $ 22 $ 69 $ 118 $ 253 MFS/Sun Life Utilities Series............................................. $ 24 $ 74 $ 126 $ 270 OCC Equity Portfolio...................................................... $ 25 $ 76 $ 130 $ 278 OCC Managed Portfolio..................................................... $ 23 $ 67 $ 109 $ 207 OCC Mid Cap Portfolio..................................................... $ 26 $ 79 $ 136 $ 289 OCC Small Cap Portfolio................................................... $ 24 $ 74 $ 127 $ 272 Sun Capital Investment Grade Bond Fund.................................... $ 23 $ 70 $ 120 $ 258 Sun Capital Money Market Fund............................................. $ 22 $ 67 $ 115 $ 248 Sun Capital Real Estate Fund.............................................. $ 28 $ 85 $ 145 $ 308 Warburg Pincus Emerging Markets Portfolio................................. $ 29 $ 90 $ 153 $ 322 Warburg Pincus International Equity Portfolio............................. $ 29 $ 89 $ 151 $ 319 Warburg Pincus Post-Venture Capital Portfolio............................. $ 29 $ 90 $ 153 $ 322 Warburg Pincus Small Company Growth Portfolio............................. $ 27 $ 82 $ 141 $ 298
THE EXAMPLES SHOULD NOT BE CONSIDERED TO BE REPRESENTATIONS OF PAST OR FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN. 8 CONDENSED FINANCIAL INFORMATION Information about the value of the units we use to measure the variable portion of your Contract ("Variable Accumulation Units") is included in the back of this Prospectus as Appendix B. This information covers the period from commencement of operations of the Sub-Accounts on December 9, 1998 through December 31, 1998. THE FUTURITY II ANNUITY Sun Life Assurance Company of Canada (U.S.) (the "Company", "we" or "us") and Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") offer the Futurity II Annuity to groups and individuals for use in connection with their retirement plans. The Contracts are available on a group basis and, in certain states, may be available on an individual basis. We issue an Individual Contract directly to the individual owner of the Contract. We issue a Group Contract to the Owner covering all individuals participating under the Group Contract. Each individual receives a Certificate that evidences his or her participation under the Group Contract. In this Prospectus, unless we state otherwise, we refer to both the owners of Individual Contracts and participating individuals under Group Contracts as "Participants" and we address all those Participants as "you"; we use the term "Contracts" to include Individual Contracts, Group Contracts and Certificates issued under Group Contracts. For the purpose of determining benefits under both Individual Contracts and Group Contracts, we establish an Account for each Participant, which we will refer to as "your" Account or a "Participant Account." The Contract provides a number of important benefits for your retirement planning. It has an Accumulation Phase, during which you make payments under the Contract and allocate them to one or more Variable Account or Fixed Account options, and an Income Phase, during which we make payments based on the amount you have accumulated. The Contract provides tax deferral, so that you do not pay taxes on your earnings under the Contract until you withdraw them. It provides a death benefit if you die during the Accumulation Phase. Finally, if you so elect, during the Income Phase we will make payments to you or someone else for life or for another period that you choose. You choose these benefits on a variable or fixed basis or a combination of both. When you choose variable investment options or a Variable Annuity option, your benefits will be responsive to changes in the economic environment, including inflationary forces and changes in rates of return available from different types of investments. With these options, you assume all investment risk under the Contract. When you choose a Guarantee Period in our Fixed Account or a Fixed Annuity option, we assume the investment risk, except in the case of early withdrawals, where you bear the risk of unfavorable interest rate changes. You also bear the risk that the interest rates we will offer in the future and the rates we will use in determining your Fixed Annuity may not exceed our minimum guaranteed rate, which is 3% per year, compounded annually. The Contracts are designed for use in connection with retirement and deferred compensation plans, some of which qualify for favorable federal income tax treatment under Sections 401, 403, 408 or 408A of the Internal Revenue Code. The Contracts are also designed so that they may be used in connection with certain non-tax-qualified retirement plans, such as payroll savings plans and such other groups (trusteed or nontrusteed) as may be eligible under applicable law. We refer to Contracts used with plans that receive favorable tax treatment as "Qualified Contracts," and all others as "Non-Qualified Contracts." COMMUNICATING TO US ABOUT YOUR CONTRACT All materials sent to us, including Purchase Payments, must be sent to our Annuity Service Mailing Address set forth on the first page of this Prospectus. For all telephone communications, you must call (888) 786-2435 or (617) 348-9600. Unless this Prospectus states differently, we will consider all materials sent to us and all telephone communications to be received on the date we actually receive them at the Annuity Service 9 Mailing Address. However, we will consider Purchase Payments, withdrawal requests and transfer instructions to be received on the next Business Day if we receive them (1) on a day that is not a Business Day or (2) after 4:00 p.m., Eastern Time. When we specify that notice to us must be in writing, we reserve the right, in our sole discretion, to accept notice in another form. SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) We are a stock life insurance company incorporated under the laws of Delaware on January 12, 1970. We do business in 48 states, the District of Columbia, and Puerto Rico, and we have an insurance company subsidiary that does business in New York. Our Executive Office mailing address is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. We are an indirect wholly-owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life (Canada)"). Sun Life (Canada) is a mutual life insurance company incorporated pursuant to Act of Parliament of Canada in 1865 and currently transacts business in all of the Canadian provinces and territories, all U.S. states (except New York), the District of Columbia, Puerto Rico, the Virgin Islands, Great Britain, Ireland, Hong Kong, Bermuda and the Philippines. THE VARIABLE ACCOUNT We established the Variable Account as a separate account on July 13, 1989, pursuant to a resolution of our Board of Directors. Under Delaware insurance law and the Contract, the income, gains or losses of the Variable Account are credited to or charged against the assets of the Variable Account without regard to the other income, gains, or losses of the Company. These assets are held in relation to the Contracts described in this Prospectus and other variable annuity contracts that provide benefits that vary in accordance with the investment performance of the Variable Account. Although the assets maintained in the Variable Account will not be charged with any liabilities arising out of any other business we conduct, all obligations arising under the Contracts, including the promise to make annuity payments, are general corporate obligations of the Company. The assets of the Variable Account are divided into Sub-Accounts. Each Sub-Account invests exclusively in shares of a specific Fund. All amounts allocated to the Variable Account will be used to purchase Fund shares as designated by you at their net asset value. Any and all distributions made by the Fund with respect to the shares held by the Variable Account will be reinvested to purchase additional shares at their net asset value. Deductions from the Variable Account for cash withdrawals, annuity payments, death benefits, Account Fees, contract charges against the assets of the Variable Account for the assumption of mortality and expense risks, administrative expenses and any applicable taxes will, in effect, be made by redeeming the number of Fund shares at their net asset value equal in total value to the amount to be deducted. The Variable Account will be fully invested in Fund shares at all times. VARIABLE ACCOUNT OPTIONS: THE FUNDS The Contract offers Sub-Accounts that invest in a number of Fund options, which are briefly discussed below. Each Fund is a mutual fund registered under the Investment Company Act of 1940, or a separate series of shares of such a mutual fund. MORE COMPREHENSIVE INFORMATION ABOUT THE FUNDS, INCLUDING A DISCUSSION OF THEIR MANAGEMENT, INVESTMENT OBJECTIVES, EXPENSES, AND POTENTIAL RISKS, IS FOUND IN THE CURRENT PROSPECTUSES FOR THE FUNDS (THE "FUND PROSPECTUSES"). THE FUND PROSPECTUSES SHOULD BE READ IN CONJUNCTION WITH THIS PROSPECTUS BEFORE YOU INVEST. A COPY OF EACH FUND PROSPECTUS, AS WELL AS A STATEMENT OF ADDITIONAL INFORMATION FOR EACH FUND, MAY BE OBTAINED WITHOUT CHARGE FROM THE COMPANY BY CALLING 1-888-388-8748 (617-348-9600, IN MASSACHUSETTS) OR WRITING TO SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.), RETIREMENT PRODUCTS AND SERVICES, P.O. BOX 9133, BOSTON MASSACHUSETTS 02117. 10 The Funds currently available are: AIM VARIABLE INSURANCE FUNDS, INC. (advised by A I M Advisors, Inc.) AIM V.I. CAPITAL APPRECIATION FUND seeks growth of capital through investment in common stocks, with emphasis on medium- and small-sized growth companies. AIM V.I. GROWTH FUND seeks growth of capital primarily by investing in seasoned and better capitalized companies considered to have strong earnings momentum. AIM V.I. GROWTH AND INCOME FUND seeks growth of capital with a secondary objective of current income. AIM V.I. INTERNATIONAL EQUITY FUND seeks to provide long-term growth of capital by investing in a diversified portfolio of international equity securities whose issuers are considered to have strong earnings momentum. THE ALGER AMERICAN FUND (advised by Fred Alger Management, Inc.) ALGER AMERICAN GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of companies which have market capitalizations of $1 billion or more. ALGER AMERICAN INCOME AND GROWTH PORTFOLIO seeks primarily to provide a high level of dividend income by investing in dividend paying equity securities. Capital appreciation is a secondary objective. ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO seeks long-term capital appreciation. It invests primarily in the equity securities of small companies with market capitalizations within the range of the Russell 2000 Growth Index or the S&P SmallCap 600 Index. GOLDMAN SACHS VARIABLE INSURANCE TRUST (advised by Goldman Sachs Asset Management, a separate operating division of Goldman, Sachs & Co., except for Goldman Sachs International Equity Fund, which is advised by Goldman Sachs Asset Management International, an affiliate of Goldman, Sachs & Co.) GOLDMAN SACHS VIT CORE LARGE CAP GROWTH FUND seeks long-term growth of capital through a broadly diversified portfolio of equity securities of large cap U.S. issuers that are expected to have better prospects for earnings growth than the growth rate of the general domestic economy. Dividend income is a secondary consideration. GOLDMAN SACHS VIT CORE SMALL CAP EQUITY FUND seeks long-term growth of capital through a broadly diversified portfolio of equity securities of U.S. issuers which are included in the Russell 2000 Index at the time of investment. GOLDMAN SACHS VIT CORE U.S. EQUITY FUND seeks long-term growth of capital and dividend income through a broadly diversified portfolio of large cap and blue chip equity securities representing all major sectors of the U.S. economy. GOLDMAN SACHS VIT GROWTH AND INCOME FUND seeks long-term growth of capital and growth of income through investments in equity securities that are considered to have favorable prospects for capital appreciation and/or dividend paying ability. GOLDMAN SACHS VIT INTERNATIONAL EQUITY FUND seeks long-term capital appreciation through investments in equity securities of companies that are organized outside the U.S. or whose securities are principally traded outside the U.S. J.P. MORGAN SERIES TRUST II (advised by J.P. Morgan Investment Management Inc.) J.P. MORGAN EQUITY PORTFOLIO seeks to provide a high total return from a portfolio of selected equity securities. 11 J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO seeks to provide a high total return from a portfolio of equity securities of foreign companies. J.P. MORGAN SMALL COMPANY PORTFOLIO seeks to provide a high total return from a portfolio of small company stocks. LORD ABBETT SERIES FUND, INC. (advised by Lord Abbett & Co.) GROWTH AND INCOME PORTFOLIO seeks to provide long-term growth of capital and income without excessive fluctuation in market value. MFS/SUN LIFE SERIES TRUST (advised by Massachusetts Financial Services Company, an affiliate of the Company) CAPITAL APPRECIATION SERIES will seek to maximize capital appreciation by investing in securities of all types, with major emphasis on common stocks. EMERGING GROWTH SERIES will seek long-term growth of capital. GOVERNMENT SECURITIES SERIES will seek current income and preservation of capital by investing in U.S. Government and U.S. Government-related securities. HIGH YIELD SERIES will seek high current income and capital appreciation by investing primarily in certain low rated or unrated fixed income securities (possibly with equity features) of U.S. and foreign issuers (also known as "junk bonds"). MASSACHUSETTS INVESTORS GROWTH STOCK SERIES will seek to provide long-term growth of capital and future income rather than current income. MASSACHUSETTS INVESTORS TRUST SERIES will seek long-term growth of capital and future income while providing more current dividend income than is normally obtainable from a portfolio of only growth stocks. NEW DISCOVERY SERIES will seek capital appreciation. TOTAL RETURN SERIES will primarily seek to obtain above-average income (compared to a portfolio entirely invested in equity securities) consistent with prudent employment of capital; its secondary objective is to take advantage of opportunities for growth of capital and income since many securities offering a better than average yield may also possess growth potential. UTILITIES SERIES will seek capital growth and current income (income above that available from a portfolio invested entirely in equity securities) by investing under normal market conditions, at least 65% of its assets in equity and debt securities of both domestic and foreign companies in the utilities industry. OCC ACCUMULATION TRUST (advised by OpCap Advisors) EQUITY PORTFOLIO seeks long-term capital appreciation through investment in a diversified portfolio of equity securities selected on the basis of a value oriented approach to investing. MANAGED PORTFOLIO seeks to achieve growth of capital over time through investment in a portfolio consisting of common stocks, bonds and cash equivalents, the percentages of which will vary based on the portfolio manager's assessments of the relative outlook for such investments. MID CAP PORTFOLIO seeks long-term capital appreciation through investment in a diversified portfolio of equity securities. The portfolio will invest primarily in companies with market capitalizations of between $500 million and $5 billion. SMALL CAP PORTFOLIO seeks capital appreciation through investment in a diversified portfolio of equity securities of companies with market capitalizations of under $1 billion. SUN CAPITAL ADVISERS TRUST (advised by Sun Capital Advisers, Inc., an affiliate of the Company) 12 SUN CAPITAL INVESTMENT GRADE BOND FUND seeks high current income consistent with relative stability of principal by investing at least 80% of its assets in investment grade bonds, including those issued by U.S. and foreign companies (including companies in emerging market countries), the U.S. Government and its agencies and instrumentalities (including those which issue mortgage-backed securities), foreign governments (including those of emerging market countries), and multinational organizations such as the World Bank. The Fund may invest up to 20% of its assets in lower rated or unrated bonds (also known as high yield or junk bonds). SUN CAPITAL MONEY MARKET FUND seeks to maximize current income, consistent with maintaining liquidity and preserving capital, by investing exclusively in high quality U.S. dollar-denominated money market securities, including those issued by U.S. and foreign banks, corporate issuers, the U.S. Government and its agencies and instrumentalities, foreign governments and multinational organizations such as the World Bank. The fund may invest in all types of money market securities, including commercial paper, certificates of deposit, bankers' acceptances, mortgage-backed and asset-backed securities, repurchase agreements and other short-term debt securities. SUN CAPITAL REAL ESTATE FUND primarily seeks long-term capital growth and, secondarily, seeks current income and growth of income. The Fund invests at least 80% of its assets in securities of real estate trusts and other real estate companies. The Fund generally focuses its investments in equity REITs, which invest most of their assets directly in U.S. or foreign real property, receive most of their income from rents and may also realize gains by selling appreciated properties. WARBURG PINCUS TRUST (advised by Warburg Pincus Asset Management, Inc. ("Warburg"); Warburg has retained Abbott Capital Management, L.P. regarding investments in private investment funds for the Post-Venture Capital Portfolio.) EMERGING MARKETS PORTFOLIO seeks long-term growth of capital by investing primarily in equity securities of non-United States issuers consisting of companies in emerging securities markets. INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing in equity securities of non-U.S. issuers. POST-VENTURE CAPITAL PORTFOLIO seeks long-term growth of capital by investing primarily in equity securities of issuers in their post-venture capital stage of development and pursues an aggressive investment strategy. SMALL COMPANY GROWTH PORTFOLIO seeks capital growth by investing in equity securities of small-sized domestic companies. The Funds may also be available to registered separate accounts offering variable annuity and variable life products of other affiliated and unaffiliated insurance companies, as well as to the Variable Account and other separate accounts of the Company. Although we do not anticipate any disadvantages to this, there is a possibility that a material conflict may arise between the interests of the Variable Account and one or more of the other separate accounts participating in the Funds. A conflict may occur due to a change in law affecting the operations of variable life and variable annuity separate accounts, differences in the voting instructions of the Participants and Payees and those of other companies, or some other reason. In the event of conflict, we will take any steps necessary to protect Participants and Payees, including withdrawal of the Variable Account from participation in the underlying Funds which are involved in the conflict or substitution of shares of other Funds. Certain of the investment advisers to the Funds may reimburse us for administrative costs in connection with administering the Funds as options under the Contracts. These amounts are not charged to the Funds or Participants, but are paid from assets of the advisers. Certain publically available mutual funds may have similar investment goals and principal investment policies and risks as one or more of the Funds, and may be managed by a Fund's portfolio managers(s). While a Fund may have many similarities to these other funds, its investment performance 13 will differ from their investment performance. This is due to a number of differences between a Fund and these similar products, including differences in sales charges, expense ratios and cash flows. THE FIXED ACCOUNT The Fixed Account is made up of all the general assets of the Company other than those allocated to any separate account. Amounts you allocate to Guarantee Periods become part of the Fixed Account, and are available to fund the claims of all classes of our customers, including claims for benefits under the Contracts. We will invest the assets of the Fixed Account in those assets we choose that are allowed by applicable state insurance laws. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks, real estate mortgages, real estate and certain other investments. We intend to invest primarily in investment-grade fixed income securities (i.e. rated by a nationally recognized rating service within the four highest grades) or instruments we believe are of comparable quality. We are not obligated to invest amounts allocated to the Fixed Account according to any particular strategy, except as may be required by applicable state insurance laws. You will not have a direct or indirect interest in the Fixed Account investments. THE FIXED ACCOUNT OPTIONS: THE GUARANTEE PERIODS You may elect one or more Guarantee Period(s) from those we make available from time to time. We publish Guaranteed Interest Rates for each Guarantee Period offered. We may change the Guaranteed Interest Rates we offer from time to time, but no Guaranteed Interest Rate will ever be less than 3% per year, compounded annually. Also, once we have accepted your allocation to a particular Guarantee Period, we promise that the Guaranteed Interest Rate applicable to that allocation will not change for the duration of the Guarantee Period. We determine Guaranteed Interest Rates in our discretion. We do not have a specific formula for establishing the rates for different Guarantee Periods. Our determination will be influenced by the interest rates on fixed income investments in which we may invest with amounts allocated to the Guarantee Periods. We will also consider other factors in determining these rates, including regulatory and tax requirements, sales commissions and administrative expenses borne by us, general economic trends and competitive factors. We cannot predict the level of future interest rates. We may from time to time in our discretion offer interest rate specials for new Purchase Payments that are higher than the rates we are then offering for renewals on transfers. Early withdrawals from your allocation to a Guarantee Period, including cash withdrawals, transfers, and commencement of an annuity, may be subject to a Market Value Adjustment, which could decrease or increase the value of your Account. See "Cash Withdrawals, Withdrawal Charge, and Market Value Adjustment." THE ACCUMULATION PHASE During the Accumulation Phase of your Contract, you make payments into your Account, and your earnings accumulate on a tax-deferred basis. The Accumulation Phase begins with our acceptance of your first Purchase Payment and ends the Business Day before your Annuity Commencement Date. The Accumulation Phase will end sooner if you surrender your Contract or die before the Annuity Commencement Date. ISSUING YOUR CONTRACT When you purchase a Contract, a completed Application and the initial Purchase Payment are sent to us for acceptance. When we accept an Individual Contract, we issue the Contract to you. When 14 we accept a Group Contract, we issue the Contract to the Owner; we issue a Certificate to you as a Participant when we accept your Application. We will credit your initial Purchase Payment to your Account within two business days of receiving your completed Application. If your Application is not complete, we will notify you. If we do not have the necessary information to complete the Application within 5 business days, we will send your money back to you or ask your permission to retain your Purchase Payment until the Application is made complete. Then we will apply the Purchase Payment within 2 business days of when the Application is complete. AMOUNT AND FREQUENCY OF PURCHASE PAYMENTS The amount of Purchase Payments may vary; however, we will not accept an initial Purchase Payment of less than $10,000, and each additional Purchase Payment must be at least $1,000, unless we waive these limits. In addition, we will not accept a Purchase Payment if your Account Value is over $1 million, or if the Purchase Payment would cause your Account Value to exceed $1 million, unless we have approved the Payment in advance. Within these limits, you may make Purchase Payments at any time during the Accumulation Phase. ALLOCATION OF NET PURCHASE PAYMENTS You may allocate your Purchase Payments among the different Sub-Accounts and Guarantee Periods we offer. At any time, you may have amounts allocated among up to 18 of the available options. In your Application, you may specify the percentage of each Purchase Payment to be allocated to each Sub-Account or Guarantee Period. These percentages are called your allocation factors. You may change the allocation factors for future Payments by sending us written notice of the change, on our required form. We will use your new allocation factors for the first Purchase Payment we receive with or after we have received notice of the change, and for all future Purchase Payments, until we receive another change notice. Although it is currently not our practice, we may deduct applicable premium or similar taxes from your Purchase Payments. See "Contract Charges -- Premium Taxes." In that case, we will credit your Net Purchase Payment, which is the Purchase Payment minus the amount of those taxes. YOUR ACCOUNT When we accept your first Purchase Payment, we establish an Account for you, which we maintain throughout the Accumulation Phase of your Contract. YOUR ACCOUNT VALUE Your Account Value is the sum of the value of the two components of your Contract: the Variable Account portion of your Contract ("Variable Account Value") and the Fixed Account portion of your Contract ("Fixed Account Value"). These two components are calculated separately, as described below. VARIABLE ACCOUNT VALUE VARIABLE ACCUMULATION UNITS In order to calculate your Variable Account Value, we use a measure called a Variable Accumulation Unit for each Sub-Account. Your Variable Account Value is the sum of your Account Value in each Sub-Account, which is the number of your Variable Accumulation Units for that Sub-Account times the value of each Unit. 15 VARIABLE ACCUMULATION UNIT VALUE The value of each Variable Accumulation Unit in a Sub-Account reflects the net investment performance of that Sub-Account. We determine that value once on each day that the New York Stock Exchange is open for trading (a "Business Day"), at the close of trading, which is currently 4:00 p.m., Eastern Time. The period that begins at the time Variable Accumulation Units are valued on a Business Day and ends at that time on the next Business Day is called a Valuation Period. On days other than Business Days, the value of a Variable Accumulation Unit does not change. To measure these values, we use a factor -- which we call the Net Investment Factor-- which represents the net return on the Sub-Account's assets. At the end of any Valuation Period, the value of a Variable Accumulation Unit for a Sub-Account is equal to the value of that Sub-Account's Variable Accumulation Units at the end of the previous Valuation Period, multiplied by the Net Investment Factor. We calculate the Net Investment Factor by dividing (1) the net asset value of a Fund share held in the Sub-Account at the end of that Valuation Period, plus the per share amount of any dividend or capital gains distribution made by that Fund during the Valuation Period, by (2) the net asset value per share of the Fund share at the end of the previous Valuation Period; we then deduct a factor representing the mortality and expense risk charge and administrative expense charge. See "Contract Charges." For a hypothetical example of how we calculate the value of a Variable Accumulation Unit, see the Statement of Additional Information. CREDITING AND CANCELING VARIABLE ACCUMULATION UNITS When we receive an allocation to a Sub-Account, either from a Net Purchase Payment or a transfer of Account Value, we credit that amount to your Account in Variable Accumulation Units. Similarly, we cancel Variable Accumulation Units when you transfer or withdraw amounts from a Sub-Account, or when we deduct certain charges under the Contract. We determine the number of Units credited or canceled by dividing the dollar amount by the Variable Accumulation Unit value for that Sub-Account at the end of the Valuation Period during which the transaction or charge is effective. FIXED ACCOUNT VALUE Your Fixed Account value is the sum of all amounts allocated to Guarantee Periods, either from Net Purchase Payments, transfers or renewals, plus interest credited on those amounts, and minus withdrawals, transfers out of Guarantee Periods, and any deductions for charges under the Contract taken from your Fixed Account Value. CREDITING INTEREST We credit interest on amounts allocated to a Guarantee Period at the applicable Guaranteed Interest Rate for the duration of the Guarantee Period. The Guarantee Period begins the day we apply your allocation and ends when the number of calendar years (or months if the Guarantee Period is less than one year) in the Guarantee Period (measured from the end of the calendar month in which the amount was allocated to the Guarantee Period) have elapsed. The last day of the Guarantee Period is its Expiration Date. During the Guarantee Period, we credit interest daily at a rate that yields the Guaranteed Interest Rate on an annual effective basis. GUARANTEE AMOUNTS Each separate allocation you make to a Guarantee Period, together with interest credited thereon, is called a Guarantee Amount. Each Guarantee Amount is treated separately for purposes of determining the Market Value Adjustment. RENEWALS We will notify you in writing between 45 and 75 days before the Expiration Date for any Guarantee Amount. A new Guarantee Period of the same duration will begin automatically for that Guarantee Amount on the first day following the Expiration Date, unless before the Expiration Date 16 we receive (1) written notice from you electing a different Guarantee Period from among those we then offer or (2) instructions to transfer all or some of the Guarantee Amount to one or more Sub-Accounts, in accordance with the transfer privilege provisions of the Contract. Each new allocation to a Guarantee Period must be at least $1,000. EARLY WITHDRAWALS If you withdraw, transfer, or annuitize an allocation to a Guarantee Period before the Expiration Date, we will apply a Market Value Adjustment to the transaction. This could result in an increase or decrease of your Account Value, depending on interest rates at the time. You bear the risk that you will receive less than your principal if the Market Value Adjustment applies. TRANSFER PRIVILEGE PERMITTED TRANSFERS During the Accumulation Phase, you may transfer all or part of your Account Value to one or more Sub-Accounts or Guarantee Periods then available, subject to the following restrictions: - you may not make more than 12 transfers in any Account Year; - the amount transferred from a Sub-Account must be at least $1,000 unless you are transferring your entire balance in that Sub-Account; - your Account Value remaining in a Sub-Account must be at least $1,000; - the amount transferred from a Guarantee Period must be the entire Guarantee Amount, except for transfers of interest credited during the current Account Year; - at least 30 days must elapse between transfers to or from Guarantee Periods; - transfers to or from Sub-Accounts are subject to terms and conditions that may be imposed by the Fund; and - we impose additional restrictions on market timers, which are further described below. These restrictions do not apply to transfers made under an approved dollar cost averaging program. There is usually no charge imposed on transfers; however, we reserve the right to impose a transfer charge of $15 for each transfer. Transfers out of a Guarantee Period more than 30 days before expiration of the period will be subject to the Market Value Adjustment described below. Under current law there is no tax liability for transfers. REQUESTS FOR TRANSFERS You may request transfers in writing or by telephone. The telephone transfer privilege is available automatically, and does not require your written election. We will require personal identifying information to process a request for transfer made by telephone. We will not be liable for following instructions communicated by telephone that we reasonably believe are genuine. If we receive your transfer request before 4:00 p.m. Eastern Time on a Business Day, it will be effective that day. Otherwise, it will be effective the next Business Day. MARKET TIMERS The Contracts are not designed for professional market timing organizations or other entities using programmed and frequent transfers. If you wish to employ such strategies, you should not purchase a Contract. Accordingly, transfers may be subject to restrictions if exercised by a market timing firm or any other third party authorized to initiate transfer transactions on behalf of multiple Participants. In imposing such restrictions, we may, among other things, not accept (1) the transfer instructions of any agent acting under a power of attorney on behalf of more than one Participant, or (2) the 17 transfer instructions of individual Participants who have executed preauthorized transfer forms that are submitted at the same time by market timing firms or other third parties on behalf of more than one Participant. We will not impose these restrictions unless our actions are reasonably intended to prevent the use of such transfers in a manner that will disadvantage or potentially impair the Contract rights of other Participants. In addition, some of the Funds have reserved the right to temporarily or permanently refuse exchange requests from the Variable Account if, in the judgment of the Fund's investment advisor, the Fund would be unable to invest effectively in accordance with its investment objective and policies, or would otherwise potentially be adversely affected. In particular, a pattern of exchanges that coincide with a market timing strategy may be disruptive to a Fund and therefore may be refused. Accordingly, the Variable Account may not be in a position to effectuate transfers and may refuse transfer requests without prior notice. We also reserve the right, for similar reasons, to refuse or delay exchange requests involving transfers to or from the Fixed Account. WAIVERS; REDUCED CHARGES; CREDITS; BONUS GUARANTEED INTEREST RATES We may reduce or waive the withdrawal charge or Account Fee, credit additional amounts, or grant bonus Guaranteed Interest Rates in certain situations. These situations may include sales of Contracts (1) where selling and/or maintenance costs associated with the Contracts are reduced, such as the sale of several Contracts to the same Participant, sales of large Contracts, and certain group sales, and (2) to officers, directors and employees of the Company or its affiliates, registered representatives and employees of broker-dealers with a current selling agreement with the Company and affiliates of such representatives and broker-dealers, employees of affiliated asset management firms, and persons who have retired from such positions ("Eligible Employees") and immediate family members of Eligible Employees. Eligible Employees and their immediate family members may also purchase a Contract without regard to minimum Purchase Payment requirements. For other situations in which withdrawal charges may be waived, see "Withdrawals, Withdrawal Charge and Market Value Adjustment." OPTIONAL PROGRAMS DOLLAR COST AVERAGING Dollar cost averaging allows you to invest gradually, over time, in up to 12 Sub-Accounts. You may select a dollar cost averaging program at no extra charge by allocating a minimum of $1,000 to a designated Sub-Account or to a Guarantee Period we make available in connection with the program. Amounts allocated to the Fixed Account under the program will earn interest at a rate declared by the Company for the Guarantee Period you select. Each month or quarter, as you select, we will transfer the same amount automatically to one or more Sub-Accounts that you choose, up to a maximum of 12 Sub-Accounts. The program continues until your Account Value allocated to the program is depleted or you elect to stop the program. The final amount transferred from the Fixed Account will include all interest earned. Only Purchase Payments may be allocated to a dollar cost averaging program. Previously applied amounts may not be transferred to a dollar cost averaging program. No Market Value Adjustment (either positive or negative) will apply to amounts automatically transferred from the Fixed Account under the dollar cost averaging program, except that if you discontinue or alter the program prior to completion, amounts remaining in the Fixed Account will be transferred to the Sun Capital Money Market Fund Sub-Account, unless you instruct us otherwise, and the Market Value Adjustment will be applied. Any new allocation of a Purchase Payment to the program will be treated as commencing a new dollar cost averaging program and is subject to the $1,000 minimum. The main objective of a dollar cost averaging program is to minimize the impact of short-term price fluctuations on Account Value. Since you transfer the same dollar amount to the variable investment options at set intervals, dollar cost averaging allows you to purchase more Variable Accumulation Units (and, indirectly, more Fund shares) when prices are low and fewer Variable Accumulation Units 18 (and, indirectly, fewer Fund shares) when prices are high. Therefore, you may achieve a lower average cost per Variable Accumulation Unit over the long term. A dollar cost averaging program allows you to take advantage of market fluctuations. However, it is important to understand that a dollar cost averaging program does not assure a profit or protect against loss in a declining market. ASSET ALLOCATION One or more asset allocation programs may be available in connection with the Contracts, at no extra charge. Asset allocation is the process of investing in different asset classes -- such as equity funds, fixed income funds, and money market funds -- depending on your personal investment goals, tolerance for risk, and investment time horizon. By spreading your money among a variety of asset classes, you may be able to reduce the risk and volatility of investing, although there are no guarantees, and asset allocation does not insure a profit or protect against loss in declining market. Currently, you may select one of three asset allocation models, each of which represents a combination of Sub-Accounts with a different level of risk. The available models are the conservative asset allocation model, the moderate asset allocation model, and the aggressive asset allocation model. Each model allocates a different percentage of Account Value to Sub-Accounts investing in the various asset classes, with the conservative model allocating the lowest percentage to Sub-Accounts investing in the equity asset class and the aggressive model allocating the highest percentage to the stock asset class. These models, as well as the terms and conditions of the asset allocation program, are fully described in a separate brochure. Additional programs may be available in the future. If you elect an asset allocation program, we will automatically allocate your Purchase Payments among the Sub-Accounts represented in the model you choose. By your election of an asset allocation program, your thereby authorize us to automatically reallocate your Account Value on a quarterly basis to reflect the current composition of the model you have selected, without further instruction, until we receive notification that you wish to terminate the program, or choose a different model. SYSTEMATIC WITHDRAWAL PROGRAM If you have an Account Value of $10,000 or more, you may select our Systematic Withdrawal or Interest Out Program. Under the Systematic Withdrawal Program, you determine the amount and frequency of regular withdrawals you would like to receive from your Fixed and/or Variable Account Value and we will effect them automatically. You may change or stop the Systematic Withdrawal Program at any time, by written notice to us. Withdrawals may be included in income and subject to a 10% federal tax penalty, as well as all charges and any Market Value Adjustment applicable upon withdrawal. You should consult your adviser before choosing this option. PORTFOLIO REBALANCING PROGRAM Under the Portfolio Rebalancing Program, we transfer funds among the Sub-Accounts to maintain the percentage allocation you have selected among these Sub-Accounts. At your election, we will make these transfers on a quarterly, semi-annual or annual basis. Portfolio Rebalancing does not permit transfers to or from any Guarantee Period. WITHDRAWALS, WITHDRAWAL CHARGE AND MARKET VALUE ADJUSTMENT CASH WITHDRAWALS REQUESTING A WITHDRAWAL At any time during the Accumulation Phase you may withdraw in cash all or any portion of your Account Value. To make a withdrawal, you must send us a written request at our Annuity Service Mailing Address. Your request must specify whether you want to withdraw the entire amount of your Account or, if less, the amount you wish to withdraw. 19 All withdrawals may be subject to a withdrawal charge (see "Withdrawal Charge" below) and withdrawals from your Fixed Account Value also may be subject to a Market Value Adjustment (see "Market Value Adjustment" below). Upon request we will notify you of the amount we would pay in the event of a full or partial withdrawal. Withdrawals also may have adverse federal income tax consequences, including a 10% penalty tax. See "Federal Tax Status." You should carefully consider these tax consequences before requesting a cash withdrawal. FULL WITHDRAWALS If you request a full withdrawal, we calculate the amount we will pay you as follows. We start with the total value of your Account at the end of the Valuation Period during which we receive your withdrawal request; we deduct the Account Fee for the Account Year in which the withdrawal is made; we add or subtract the amount of any Market Value Adjustment applicable to your Fixed Account Value; and finally, we deduct any applicable withdrawal charge. A full withdrawal results in the surrender of your Contract, and cancellation of all rights and privileges under your Contract. PARTIAL WITHDRAWALS If you request a partial withdrawal we will pay you the actual amount specified in your request and then reduce the value of your Account by deducting the amount paid, adding or deducting any Market Value Adjustment applicable to amounts withdrawn from the Fixed Account, and deducting any applicable withdrawal charge. You may specify the amount you want withdrawn from each Sub-Account and/or Guarantee Amount to which your Account is allocated. If you do not so specify, we will deduct the total amount you request pro rata, based on your allocations at the end of the Valuation Period during which we receive your request. If you request a partial withdrawal that would result in your Account Value being reduced to an amount less than the Account Fee for the Account Year in which you make the withdrawal, we will treat it as a request for a full withdrawal. TIME OF PAYMENT We will pay you the applicable amount of any full or partial withdrawal within 7 days after we receive your withdrawal request, except in cases where we are permitted to defer payment under the Investment Company Act of 1940 and applicable state insurance law. Currently, we may defer payment of amounts you withdraw from the Variable Account only for following periods: - when the New York Stock Exchange is closed except weekends and holidays or when trading on the New York Stock Exchange is restricted; - when it is not reasonably practical to dispose of securities held by a Fund or to determine the value of the net assets of a Fund, because an emergency exists; or - when an SEC order permits us to defer payment for the protection of Participants. We also may defer payment of amounts you withdraw from the Fixed Account for up to six months from the date we receive your withdrawal request. We do not pay interest on the amount of any payments we defer. WITHDRAWAL RESTRICTIONS FOR QUALIFIED PLANS If yours is a Qualified Contract, you should carefully check the terms of the plan for limitations and restrictions on cash withdrawals. Special restrictions apply to withdrawals from Contracts used for Section 403(b) annuities. See "Federal Tax Status -- Tax-Sheltered Annuities." 20 WITHDRAWAL CHARGE We do not deduct any sales charge from your Purchase Payments when they are made. However, we may impose a withdrawal charge (known as a "contingent deferred sales charge") on certain amounts you withdraw. We impose this charge to defray some of our expenses related to the sale of the Contracts, such as commissions we pay to agents, the cost of sales literature, and other promotional costs and transaction expenses. FREE WITHDRAWAL AMOUNT In each Account Year you may withdraw a portion of your Account Value -- which we call the "free withdrawal amount" -- before incurring the withdrawal charge. For any year, the free withdrawal amount is equal to (1) 10% of the amount of all Purchase Payments you have made during the last 7 Account Years, including the current Account Year (the "Annual Withdrawal Allowance"), plus (2) the amount of all Purchase Payments made before the last 7 Account Years that you have not previously withdrawn. Any portion of the Annual Withdrawal Allowance that you do not use in an Account Year is cumulative; that is, it is carried forward and available for use in future years. For convenience, we refer to Purchase Payments made during the last 7 Account Years (including the current Account Year) as "New Payments," and all Purchase Payments made before the last 7 Account Years as "Old Payments." For example, assume you wish to make a withdrawal from your Contract in Account Year 10. You made an initial Purchase Payment of $10,000 in Account Year 1, you made one additional Purchase Payment of $8,000 in Account Year 8, and you have made no previous withdrawals. Your Account Value in Account Year 10 is $35,000. The free withdrawal amount for Account Year 10 is $19,400, calculated as follows: - $800, which is the Annual Withdrawal Allowance for Account Year 10 (10% of the $8,000 Purchase Payment made in Account Year 8, the only New Payment); plus - $8,600, which is the total of the unused Annual Withdrawal Allowances of $1,000 for each of Account Years 1 through 7 and $800 for each of Account Years 8 and 9 that are carried forward and available for use in Account Year 10; plus - $10,000, which is the amount of all Old Payments that you have not previously withdrawn. WITHDRAWAL CHARGE ON PURCHASE PAYMENTS If you withdraw more than the free withdrawal amount in any Account Year, we consider the excess amount to be withdrawn first from New Payments that you have not previously withdrawn. We impose the withdrawal charge on the amount of these New Payments. Thus, the maximum amount on which we will impose the withdrawal charge in any year will never be more than the total of all New Payments that you have not previously withdrawn. The amount of your withdrawal, if any, that exceeds the total of the free withdrawal amount plus the aggregate amount of all New Payments not previously withdrawn, is not subject to the withdrawal charge. ORDER OF WITHDRAWAL New Payments are withdrawn on a first-in first-out basis until all New Payments have been withdrawn. For example, assume the same facts as in the example above. In Account Year 10 you wish to withdraw $25,000. We attribute the withdrawal first to the free withdrawal amount of $19,400, which is not subject to the withdrawal charge. The remaining $5,600 is withdrawn from the Purchase Payment made in Account Year 8 (the only New Payment) and is subject to the withdrawal charge. The $2,400 balance of the Account Year 8 Purchase Payment will remain in your Account. If you make a subsequent $5,000 withdrawal in Account Year 10, $2,400 of that amount will be withdrawn from the remainder of the Account Year 8 Purchase Payment and will be subject to the withdrawal charge. The 21 other $2,600 of your withdrawal (which exceeds the amount of all New Payments not previously withdrawn) will not be subject to the withdrawal charge. CALCULATION OF WITHDRAWAL CHARGE We calculate the amount of the withdrawal charge by multiplying the Purchase Payments you withdraw by a percentage. The percentage varies according to the number of Account Years the Purchase Payment has been held in your Account, including the year in which you made the Payment, but not the year you withdraw it. The applicable percentages are as follows:
NUMBER OF ACCOUNT YEARS PERCENTAGE - -------------- --------------- 0-1 6% 2-3 5% 4-5 4% 6 3% 7 or more 0%
For example, again using the same facts as in the example above, the percentage applicable to the withdrawals in Account Year 10 of Purchase Payments made in Account Year 8 would be 5%, because the number of Account Years the Purchase Payments have been held in your Account would be two. The withdrawal charge will never be greater than 6% of the aggregate amount of Purchase Payments you make under the Contract. For a Group Contract, we may modify the withdrawal charges and limits, upon notice to the Owner of the Group Contract. However, any modification will only apply to Accounts established after the date of the modification. For additional examples of how we calculate withdrawal charges, please see Appendix C. TYPES OF WITHDRAWALS NOT SUBJECT TO WITHDRAWAL CHARGE We do not impose a withdrawal charge on withdrawals from the Accounts of (a) our employees, (b) employees of our affiliates, or (c) licensed insurance agents who sell the Contracts. We also may waive withdrawal charges with respect to Purchase Payments derived from the surrender of other annuity contracts we issue. If approved in your state, we will waive the withdrawal charge for a full withdrawal if (a) at least one year has passed since we issued your Contract and (b) you are confined to an eligible nursing home and have been confined there for at least the preceding 180 days, or any shorter period required by your state. An "eligible nursing home" means a licensed hospital or licensed skilled or intermediate care nursing facility at which medical treatment is available on a daily basis and daily medical records are kept for each patient. You must provide us evidence of confinement in the form we determine. For each Qualified Contract, the free withdrawal amount in any Account Year will be the greater of the free withdrawal amount described above and any amounts required to be withdrawn to comply with the minimum distribution requirement of the Internal Revenue Code. This applies only to the portion of the required minimum distribution attributable to that Qualified Contract. We do not impose the withdrawal charge on amounts you apply to provide an annuity, amounts we pay as a death benefit, or amounts you transfer among the Sub-Accounts, between the Sub-Accounts and the Fixed Account, or within the Fixed Account. MARKET VALUE ADJUSTMENT We will apply a market value adjustment if you withdraw or transfer amounts from your Fixed Account Value more than 30 days before the end of the applicable Guarantee Period. For this purpose, using Fixed Account Value to provide an annuity is considered a withdrawal, and the Market Value 22 Adjustment will apply. However, we will not apply the Market Value Adjustment to automatic transfers to a Sub-Account from a Guarantee Period as part of our dollar cost averaging program. We apply the Market Value Adjustment separately to each Guarantee Amount in the Fixed Account, that is to each separate allocation you have made to a Guarantee Period together with interest credited on that allocation. However, we do not apply the adjustment to the amount of interest credited during your current Account Year. Any withdrawal from a Guarantee Amount is attributed first to such interest. A Market Value Adjustment may decrease, increase or have no effect on your Account Value. This will depend on changes in interest rates since you made your allocation to the Guarantee Period and the length of time remaining in the Guarantee Period. In general, if the Guaranteed Interest Rate we currently declare for Guarantee Periods equal to the balance of your Guarantee Period (or your entire Guarantee Period for Guarantee Periods of less than one year) is higher than your Guaranteed Interest Rate, the Market Value Adjustment is likely to decrease your Account Value. If our current Guaranteed Interest Rate is lower, the Market Value Adjustment is likely to increase your Account Value. We determine the amount of the Market Value Adjustment by multiplying the amount that is subject to the adjustment by the following formula: N/12 1 + I ( -------- ) -1 1 + J + b
where: I is the Guaranteed Interest Rate applicable to the Guarantee Amount from which you withdraw, transfer or annuitize; J is the Guaranteed Interest Rate we declare at the time of your withdrawal, transfer or annuitization for Guarantee Periods equal to the length of time remaining in the Guarantee Period applicable to your Guarantee Amount, rounded to the next higher number of complete years, for Guarantee Periods of one year or more. For any Guarantee Periods of less than one year, J is the Guaranteed Interest Rate we declare at the time of your withdrawal, transfer or annuitization for a Guarantee Period of the same length as your Guarantee Period. If, at that time, we do not offer the applicable Guarantee Period we will use an interest rate determined by straight-line interpolation of the Guaranteed Interest Rates for the Guarantee Periods we do offer; N is the number of complete months remaining in your Guarantee Period; and b is a factor that currently is 0% but that in the future we may increase to up to 0.25%. Any increase would be applicable only to Participants who purchase their Contracts after the date of that increase. We will apply the Market Value Adjustment to the amount being withdrawn after deduction of any Account Fee, if applicable, but before we impose any withdrawal charge on the amount withdrawn. For examples of how we calculate the Market Value Adjustment, see Appendix C. No Market Value Adjustment will apply to Contracts issued in the states of Maryland, Texas and Washington, or to one-year Guarantee Periods under Contracts issued in the state of Oregon. CONTRACT CHARGES ACCOUNT FEE Each year during the Accumulation Phase of your Contract we will deduct from your Account an Account Fee to help cover the administrative expenses we incur related to the issuance of Contracts and the maintenance of Accounts. We deduct the Account Fee on each Account Anniversary, which is the anniversary of the first day of the month after we issue your Contract. In Account Years 1 through 5, the Account Fee is equal to the lesser of (a) $35 and (b) 2% of your Account Value. After Account Year 5, we may change the Account Fee each year, but the Account Fee will never exceed the lesser of 23 (a) $50 and (b) 2% of your Account Value. We deduct the Account Fee pro rata from each Sub-Account and each Guarantee Amount, based on the allocation of your Account Value on your Account Anniversary. We will not charge you the Account Fee if: (1) your Account has been allocated only to the Fixed Account during the applicable Account Year; or (2) your Account Value is more than $75,000 on your Account Anniversary. If you make a full withdrawal of your Account, we will deduct the full amount of the Account Fee at the time of the withdrawal. In addition, on the Annuity Commencement Date we will deduct a pro rata portion of the Account Fee to reflect the time elapsed between the last Account Anniversary and the day before the Annuity Commencement Date. After the Annuity Commencement Date, we will deduct an annual Account Fee of $35 in the aggregate in equal amounts from each Variable Annuity payment we make during the year. We do not deduct any fee from Fixed Annuity payments. ADMINISTRATIVE EXPENSE CHARGE We deduct an administrative expense charge from the assets of the Variable Account at an annual effective rate equal to 0.15% during both the Accumulation Phase and the Income Phase. This charge is designed to reimburse expenses we incur in administering the Contracts, the Accounts and the Variable Account that are not covered by the Account Fee. MORTALITY AND EXPENSE RISK CHARGE We deduct a mortality and expense charge from the assets of the Variable Account at an effective annual rate equal to 1.25% during both the Accumulation Phase and the Income Phase. The mortality risk we assume arises from our contractual obligation to continue to make annuity payments to each Annuitant, regardless of how long the Annuitant lives and regardless of how long all Annuitants as a group live. This obligation assures each Annuitant that neither the longevity of fellow Annuitants nor an improvement in life expectancy generally will have an adverse effect on the amount of any annuity payment received under the contract. The expense risk we assume is the risk that the Account Fee and administrative expense charge we assess under the Contracts may be insufficient to cover the actual total administrative expenses we incur. If the amount of the charge is insufficient to cover the mortality and expense risks, we will bear the loss. If the amount of the charge is more than sufficient to cover the risks, we will make a profit on the charge. We may use this profit for any proper corporate purpose, including the payment of marketing and distribution expenses for the Contracts. PREMIUM TAXES Some states and local jurisdictions impose a premium tax on us that is equal to a specified percentage of the Purchase Payments you make. In many states there is no premium tax. We believe that the amounts of applicable premium taxes currently range from 0% to 3.5%. You should consult a tax adviser to find out if your state imposes a premium tax and the amount of any tax. In order to reimburse us for the premium tax we may pay on Purchase Payments, our policy is to deduct the amount of such taxes from the amount you apply to provide an annuity at the time of annuitization. However, we reserve the right to deduct the amount of any applicable tax from your Account at any time, including at the time you make a Purchase Payment or make a full or partial withdrawal. We do not make any profit on the deductions we make to reimburse premium taxes. FUND EXPENSES There are fees and charges deducted from each Fund. These fees and expenses are described in the Fund's Prospectus and Statement of Additional Information. 24 MODIFICATION IN THE CASE OF GROUP CONTRACTS For Group Contracts, we may modify the Account Fee, the administrative expense charge and the mortality and expense risk charge upon notice to Owners. However, such modification will apply only with respect to Participant Accounts established after the effective date of the modification. DEATH BENEFIT If you die during the Accumulation Phase, we will pay a death benefit to your Beneficiary, using the payment method elected (a single cash payment or one of our Annuity Options). If the Beneficiary is not living on the date of death, we will pay the death benefit in one sum to your estate. We do not pay a death benefit if you die during the Income Phase. However, the Beneficiary will receive any payments provided under an Annuity Option that is in effect. If your spouse is your Beneficiary, upon your death your spouse may elect to continue the Contract as the Participant, rather than receive the death benefit. In that case, the amount of your death benefit, calculated as described below, will become the Contract's Account Value on the Death Benefit Date. All other provisions, including any withdrawal charges, will continue as if your spouse had purchased the Contract on the original date of coverage. AMOUNT OF DEATH BENEFIT To calculate the amount of your death benefit, we use a "Death Benefit Date." The Death Benefit Date is the date we receive proof of your death in an acceptable form ("Due Proof of Death") if you have elected a death benefit payment method before your death and it remains effective. Otherwise, the Death Benefit Date is the later of the date we receive Due Proof of Death or, the date we receive the Beneficiary's election of either payment method or, if the Beneficiary is your spouse, Contract continuation. If we do not receive the Beneficiary's election within 60 days after we receive Due Proof of Death, the Death Benefit Date will be the last day of the 60 day period. The amount of the death benefit is determined as of the Death Benefit Date. If you were 85 or younger on your Contract Date (the date we accepted your first Purchase Payment), the death benefit will be the greatest of the following amounts: 1. Your Account Value for the Valuation Period during which the Death Benefit Date occurs; 2. The amount we would pay if you had surrendered your entire Account on the Death Benefit Date; 3. Your Account Value on the Seven-Year Anniversary immediately before the Death Benefit Date, adjusted for subsequent Purchase Payments and partial withdrawals and charges made between the Seven-Year Anniversary and the Death Benefit Date; 4. Your highest Account Value on any Account Anniversary before your 81st birthday, adjusted for subsequent Purchase Payments and partial withdrawals and charges made between that Account Anniversary and the Death Benefit Date; and 5. Your total Purchase Payments plus the following interest accruals, adjusted for partial withdrawals; interest will accrue on Purchase Payments allocated to and transfers to the Variable Account while they remain in the Variable Account at 5% per year until the first day of the month following your 80th birthday, or until the Purchase Payment or amount transferred has doubled in amount, whichever is earlier. If you were 86 or older on your Contract Date, the death benefit is equal to amount (2) above; because this amount will reflect any applicable withdrawal charges and market value adjustment, it may be less than your Account Value. In calculating the death benefit amount payable under (3), (4), and (5), any partial withdrawals will reduce the amount by the ratio of the Account Value immediately following the withdrawal to the Account Value immediately before the withdrawal. 25 If the death benefit is amount (2), (3), (4), or (5), your Account Value will be increased by the excess, if any, of that amount over amount (1). Any such increase will be allocated to the Sub-Accounts in proportion to your Account Value in those Sub-Accounts on the Death Benefit Date. Also, any portion of this new Account Value attributed to the Fixed Account will be transferred to the Sun Capital Money Market Sub-Account (without the application of a Market Value Adjustment). The Beneficiary may then transfer to the Fixed Account and begin a new Guarantee Period. METHOD OF PAYING DEATH BENEFIT The death benefit may be paid in a single cash payment or as an annuity (either fixed, variable or a combination), under one or more of our Annuity Options. We describe the Annuity Options in this Prospectus under "Income Phase - -- Annuity Provisions." During the Accumulation Phase, you may elect the method of payment for the death benefit. If no such election is in effect on the date of your death, the Beneficiary may elect either a single cash payment or an annuity. With respect to a Non-Qualified Contract, if the Beneficiary is the Owner's spouse, the Beneficiary may elect to continue the Non-Qualified Contract. These elections are made by sending us a completed election form, which we will provide. If we do not receive the Beneficiary's election within 60 days after we receive Due Proof of Death, we will pay the death benefit in a single cash payment. If we pay the death benefit in the form of an Annuity Option, the Beneficiary becomes the Annuitant under the terms of that Annuity Option. NON-QUALIFIED CONTRACTS If your Contract is a Non-Qualified Contract, special distribution rules apply to the payment of the death benefit. The amount of the death benefit must be distributed either (1) as a lump sum within 5 years after your death or (2) if in the form of an annuity, over a period not greater than the life or expected life of the "designated beneficiary" within the meaning of Section 72(s) of the Internal Revenue Code, with payments beginning no later than one year after your death. The person you have named a Beneficiary under your Contract, if any, will be the "designated beneficiary." If the named Beneficiary is not living, the Annuitant automatically becomes the designated beneficiary. If the designated beneficiary is your surviving spouse, your spouse may continue the Contract in his or her own name as Participant. To make this election, your spouse must give us written notification within 60 days after we receive Due Proof of Death. In that case, we will not pay a death benefit, and the Account Value will be increased to reflect the death benefit calculation. The special distribution rules will then apply on the death of your spouse. During the Income Phase, if the Annuitant dies, the remaining value of the Annuity Option in place must be distributed at least as rapidly as the method of distribution under that option. If the Participant is not a natural person, these distribution rules apply on a change in, or the death of, any Annuitant or Co-Annuitant. Payments made in contravention of these special rules would adversely affect the treatment of the Contracts as annuity contracts under the Internal Revenue Code. Neither you nor the Beneficiary may exercise rights that would have that effect. SELECTION AND CHANGE OF BENEFICIARY You select your Beneficiary in your Application. You may change your Beneficiary at any time by sending us written notice on our required form, unless you previously made an irrevocable Beneficiary designation. A new Beneficiary designation is not effective until we record the change. 26 PAYMENT OF DEATH BENEFIT Payment of the death benefit in cash will be made within 7 days of the Death Benefit Date, except if we are permitted to defer payment in accordance with the Investment Company Act of 1940. If an Annuity Option is elected, the Annuity Commencement Date will be the first day of the second calendar month following the Death Benefit Date, and your Account will remain in effect until the Annuity Commencement Date. DUE PROOF OF DEATH We accept the following as proof of any person's death: - an original certified copy of an official death certificate; - an original certified copy of a decree of a court of competent jurisdiction as to the finding of death; or - any other proof we find satisfactory. THE INCOME PHASE -- ANNUITY PROVISIONS During the Income Phase, we make regular monthly payments to your Annuitant. The Income Phase of your Contract begins with the Annuity Commencement Date. On that date, we apply your Account Value, adjusted as described below, under the Annuity Option or Options you have selected, and we make the first payment. Once the Income Phase begins, no lump sum settlement option or cash withdrawals are permitted, except pursuant to Annuity Option D, Monthly Payments for a Specified Period Certain, as described below under the heading "Annuity Options," and you cannot change the Annuity Option selected. You may request a full withdrawal before the Annuity Commencement Date, which will be subject to all charges applicable on withdrawals. See "Cash Withdrawals, Withdrawal Charge and Market Value Adjustment." SELECTION OF THE ANNUITANT OR CO-ANNUITANT You select the Annuitant in your Application. The Annuitant is the person who receives payments during the Income Phase and on whose life these payments are based. In your Contract, the Annuity Options refer to the Annuitant as the "Payee." If you name someone other than yourself as Annuitant and the Annuitant dies before the Income Phase, you become the Annuitant. In a Non-Qualified Contract, if you name someone other than yourself as Annuitant, you may also select a Co-Annuitant, who will become the new Annuitant if the original Annuitant dies before the Income Phase (if both the Annuitant and Co-Annuitant die before the Income Phase, you become the Annuitant). If you have named both an Annuitant and a Co-Annuitant, you may designate one of them to become the sole Annuitant as of the Annuity Commencement Date, if both are living at that time. If you have not made that designation on the 30th day before the Annuity Commencement Date, and both the Annuitant and the Co-Annuitant are still living, the Co-Annuitant will become the Annuitant. When an Annuity Option has been selected as the method of paying the death benefit, the Beneficiary is the Annuitant. SELECTION OF THE ANNUITY COMMENCEMENT DATE You select the Annuity Commencement Date in your Application. The following restrictions apply to the date you may select: - The earliest possible Annuity Commencement date is the first day of the second month following your Contract Date. 27 - The latest possible Annuity Commencement Date is the first day of the month following the Annuitant's 95th birthday or, if there is a Co-Annuitant, the 95th birthday of the younger of the Annuitant and Co-Annuitant. - The Annuity Commencement Date must always be the first day of a month. You may change the Annuity Commencement Date from time to time by sending us written notice, with the following additional limitations: - We must receive your notice at least 30 days before the current Annuity Commencement Date. - The new Annuity Commencement Date must be at least 30 days after we receive the notice. There may be other restrictions on your selection of the Annuity Commencement Date imposed by your retirement plan or applicable law. In most situations, current law requires that for a Qualified Contract, certain minimum distributions must commence no later than April 1 following the year the Annuitant reaches age 70 1/2 (or, for Qualified Contracts other than IRAs, no later than April 1 following the year the Annuitant retires, if later than the year the Annuitant reaches age 70 1/2). ANNUITY OPTIONS We offer the following Annuity Options for payments during the Income Phase. Each Annuity Option may be selected for either a Variable Annuity, a Fixed Annuity, or a combination of both. We may also agree to other settlement options, in our discretion. ANNUITY OPTION A -- LIFE ANNUITY We provide monthly payments during the lifetime of the Annuitant. Annuity payments stop when the Annuitant dies. There is no provision for continuation of any payments to a Beneficiary. ANNUITY OPTION B -- LIFE ANNUITY WITH 60, 120, 180 OR 240 MONTHLY PAYMENTS CERTAIN We make monthly payments during the lifetime of the Annuitant. In addition, we guarantee that the Beneficiary will receive monthly payments for the remainder of the period certain, if the Annuitant dies during that period. The election of a longer period results in smaller monthly payments. If no Beneficiary is designated, we pay the discounted value of the remaining payments in one sum to the Annuitant's estate. The Beneficiary may also elect to receive the discounted value of the remaining payments in one sum. The discount rate for a Variable Annuity will be the assumed interest rate in effect; the discount rate for a Fixed Annuity will be based on the interest rate we used to determine the amount of each payment. ANNUITY OPTION C -- JOINT AND SURVIVOR ANNUITY We make monthly payments during the lifetime of the Annuitant and another person you designate and during the lifetime of the survivor of the two. We stop making payments when the last survivor dies. There is no provision for continuance of any payments to a Beneficiary. ANNUITY OPTION D -- MONTHLY PAYMENTS FOR A SPECIFIED PERIOD CERTAIN We make monthly payments for a specified period of time from 5 to 30 years, as you elect. If payments under this option are paid on a variable annuity basis, the Annuitant may elect to receive in one sum the discounted value of the remaining payments, less any applicable withdrawal charge. The discount rate for this purpose will be the assumed interest rate in effect. If the Annuitant dies during the period selected, the remaining income payments are made as described under Annuity Option B. The election of this Annuity Option may result in the imposition of a penalty tax. 28 SELECTION OF ANNUITY OPTION You select one or more of the Annuity Options, which you may change from time to time during the Accumulation Phase, as long as we receive your selection or change in writing at least 30 days before the Annuity Commencement Date. If we have not received your written selection on the 30th day before the Annuity Commencement Date, you will receive Annuity Option B, for a life annuity with 120 monthly payments certain. You may specify the proportion of your Adjusted Account Value you wish to provide a Variable Annuity or a Fixed Annuity. Under a Variable Annuity, the dollar amount of payments will vary, while under a Fixed Annuity, the dollar amount of payments will remain the same. If you do not specify a Variable Annuity or a Fixed Annuity, your Adjusted Account Value will be divided between Variable and Fixed Annuities in the same proportions as your Account Value was divided between the Variable and Fixed Accounts on the Annuity Commencement Date. You may allocate your Adjusted Account Value applied to a Variable Annuity among the Sub-Accounts, or we will use your existing allocations. There may be additional limitations on the options you may elect under your particular retirement plan or applicable law. REMEMBER THAT THE ANNUITY OPTIONS MAY NOT BE CHANGED ONCE ANNUITY PAYMENTS BEGIN. AMOUNT OF ANNUITY PAYMENTS ADJUSTED ACCOUNT VALUE The Adjusted Account Value is the amount we apply to provide a Variable Annuity and/or a Fixed Annuity. We calculate Adjusted Account Value by taking your Account Value on the Business Day just before the Annuity Commencement Date and making the following adjustments: - We deduct a proportional amount of the Account Fee, based on the fraction of the current Account Year that has elapsed; - If applicable, we apply the Market Value Adjustment to your Account Value in the Fixed Account, which may result in a deduction, an addition, or no change; and - We deduct any applicable premium tax or similar tax if not previously deducted. VARIABLE ANNUITY PAYMENTS Variable Annuity payments may vary each month. We determine the dollar amount of the first payment using the portion of your Adjusted Account Value applied to a Variable Annuity and the Annuity Payment Rates in your Contract, which are based on an assumed interest rate of 3% per year, compounded annually. See "Annuity Payment Rates." To calculate the remaining payments, we convert the amount of the first payment into Annuity Units for each Sub-Account; we determine the number of those Annuity Units by dividing the portion of the first payment attributable to the Sub-Account by the Annuity Unit Value of that Sub-Account for the Valuation Period ending just before the Annuity Commencement Date. This number of Annuity Units for each Sub-Account will remain constant (unless the Annuitant requests an exchange of Annuity Units). However, the dollar amount of the next Variable Annuity payment -- which is the sum of the number of Annuity Units for each Sub-Account times its Annuity Unit Value for the Valuation Period ending just before the date of the payment -- will increase, decrease, or remain the same, depending on the net investment return of the Sub-Accounts. If the net investment return of the Sub-Accounts selected is the same as the assumed interest rate of 3%, compounded annually, the payments will remain level. If the net investment return exceeds the assumed interest rate, payments will increase and, conversely, if it is less than the assumed interest rate, payments will decrease. Please refer to the Statement of Additional Information for more information about calculating Variable Annuity Units and Variable Annuity payments, including examples of these calculations. 29 FIXED ANNUITY PAYMENTS Fixed Annuity payments are the same each month. We determine the dollar amount of each Fixed Annuity payment using the fixed portion of your Adjusted Account Value and the applicable Annuity Payment Rates. These will be either (1) the rates in your Contract, which are based on a minimum guaranteed interest rate of 3% per year, compounded annually, or (2) new rates we have published and are using on the Annuity Commencement Date, if they are more favorable. See "Annuity Payment Rates." MINIMUM PAYMENTS If your Adjusted Account Value is less than $2,000, or the first annuity payment for any Annuity Option is less than $20, we will pay the Adjusted Account Value to the Annuitant in one payment. EXCHANGE OF VARIABLE ANNUITY UNITS During the Income Phase, the Annuitant may exchange Annuity Units from one Sub-Account to another, up to 12 times each Account Year. To make an exchange, the Annuitant sends us, at our Annuity Service Mailing Address, a written request stating the number of Annuity Units in the Sub-Account he or she wishes to exchange and the new Sub-Account for which Annuity Units are requested. The number of new Annuity Units will be calculated so the dollar amount of an annuity payment on the date of the exchange would not be affected. To calculate this number, we use Annuity Unit values for the Valuation Period during which we receive the exchange request. We permit only exchanges among Sub-Accounts. No exchanges to or from a Fixed Annuity are permitted. ACCOUNT FEE During the Income Phase, we deduct the annual Account Fee of $35 in equal amounts from each Variable Annuity Payment. We do not deduct the Account Fee from Fixed Annuity payments. ANNUITY PAYMENT RATES The Contract contains Annuity Payment Rates for each Annuity Option described in this Prospectus. The rates show, for each $1,000 applied, the dollar amount of: (a) the first monthly Variable Annuity payment based on the assumed interest rate specified in the applicable Contract (at least 3% per year, compounded annually); and (b) the monthly Fixed Annuity payment, when this payment is based on the minimum guaranteed interest rate specified in the Contract (at least 3% per year, compounded annually). We may change these rates under Group Contracts for Accounts established after the effective date of such change (See "Other Contract Provisions -- Modification"). The Annuity Payment Rates may vary according to the Annuity Option elected and the adjusted age of the Annuitant. The Contract also describes the method of determining the adjusted age of the Annuitant. The mortality table used in determining the Annuity Payment Rates for Options A, B and C is the 1983 Individual Annuitant Mortality Table. ANNUITY OPTIONS AS METHOD OF PAYMENT FOR DEATH BENEFIT You or your Beneficiary may also select one or more Annuity Options to be used in the event of your death before the Income Phase, as described under the "Death Benefit" section of this Prospectus. In that case, your Beneficiary will be the Annuitant. The Annuity Commencement Date will be the first day of the second month beginning after the Death Benefit Date. OTHER CONTRACT PROVISIONS EXERCISE OF CONTRACT RIGHTS An Individual Contract belongs to the individual to whom the Contract is issued. A Group Contract belongs to the Owner. In the case of a Group Contract, the Owner may expressly reserve all 30 Contract rights and privileges; otherwise, each Participant will be entitled to exercise such rights and privileges. In any case, such rights and privileges can be exercised without the consent of the Beneficiary (other than an irrevocably designated Beneficiary) or any other person. Such rights and privileges may be exercised only during the lifetime of the Participant before the Annuity Commencement Date, except as the Contract otherwise provides. The Annuitant becomes the Payee on and after the Annuity Commencement Date. The Beneficiary becomes the Payee on the death of the Participant prior to the Annuity Commencement Date, or on the death of the Annuitant after the Annuity Commencement Date. Such Payee may thereafter exercise such rights and privileges, if any, of ownership which continue. CHANGE OF OWNERSHIP Ownership of a Qualified Contract may not be transferred except to: (1) the Annuitant; (2) a trustee or successor trustee of a pension or profit sharing trust which is qualified under Section 401 of the Internal Revenue Code; (3) the employer of the Annuitant, provided that the Qualified Contract after transfer is maintained under the terms of a retirement plan qualified under Section 403(a) of the Internal Revenue Code for the benefit of the Annuitant; (4) the trustee or custodian of an individual retirement account plan qualified under Section 408 of the Internal Revenue Code for the benefit of the Participants under a Group Contract; or (5) as otherwise permitted from time to time by laws and regulations governing the retirement or deferred compensation plans for which a Qualified Contract may be issued. Subject to the foregoing, a Qualified Contract may not be sold, assigned, transferred, discounted or pledged as collateral for a loan or as security for the performance of an obligation or for any other purpose to any person other than the Company. The Owner of a Non-Qualified Contract may change the ownership of the Contract prior to the last Annuity Commencement Date; and each Participant, in like manner, may change the ownership interest in a Contract. A change of ownership will not be binding on us until we receive written notification. When we receive such notification, the change will be effective as of the date on which the request for change was signed by the Owner or Participant, as appropriate, but the change will be without prejudice to us on account of any payment we make or any action we take before receiving the change. If you change the Owner of a Non-Qualified Contract, you will become immediately liable for the payment of taxes on any gain realized under the Contract prior to the change of ownership, including possible liability for a 10% federal excise tax. VOTING OF FUND SHARES We will vote Fund shares held by the Sub-Accounts at meetings of shareholders of the Funds or in connection with similar solicitations, but will follow voting instructions received from persons having the right to give voting instructions. During the Accumulation Phase, you will have the right to give voting instructions, except in the case of a Group Contract where the Owner has reserved this right. During the Income Phase, the Payee -- that is the Annuitant or Beneficiary entitled to receive benefits -- is the person having such voting rights. We will vote any shares attributable to us and Fund shares for which no timely voting instructions are received in the same proportion as the shares for which we receive instructions from Owners, Participants and Payees, as applicable. Owners of Qualified Contracts issued on a group basis may be subject to other voting provisions of the particular plan and of the Investment Company Act of 1940. Employees who contribute to plans that are funded by the Contracts may be entitled to instruct the Owners as to how to instruct us to vote the Fund shares attributable to their contributions. Such plans may also provide the additional extent, if any, to which the Owners shall follow voting instructions of persons with rights under the plans. If no voting instructions are received from any such person with respect to a particular Participant Account, the Owner may instruct the Company as to how to vote the number of Fund shares for which instructions may be given. Neither the Variable Account nor the Company is under any duty to provide information concerning the voting instruction rights of persons who may have such rights under plans, other than rights afforded by the Investment Company Act of 1940, or any duty to inquire as to the instructions received 31 or the authority of Owners, Participants or others, as applicable, to instruct the voting of Fund shares. Except as the Variable Account or the Company has actual knowledge to the contrary, the instructions given by Owners under Group Contracts and Payees will be valid as they affect the Variable Account, the Company and any others having voting instruction rights with respect to the Variable Account. All Fund proxy material, together with an appropriate form to be used to give voting instructions, will be provided to each person having the right to give voting instructions at least 10 days prior to each meeting of the shareholders of the Fund. We will determine the number of Fund shares as to which each such person is entitled to give instructions as of the record date set by the Fund for such meeting which is expected to be not more than 90 days prior to each such meeting. Prior to the Annuity Commencement Date, the number of Fund shares as to which voting instructions may be given to the Company is determined by dividing the value of all of the Variable Accumulation Units of the particular Sub-Account credited to the Participant Account by the net asset value of one Fund share as of the same date. On or after the Annuity Commencement Date, the number of Fund shares as to which such instructions may be given by a Payee is determined by dividing the reserve held by the Company in the Sub-Account with respect to the particular Payee by the net asset value of a Fund share as of the same date. After the Annuity Commencement Date, the number of Fund shares as to which a Payee is entitled to give voting instructions will generally decrease due to the decrease in the reserve. PERIODIC REPORTS During the Accumulation Period we will send you, or such other person having voting rights, at least once during each Account Year, a statement showing the number, type and value of Accumulation Units credited to your Account and the Fixed Accumulation Value of your Account, which statement shall be accurate as of a date not more than 2 months previous to the date of mailing. These periodic statements contain important information concerning your transactions with respect to a Contract. It is your obligation to review each such statement carefully and to report to us, at the address or telephone number provided on the statement, any errors or discrepancies in the information presented therein within 60 days of the date of such statement. Unless we receive notice of any such error or discrepancy from you within such period, we may not be responsible for correcting the error or discrepancy. In addition, every person having voting rights will receive such reports or prospectuses concerning the Variable Account and the Funds as may be required by the Investment Company Act of 1940 and the Securities Act of 1933. We will also send such statements reflecting transactions in your Account as may be required by applicable laws, rules and regulations. Upon request, we will provide you with information regarding fixed and variable accumulation values. SUBSTITUTION OF SECURITIES Shares of any or all Funds may not always be available for investment under the Contract. We may add or delete Funds or other investment companies as variable investment options under the Contracts. We may also substitute for the shares held in any Sub-Account shares of another registered open-end investment company or unit investment trust, provided that the substitution has been approved , if required, by the SEC. In the event of any substitution pursuant to this provision, we may make appropriate endorsement to the Contract to reflect the substitution. CHANGE IN OPERATION OF VARIABLE ACCOUNT At our election and subject to any necessary vote by persons having the right to give instructions with respect to the voting of Fund shares held by the Sub-Accounts, the Variable Account may be operated as a management company under the Investment Company Act of 1940 or it may be deregistered under the Investment Company Act of 1940 in the event registration is no longer required. Deregistration of the Variable Account requires an order by the SEC. In the event of any change in the operation of the Variable Account pursuant to this provision, we may make appropriate endorsement to 32 the Contract to reflect the change and take such other action as may be necessary and appropriate to effect the change. SPLITTING UNITS We reserve the right to split or combine the value of Variable Accumulation Units, Annuity Units or any of them. In effecting any such change of unit values, strict equity will be preserved and no change will have a material effect on the benefits or other provisions of the Contract. MODIFICATION Upon notice to the Participant, in the case of an Individual Contract, and the Owner and Participant(s), in the case of a Group Contract (or the Payee(s) during the Income Phase), we may modify the Contract if such modification: (i) is necessary to make the Contract or the Variable Account comply with any law or regulation issued by a governmental agency to which the Company or the Variable Account is subject; (ii) is necessary to assure continued qualification of the Contract under the Internal Revenue Code or other federal or state laws relating to retirement annuities or annuity contracts; (iii) is necessary to reflect a change in the operation of the Variable Account or the Sub-Account(s) (See "Change in Operation of Variable Account"); (iv) provides additional Variable Account and/or fixed accumulation options; or (v) as may otherwise be in the best interests of Owners, Participants, or Payees, as applicable. In the event of any such modification, we may make appropriate endorsement in the Contract to reflect such modification. In addition, upon notice to the Owner, we may modify a Group Contract to change the withdrawal charges, Account Fees, mortality and expense risk charges, administrative expense charges, the tables used in determining the amount of the first monthly variable annuity and fixed annuity payments and the formula used to calculate the Market Value Adjustment, provided that such modification applies only to Participant Accounts established after the effective date of such modification. In order to exercise our modification rights in these particular instances, we must notify the Owner of such modification in writing. The notice shall specify the effective date of such modification which must be at least 60 days following the date we mail notice of modification. All of the charges and the annuity tables which are provided in the Group Contract prior to any such modification will remain in effect permanently, unless improved by the Company, with respect to Participant Accounts established prior to the effective date of such modification. DISCONTINUANCE OF NEW PARTICIPANTS We may limit or discontinue the acceptance of new Applications and the issuance of new Certificates under a Group Contract by giving 30 days prior written notice to the Owner. This will not affect rights or benefits with respect to any Participant Accounts established under such Group Contract prior to the effective date of such limitation or discontinuance. RESERVATION OF RIGHTS We reserve the right, to the extent permitted by law, to: (1) combine any 2 or more variable accounts; (2) add or delete Funds or other investment companies and corresponding Sub-Accounts; (3) add or remove Guarantee Periods available at any time for election by a Participant; and (4) restrict or eliminate any of the voting rights of Participants (or Owners) or other persons who have voting rights as to the Variable Account. Where required by law, we will obtain approval of changes from Participants or any appropriate regulatory authority. In the event of any change pursuant to this provision, we may make appropriate endorsement to the Contract to reflect the change. RIGHT TO RETURN If you are not satisfied with your Contract, you may return it by mailing or delivering it to us at the Annuity Service Mailing Address on the cover of this Prospectus within 10 days after it was delivered to you. When we receive the returned Contract, it will be cancelled and we will refund to you your Account Value at the end of the Valuation Period during which we received it. However, if 33 applicable state law requires we will return the full amount of any Purchase Payment(s) we received. State law may also require us to give you a longer "free look" period or allow you to return the Contract to your sales representative. If you are establishing an Individual Retirement Account ("IRA"), the Internal Revenue Code requires that we give you a disclosure statement containing certain information about the Contract and applicable legal requirements. We must give you this statement on or before the date the IRA is established. If we give you the disclosure statement before the seventh day preceding the date the IRA is established, you will not have any right of revocation under the Code. If we give you the disclosure statement at a later date, then you may give us a notice of revocation at any time within 7 days after your Contract Date. Upon such revocation, we will refund your Purchase Payment(s). This right of revocation with respect to an IRA is in addition to the return privilege set forth in the preceding paragraph. We allow a Participant establishing an IRA a "ten day free-look," notwithstanding the provisions of the Internal Revenue Code. FEDERAL TAX STATUS INTRODUCTION This section describes general federal income tax consequences based upon our understanding of current federal tax laws. Actual federal tax consequences may vary depending on, among other things, the type of retirement plan with which you use a Contract and whether (depending on the site of Contract issuance) Puerto Rico tax law applies. Also, Congress has the power to enact legislation affecting the tax treatment of annuity contracts, and such legislation could apply retroactively to Contracts that you purchased before the date of enactment. We do not make any guarantee regarding the federal, state, or local tax status of any Contract or any transaction involving any Contract. You should consult a qualified tax professional for advice before purchasing a Contract or executing any other transaction (such as a rollover, distribution, withdrawal or payment) involving a Contract. DEDUCTIBILITY OF PURCHASE PAYMENTS For federal income tax purposes, Purchase Payments made under Non-Qualified Contracts are not deductible. PRE-DISTRIBUTION TAXATION OF CONTRACTS Generally, an increase in the value of a Contract will not give rise to tax, prior to distribution. However, corporate (or other non-natural person) Owners of, and Participants under, a Non-Qualified Contract incur current tax, regardless of distribution, on Contract value increases. Such current taxation does not apply, though, to (i) immediate annuities, which the Internal Revenue Code (the "Code") defines as a single premium contract with an annuity commencement date within one year of the date of purchase, or (ii) any Contract that the non-natural person holds as agent for a natural person (such as where a bank or other entity holds a Contract as trustee under a trust agreement). The Internal Revenue Service could assert that Owners or Participants under both Qualified Contracts and Non-Qualified Contracts annually receive a taxable deemed distribution equal to the cost of any life insurance benefit under the Contract. You should note that qualified retirement investments automatically provide tax deferral regardless of whether the underlying contract is an annuity. DISTRIBUTIONS AND WITHDRAWALS FROM NON-QUALIFIED CONTRACTS The Account Value will include an amount attributable to Purchase Payments, the return of which is not taxable, and an amount attributable to investment earnings, the return of which is taxable at ordinary income rates. The relative portions of a distribution that derive from nontaxable Purchase Payments and taxable investment earnings depend upon the timing of the distribution. 34 If you withdraw less than your entire Account Value under a Non-Qualified Contract before the Annuity Commencement Date, you must treat the withdrawal first as a return of investment earnings. You may treat only withdrawals in excess of the amount of the Account Value attributable to investment earnings as a return of Purchase Payments. Account Value amounts assigned or pledged as collateral for a loan will be treated as if withdrawn from the Contract. If a Payee receives annuity payments under a Non-Qualified Contract after the Annuity Commencement Date, however, the Payee treats a portion of each payment as a nontaxable return of Purchase Payments. In general, the nontaxable portion of such a payment bears the same ratio to the total payment as the Purchase Payments bear to the Payee's expected return under the Contract. The remainder of the payment constitutes a taxable return of investment earnings. Once the Payee has received nontaxable payments in an amount equal to total Purchase Payments, all future distributions constitute fully taxable ordinary income. If the Annuitant dies before the Payee recovers the full amount of Purchase Payments, the Payee may deduct an amount equal to unrecovered Purchase Payments. Upon the transfer of a Non-Qualified Contract by gift (other than to the Participant's spouse), the Participant must treat an amount equal to the Account Value minus the total amount paid for the Contract as income. A penalty tax of 10% may apply to taxable cash withdrawals and lump-sum payments from Non-Qualified Contracts. This penalty will not apply in certain circumstances, such as distributions pursuant to the death of the Participant or distributions under an immediate annuity (as defined above), or after age 59 1/2. DISTRIBUTIONS AND WITHDRAWALS FROM QUALIFIED CONTRACTS Generally, distributions from a Qualified Contract will constitute fully taxable ordinary income. Also, a 10% penalty tax will, except in certain circumstances, apply to distributions prior to age 59 1/2. Distributions from a Qualified Contract are not subject to current taxation or a 10% penalty, however, if: - the distribution is not a hardship distribution or part of a series of payments for life or for a specified period of 10 years or more (an "eligible rollover distribution"), and - the Participant or Payee rolls over the distribution (with or without actually receiving the distribution) into a qualified retirement plan eligible to receive the rollover. Only you or your spouse may elect to roll over a distribution to an eligible retirement plan. WITHHOLDING In the case of an eligible rollover distribution (as defined above) from a Qualified Contract (other than from a Contract issued for use with an individual retirement account), we (or the plan administrator) must withhold and remit to the U.S. Government 20% of the distribution, unless the Participant or Payee elects to make a direct rollover of the distribution to another qualified retirement plan that is eligible to receive the rollover; however, only you and your spouse may elect a direct rollover. In the case of a distribution from (i) a Non-Qualified Contract, (ii) a Qualified Contract issued for use with an individual retirement account, or (iii) a Qualified Contract where the distribution is not an eligible rollover distribution, we will withhold and remit to the U.S. Government a part of the taxable portion of each distribution unless, prior to the distribution, the Participant or Payee provides us his or her taxpayer identification number and instructs us (in the manner prescribed) not to withhold. The Participant or Payee may credit against his or her federal income tax liability for the year of distribution any amounts that we (or the plan administrator) withhold. 35 PURCHASE OF IMMEDIATE ANNUITY CONTRACT AND DEFERRED ANNUITY CONTRACT You should consider the following information only if you intend to purchase an immediate annuity contract and a deferred annuity contract together. We understand that the Treasury Department might reconsider the tax treatment of annuity payments under an immediate annuity contract (as defined above) purchased together with a deferred annuity contract. We believe that any adverse change in the existing tax treatment of such immediate annuity contracts would not apply to contracts issued before the Treasury Department announces the change. However, there can be no assurance that the Treasury Department will not apply any such change retroactively. INVESTMENT DIVERSIFICATION AND CONTROL The Treasury Department has issued regulations that prescribe investment diversification requirements for mutual fund series underlying nonqualified variable contracts. Contracts must comply with these regulations to qualify as annuities for federal income tax purposes. Contracts that do not meet the guidelines are subject to current taxation on annual increases in value. We believe that each Fund complies with these regulations. The preamble to the regulations states that the Internal Revenue Service may promulgate guidelines under which an owner's excessive control over investments underlying the contract will preclude the contract from qualifying as an annuity for federal tax purposes. We cannot predict whether such guidelines, if in fact promulgated, will be retroactive. We will take any action (including modification of the Contract and/or the Variable Account) necessary to comply with any retroactive guidelines. TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT As a life insurance company under the Code, we will record and report operations of the Variable Account separately from other operations. The Variable Account will not, however, constitute a regulated investment company or any other type of taxable entity distinct from our other operations. We will not incur tax on the income of the Variable Account (consisting primarily of interest, dividends, and net capital gains) if we use this income to increase reserves under Contracts participating in the Variable Account. QUALIFIED RETIREMENT PLANS You may use Qualified Contracts with several types of qualified retirement plans. Because tax consequences will vary with the type of qualified retirement plan and the plan's specific terms and conditions, we provide below only brief, general descriptions of the consequences that follow from using Qualified Contracts in connection with various types of qualified retirement plans. We stress that the rights of any person to any benefits under these plans may be subject to the terms and conditions of the plans themselves, regardless of the terms of the Qualified Contracts that you are using. These terms and conditions may include restrictions on, among other things, ownership, transferability, assignability, contributions and distributions. Owners, Participants, Payees, Beneficiaries and administrators of qualified retirement plans should consider, with the guidance of a tax adviser, whether the death benefit payable under the Contract affects the qualified status of their retirement plan. PENSION AND PROFIT-SHARING PLANS Sections 401(a), 401(k) and 403(a) of the Code permit business employers and certain associations to establish various types of retirement plans for employees. The Tax Equity and Fiscal Responsibility Act of 1982 eliminated most differences between qualified retirement plans of corporations and those of self-employed individuals. Self-employed persons may therefore use Qualified Contracts as a funding vehicle for their retirement plans, as a general rule. TAX-SHELTERED ANNUITIES Section 403(b) of the Code permits public school employees and employees of certain types of charitable, educational and scientific organizations specified in Section 501(c)(3) of the Code to purchase annuity contracts and, subject to certain limitations, exclude the amount of purchase payments 36 from gross income for tax purposes. The Code imposes restrictions on cash withdrawals from Section 403(b) annuities. If the Contracts are to receive tax deferred treatment, cash withdrawals of amounts attributable to salary reduction contributions (other than withdrawals of accumulation account value as of December 31, 1988) may be made only when the Participant attains age 59 1/2, separates from service with the employer, dies or becomes disabled (within the meaning of Section 72(m)(7) of the Code). These restrictions apply to (i) any post-1988 salary reduction contributions, (ii) any growth or interest on post-1988 salary reduction contributions, and (iii) any growth or interest on pre-1989 salary reduction contributions that occurs on or after January 1, 1989. It is permissible, however, to withdraw post-1988 salary reduction contributions in cases of financial hardship. While the Internal Revenue Service has not issued specific rules defining financial hardship, we expect that to qualify for a hardship distribution, the Participant must have an immediate and heavy bona fide financial need and lack other resources reasonably available to satisfy the need. Hardship withdrawals (as well as certain other premature withdrawals) will be subject to a 10% tax penalty, in addition to any withdrawal charge applicable under the Contracts. Under certain circumstances the 10% tax penalty will not apply if the withdrawal is for medical expenses. Under the terms of a particular Section 403(b) plan, the Participant may be entitled to transfer all or a portion of the Account Value to one or more alternative funding options. Participants should consult the documents governing their plan and the person who administers the plan for information as to such investment alternatives. INDIVIDUAL RETIREMENT ACCOUNTS Sections 219 and 408 of the Code permit eligible individuals to contribute to an individual retirement program, including Simplified Employee Pension Plans, Employer/Association of Employees Established Individual Retirement Account Trusts, and Simple Retirement Accounts. Such IRAs are subject to limitations on contribution levels, the persons who may be eligible, and on the time when distributions may commence. In addition, certain distributions from some other types of retirement plans may be placed in an IRA on a tax-deferred basis. If we sell Contracts for use with IRAs, the Internal Revenue Service or other agency may impose supplementary information requirements. We will provide purchasers of the Contracts for such purposes with any necessary information. You will have the right to revoke the Contract under certain circumstances, as described in the section of this Prospectus entitled "Right to Return." ROTH IRAS Section 408A of the Code permits an individual to contribute to an individual retirement program called a Roth IRA. Unlike contributions to a traditional IRA under Section 408 of the Code, contributions to a Roth IRA are not tax-deductible. Provided certain conditions are satisfied, distributions are generally tax-free. Like traditional IRAs, Roth IRAs are subject to limitations on contribution amounts and the timing of distributions. If an individual converts a traditional IRA into a Roth IRA the full amount of the IRA is included in taxable income. The Internal Revenue Service and other agencies may impose special information requirements with respect to Roth IRAs. If and when we make Contracts available for use with Roth IRAs, we will provide any necessary information. ADMINISTRATION OF THE CONTRACTS We perform certain administrative functions relating to the Contracts, Participant Accounts, and the Variable Account. These functions include, but are not limited to, maintaining the books and records of the Variable Account and the Sub-Accounts; maintaining records of the name, address, taxpayer identification number, Contract number, Participant Account number and type, the status of each Participant Account and other pertinent information necessary to the administration and operation of the Contracts; processing Applications, Purchase Payments, transfers and full and partial withdrawals; issuing Contracts and Certificates; administering annuity payments; furnishing accounting and 37 valuation services; reconciling and depositing cash receipts; providing confirmations; providing toll-free customer service lines; and furnishing telephonic transfer services. DISTRIBUTION OF THE CONTRACTS We offer the Contracts on a continuous basis. The Contracts are sold by licensed insurance agents in those states where the Contracts may be lawfully sold. Such agents will be registered representatives of broker-dealers registered under the Securities Exchange Act of 1934 who are members of the National Association of Securities Dealers, Inc. and who have entered into distribution agreements with the Company and the general distributor, Clarendon Insurance Agency, Inc. ("Clarendon"), One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. Clarendon, a wholly-owned subsidiary of the Company, is registered with the SEC under the Securities Exchange Act of 1934 as a broker-dealer and is a member of the National Association of Securities Dealers, Inc. Commissions and other distribution compensation will be paid by the Company to the selling agents and will not be more than 7.46% of Purchase Payments. In addition, after the first Account Year, broker-dealers who have entered into distribution agreements with the Company may receive an annual renewal commission of no more than 1.00% of the Participant's Account Value. In addition to commissions, the Company may, from time to time, pay or allow additional promotional incentives, in the form of cash or other compensation. We reserve the right to offer these additional incentives only to certain broker-dealers that sell or are expected to sell during specified time periods certain minimum amounts of the Contracts or Certificates or other contracts offered by the Company. Promotional incentives may change at any time. Commissions will not be paid with respect to Accounts established for the personal account of employees of the Company or any of its affiliates, or of persons engaged in the distribution of the Contracts, or of immediate family members of such employees or persons. In addition, commissions may be waived or reduced in connection with certain transactions described in this Prospectus under the heading "Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest Rates." PERFORMANCE INFORMATION From time to time the Variable Account may publish reports to shareholders, sales literature and advertisements containing performance information relating to the Sub-Accounts. This information may include "Average Annual Total Return," "Cumulative Growth Rate" and "Compound Growth Rate." Some Sub-Accounts may advertise "yield" and "effective yield." Average Annual Total Return measures the net income of the Sub-Account and any realized or unrealized gains or losses of the Fund in which it invests, over the period stated. Average Annual Total Return figures are annualized and represent the average annual percentage change in the value of an investment in a Sub-Account over that period. Cumulative Growth Rate represents the cumulative change in the value of an investment in the Sub-Account for the period stated, and is arrived at by calculating the change in the Accumulation Unit Value of a Sub-Account between the first and the last day of the period being measured. The difference is expressed as a percentage of the Accumulation Unit Value at the beginning of the base period. "Compound Growth Rate" is an annualized measure, calculated by applying a formula that determines the level of return which, if earned over the entire period, would produce the cumulative return. Average Annual Total Return figures assume an initial purchase payment of $1,000 and reflect all applicable withdrawal and Contract charges. The Cumulative Growth Rate and Compound Growth Rate figures that we advertise do not reflect withdrawal charges or the Account Fee, although they reflect all recurring charges. Results calculated without withdrawal and/or certain Contract charges will be higher. We may also use other types of rates of return that do not reflect withdrawal and Contract charges. The performance figures used by the Variable Account are based on the actual historical performance of the Funds for the specified periods, and the figures are not intended to indicate future performance. For periods before the date the Contracts became available, we calculate the performance 38 information for the Sub-Account on a hypothetical basis. To do this, we reflect deductions of the current Contract fees and charges from the historical performance of the corresponding series. Yield is a measure of the net dividend and interest income earned over a specific one month or 30-day period (7-day period for the Sun Capital Money Market Fund Sub-Account), expressed as a percentage of the value of the Sub-Account's Accumulation Units. Yield is an annualized figure, which means that we assume that the Sub-Account generates the same level of net income over a one-year period and compound that income on a semi-annual basis. We calculate the effective yield for the Sun Capital Money Market Fund Sub-Account similarly, but include the increase due to assumed compounding. The Sun Capital Money Market Fund Sub-Account's effective yield will be slightly higher than its yield as a result of its compounding effect. The Variable Account may also from time to time compare its investment performance to various unmanaged indices or other variable annuities and may refer to certain rating and other organizations in its marketing materials. More information on performance and our computations is set forth in the Statement of Additional Information. The Company may also advertise the ratings and other information assigned to it by independent industry ratings organizations. Some of these organizations are A.M. Best, Moody's Investor's Service, Standard and Poor's Insurance Rating Services, and Duff and Phelps. Each year A.M. Best reviews the financial status of thousands of insurers, culminating in the assignment of Best's rating. These ratings reflect A.M. Best's current opinion of the relevant financial strength and operating performance of an insurance company in comparison to the norms of the life/health industry. Best's ratings range from A++ to F. Standard and Poor's and Duff and Phelps' ratings measure the ability of an insurance company to meet its obligations under insurance policies it issues. These two ratings do not measure the insurance company's ability to meet non-policy obligations. Ratings in general do not relate to the performance of the Sub-Accounts. We may also advertise endorsements from organizations, individuals or other parties that recommend the Company or the Contracts. We may occasionally include in advertisements (1) comparisons of currently taxable and tax deferred investment programs, based on selected tax brackets; or (2) discussions of alternative investment vehicles and general economic conditions. AVAILABLE INFORMATION The Company and the Variable Account have filed with the SEC registration statements under the Securities Act of 1933 relating to the Contracts. This Prospectus does not contain all of the information contained in the registration statements and their exhibits. For further information regarding the Variable Account, the Company and the Contracts, please refer to the registration statements and their exhibits. In addition, the Company is subject to the informational requirements of the Securities Exchange Act of 1934. We file reports and other information with the SEC to meet these requirements. You can inspect and copy this information and our registration statements at the SEC's public reference facilities at the following locations: WASHINGTON, D.C. -- 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; CHICAGO, ILLINOIS -- 500 West Madison Street, Chicago, IL 60661; NEW YORK, NEW YORK -- 7 World Trade Center, 13th Floor, New York, NY 10048. The Washington, D.C. office will also provide copies by mail for a fee. You may also find these materials on the SEC's website (http:// www.sec.gov). INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company's Annual Report on Form 10-K for the year ended December 31, 1998 filed with the SEC is incorporated by reference in this Prospectus. Any statement contained in a document we incorporate by reference is deemed modified or superceded to the extent that a later filed document, including this Prospectus, shall modify or supercede that statement. Any statement so modified or superceded shall not be deemed, except as so modified or superceded, to constitute part of this Prospectus. 39 The Company will furnish, without charge, to each person to whom a copy of this Prospectus is delivered, upon the written or oral request of such person, a copy of the document referred to above which has been incorporated by reference in this Prospectus, other than exhibits to such document (unless such exhibits are specifically incorporated by reference in this Prospectus). Requests for such document should be directed to the Secretary, Sun Life Assurance Company of Canada (U.S.), One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481, telephone (800) 225-3950. ADDITIONAL INFORMATION ABOUT THE COMPANY BUSINESS OF THE COMPANY We are engaged in the sale of individual variable life insurance and individual and group fixed and variable annuities. These contracts are sold in both the tax qualified and non-tax qualified markets. These products are distributed through individual insurance agents, insurance brokers and registered broker-dealers. The following table sets forth premiums and deposits by major product categories for each of the last three years. See notes to financial statements for industry segment information.
1998 1997 1996 ------------ ------------ ------------ (IN THOUSANDS) Individual insurance products $ 155,907 $ 204,670 $ 207,845 Retirement products $ 2,194,895 $ 2,204,693 $ 1,834,327 ------------ ------------ ------------ $ 2,350,802 $ 2,409,363 $ 2,042,172 ------------ ------------ ------------ ------------ ------------ ------------
We have obtained authorization to do business in 48 states, the District of Columbia and Puerto Rico, and anticipate that we will be authorized to do business in all states except New York. We have formed a wholly-owned subsidiary, Sun Life Insurance and Annuity Company of New York, which issues individual fixed and combination fixed/variable annuity contracts and group life and long-term disability insurance in New York. Our other active subsidiaries are Sun Capital Advisers, Inc., a registered investment adviser, Clarendon Insurance Agency, Inc., a registered broker-dealer that acts as the general distributor of the Contracts and other annuity and life insurance contracts that we and our affiliates issue, Sun Life of Canada (U.S.) Distributors, Inc., a registered broker-dealer and investment adviser, New London Trust, F.S.B., a federally chartered savings bank, Sun Life Financial Services Limited, which provides off-shore administrative services to us and our parent, Sun Life Assurance Company of Canada ("Sun Life (Canada)"), and Sun Life Information Services Ireland Limited, an offshore technology center. We are a wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). Life Holdco is a wholly-owned subsidiary of Sun Life Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("U.S. Holdco"). U.S. Holdco is a wholly-owned subsidiary of Sun Life (Canada), 150 King Street West, Toronto, Ontario, Canada. Sun Life (Canada) is a mutual life insurance company incorporated pursuant to Act of Parliament of Canada in 1865 and currently transacts business in all of the Canadian provinces and territories, all U.S. states (except New York), the District of Columbia, Puerto Rico, the Virgin Islands, Great Britain, Ireland, Hong Kong, Bermuda and the Philippines. 40 SELECTED FINANCIAL DATA The following selected financial data for the Company should be read in conjunction with the statutory financial statements of the Company and notes thereto included in this Prospectus beginning on page 54.
FOR THE YEARS ENDED DECEMBER 31 --------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS) Revenues Premiums, annuity deposits and other revenue $ 2,581,463 $ 2,623,629 $ 2,215,322 $ 1,883,901 $ 1,997,525 Net investment income and realized gains 187,208 298,121 310,172 315,966 312,583 ----------- ----------- ----------- ----------- ----------- 2,768,671 2,921,750 2,525,494 2,199,867 2,310,108 ----------- ----------- ----------- ----------- ----------- Benefits and expenses Policyholder benefits 2,416,950 2,579,104 2,232,528 1,995,208 2,102,290 Other expenses 214,607 206,065 175,342 150,937 186,892 ----------- ----------- ----------- ----------- ----------- 2,631,557 2,785,169 2,407,870 2,146,145 2,289,182 ----------- ----------- ----------- ----------- ----------- Operating gain 137,114 136,581 117,624 53,722 20,926 Federal income tax expense (benefit) 11,713 7,339 (5,400) 17,807 19,469 ----------- ----------- ----------- ----------- ----------- Net income $ 125,401 $ 129,242 $ 123,024 $ 35,915 $ 1,457 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Assets $16,902,621 $15,925,357 $13,621,952 $12,359,683 $10,117,822 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Surplus notes $ 565,000 $ 565,000 $ 315,000 $ 650,000 $ 335,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See Note 1 to financial statements for changes in accounting principles and reporting. See discussion in Management's Discussion and Analysis of Financial Conditions and Results of Operations. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT This Prospectus includes forward looking statements by the Company under the Private Securities Litigation Reform Act of 1995. These statements are not matters of historical fact; they relate to such topics as future product sales, 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: - The Company's ability to identify and address 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 their own Year 2000 issues in a timely manner. - 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. 41 RESULTS OF OPERATIONS NET INCOME Net income decreased by $3.8 million to $125.4 million in 1998, reflecting an increase of $22.5 million in income from operations and a decrease of $26.3 million in net realized capital gains. (In the following discussion, "income from operations" refers to the statutory statement of operations line item, net gain from operations after dividends to policyholders and federal income tax and before realized capital gains.) Income from operations increased from $102.5 million in 1997 to $125.0 million in 1998, mainly as a result of the following factors: - A $16.7 million increase, to $31.4 million in 1998, in the income from operations from the Company's Retirement Products and Services segment. (This is discussed in the "Retirement Products and Services Segment" section below.) - The effect of terminating certain reinsurance agreements with the Company's ultimate parent. The termination of these agreements was the predominant factor in the $71.1 million increase in income from operations for the Company's Individual Insurance segment. - The effects of the Company's December 1997 reorganization (described in the "Corporate Segment" section below), as a result of which Massachusetts Financial Services Company ("MFS") was no longer a subsidiary of the Company. As a result of this reorganization, dividends from subsidiaries were lower in 1998 than in 1997 and certain subsidiary tax benefits were no longer available to the Company. Also affecting income from operations for the Corporate segment in 1998 was that income earned on the proceeds of a December 1997 issuance of a $250 million surplus note was lower than the related interest expense. Net realized capital gains decreased from $26.7 million in 1997 to $0.4 million in 1998. This change also reflected the Company's reorganization, as a result of which the Company had a realized capital gain of $21.2 million in 1997. Net income increased by $6.2 million to $129.2 million in 1997, as compared to 1996 reflecting a decrease of $15.6 million in income from operations and an increase of $21.8 million in net realized capital gains. Income from operations decreased from $118.2 million in 1996 to $102.5 million in 1997, mainly as a result of the following factors: - A $7.6 million decrease, to $14.7 million, in income from operations from the Company's Retirement Products and Services segment. (This is discussed in the "Retirement Products and Services Segment" section below.) - An increase of $6.5 million, compared to 1996, in the effects of the reinsurance arrangements between the Company and its ultimate parent. - A decrease, by approximately $9 million, in dividends from subsidiaries, as well as higher taxes and expenses in the Corporate segment. As noted above, the $21.9 million increase in net realized capital gains, from $4.8 million in 1996 to $26.7 million in 1997, was caused mainly by the December 1997 Company reorganization, as a result of which the Company had a realized capital gain of $21.2 million in 1997. INCOME FROM OPERATIONS BY SEGMENT The Company's income from operations reflects the operations of its three business segments: the Retirement Products and Services segment, the Individual Insurance segment and the Corporate segment. The following table provides a summary: 42 Income from Operations by Segment* ($ in millions)
% CHANGE ---------------------------- 1998 1997 1996 1998/1997 1997/1996 --------- --------- --------- ------------- ------------- Individual Insurance 89.1 18.0 11.5 395.0% 56.5% Retirement Products and Services 31.4 14.7 22.3 113.6% (34.1)% Corporate 4.5 69.8 84.4 (93.6)% (17.3)% --------- --------- --------- ----- ----- 125.0 102.5 118.2 22.0% (13.3)% --------- --------- --------- ----- ----- --------- --------- --------- ----- -----
*Before realized capital gains These results are discussed more fully below. RETIREMENT PRODUCTS AND SERVICES SEGMENT The Retirement Products and Services segment focuses on the savings and retirement needs of those preparing for retirement or those who have already retired. It primarily markets to upscale consumers in the U.S., selling individual and group fixed and variable annuities. Its major product lines, "Regatta" and "Futurity," are combination fixed/variable annuities. In these combination annuities, contract holders have the choice of allocating payments either to a fixed account, which provides a guaranteed rate of return, or to variable accounts. Withdrawals from the Company's fixed account are subject to market value adjustment. In the variable accounts, the contract holder can choose from a range of investment options and styles. The return depends upon investment performance of the options selected. Investment funds available under Regatta are managed by 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 these 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 distributed through a dedicated wholesaler network, including Sun Life of Canada (US) Distributors, Inc., that services similar distribution channels. Although new pension products are not currently sold, there has been a substantial block of group retirement business in-force, including guaranteed investment contracts ("GICs"), pension plans and group annuities. A significant portion of these pension contracts are non-surrenderable, with the result that the Company's liquidity exposure is limited. GICs were marketed directly in the U.S. through independent managers. In 1997, the Company decided to no longer market group pension and GIC products. Following are the major factors affecting the Retirement Products and Services segment results compared to the prior year: 1998 COMPARED TO 1997: - A SHIFTING PATTERN IN SALES. Annuity deposits declined by about $27 million, or 1%, to $2.2 billion in 1998. Fixed annuity account deposits were lower by approximately 7% in 1998, while deposits into variable annuity accounts have been increasing in total and as a proportion of total annuity deposits. These trends reflected market conditions and competitive factors. Deposits into the Dollar Cost Averaging (DCA) programs, a feature of the Company's combination fixed/variable annuity products, were a significant element of account deposits. Under these programs, which were redesigned in late 1996, deposits are made into the fixed portion of the annuity contract and receive a bonus rate of interest for the policy year. During the year, the fixed deposit is systematically transferred to the variable portion of the contract in equal periodic installments. DCA deposits overall were flat in 1998 compared to 43 1997. This pattern resulted, in part, from heightened competition, as other companies introduced similar DCA programs within the past year. During the fourth quarter of 1998, the Company introduced a higher DCA rate and a new six-month DCA program. DCA deposits for that quarter were higher, compared to the preceding 1998 quarters. An increase in variable account deposits in 1998 reflected both the continuing strong growth in equity markets generally and the continuing strong performance of the investment funds underlying the Company's variable annuity products. The continuing strong equity markets, low interest rate environment, and demographic trends, among other factors, have increased the demand and market for wealth accumulation products in the U.S., particularly for variable annuities. These factors have contributed to the growth in the Company's variable account deposits in 1998, despite heightened competition. The Company introduced its Futurity line of products in February 1998. Related deposits represented about 6% of the total for the Retirement Products and Services segment in 1998, reflecting this recent introduction. The Company expects that sales for the Futurity product will continue to increase in the future, based on its 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 respond favorably to future introductions of new Futurity products and product enhancements. - HIGHER FEE INCOME RESULTING FROM HIGHER VARIABLE ANNUITY ACCOUNT BALANCES. The main factors driving this growth in account balances have been market appreciation and net deposit activity. This growth has generated corresponding increases in fee income, since fees are determined based on the average assets held in these accounts. Fee income increased by approximately $43 million, or 39%, in 1998. - WHILE THERE HAS BEEN A SHIFT TO VARIABLE ACCOUNTS FROM THE GENERAL ACCOUNT, NET INVESTMENT INCOME HAS DECLINED. Net investment income reflects only income earned on invested assets of the general account. In 1998, net investment income for the Retirement Products and Services segment decreased by about $40 million, or 20%, compared to 1997, mainly as a result of the decline in average invested assets in the Company's general account. This decline in average general account assets mainly reflected the shift in deposits in recent years from the fixed account to variable accounts. It also reflected the Company's decision in 1997 to no longer market group pension and GIC products. - LOWER POLICYHOLDER BENEFITS, MAINLY REFLECTING LOWER SURRENDER ACTIVITY COMPARED TO 1997. During 1997 and into the first half of 1998, surrender and withdrawal activity was high. This activity primarily related to a block of separate account contracts that had been issued seven or more years previously and for which the surrender charge periods had expired. While variable account surrenders have continued to rise, general account surrenders have declined. As a result of this pattern of activity, policyholder benefits (of which surrenders and withdrawals, the related changes in the liability for premium and other deposit funds, and related separate account transfers are the major elements) increased in 1997 and were lower in 1998. The Company expects that as the separate account block of business continues to grow, and as a higher proportion of it is no longer subject to surrender charges, surrenders will tend to increase. - INVESTMENTS IN TECHNOLOGY AND INFRASTRUCTURE TO ENHANCE ANNUITY OPERATIONS. As a result of these investments, operational expenses increased by approximately $12 million, or 25%, in 1998 compared to 1997. These increases reflected three main factors: (1) HIGHER VOLUMES OF ANNUITY BUSINESS, REQUIRING GREATER ADMINISTRATIVE SUPPORT. The Company expects that increases in the volume of its annuity business will continue to have a similar effect on expenses in the near term. (2) IMPROVEMENTS TO THE COMPUTER SYSTEMS AND TECHNOLOGY THAT SUPPORT THE ANNUITY BUSINESS. These improvements involved information systems supporting the growth of 44 the Company's in-force business, particularly its combination fixed/variable annuities. The Company expects to continue to invest in its systems and technology in the future. The extent and nature of these investments will depend on the Company's assessments of the relative costs and benefits of given projects. (3) COSTS ASSOCIATED WITH THE PRODUCT DESIGN AND IMPLEMENTATION OF THE NEW FUTURITY MULTI-MANAGER ANNUITY PRODUCT AND THE DEVELOPMENT OF A NEW PRODUCT WITHIN THE REGATTA PRODUCT LINE. The Company expects to continue to invest in further product enhancements in the future. 1997 COMPARED TO 1996: - STRONG FIXED ACCOUNT DEPOSITS. Fixed account deposits in 1997 were approximately $650 million, or 240%, higher than in 1996. This increase resulted mainly from the Company's redesign of its DCA programs in late 1996. The Company benefited at the time from the popularity of its DCA program features and from the absence of major competitors offering similar features. - IN 1997, VARIABLE ANNUITY DEPOSITS WERE ABOUT $200 MILLION, OR 16%, LOWER THAN IN 1996. This trend reflected heightened competition, uncertainties in the marketplace regarding the attractiveness of variable annuities, and customer preferences for depositing into the DCA programs rather than directly into the variable accounts. - HIGHER FEE INCOME RESULTING FROM HIGHER VARIABLE ANNUITY ACCOUNT BALANCES. The main factors driving this growth in account balances were market appreciation and net deposit activity. This growth generated corresponding increases in fee income, since fees are determined based on the average assets held in these accounts. - DECLINING GENERAL ACCOUNT BALANCES, RESULTING IN DECLINING NET INVESTMENT INCOME. In 1997, net investment income for the Retirement Products and Services segment decreased by about 16%, mainly as a result of a decline in average invested assets in the Company's general account. This decline in average general account assets mainly reflected the Company's decision in 1997 to no longer market group pension and GIC products. - HIGHER POLICYHOLDER BENEFITS, MAINLY REFLECTING HIGH SURRENDER ACTIVITY IN 1997. As noted above, surrender and withdrawal activity was high in 1997. This activity primarily related to a block of separate account contracts that had been issued seven or more years previously and for which the surrender charge period had expired. As a result of this pattern of activity, policyholder benefits (of which surrenders and withdrawals, the related changes in the liability for premium and other deposit funds, and related separate account transfers are the major elements) were unusually high in 1997 compared to 1996. - HIGHER COMMISSIONS. Commissions increased by approximately $22 million, or 20%, in 1997, directly reflecting higher sales of combination fixed/variable annuity products in 1997 compared to 1996. - HIGHER OPERATIONAL EXPENSES. Operational expenses increased by approximately $5 million, or 13%, as a result of the additional staffing needed to administer higher volumes of business and because of non-recurring costs of moving the Retirement Products and Services operations to a new facility. INDIVIDUAL INSURANCE SEGMENT The Individual Insurance segment comprises two main elements: internal reinsurance and variable life products. 45 INTERNAL REINSURANCE In recent years, the Company has had various reinsurance agreements with its ultimate parent, Sun Life (Canada). In some of these arrangements, Sun Life (Canada) has reinsured the mortality risks of individual life policies sold in prior years by the Company. In another agreement, which became effective January 1, 1991 and terminated October 1, 1998, the Company reinsured certain individual life insurance contracts issued by Sun Life (Canada). The latter agreement had a significant effect on net income in both 1997 and 1998. The former agreements, in the aggregate, also affected net income in those years, but to a much lesser extent. The effects of these agreements on the Company's net income are summarized in the following table. INTERNAL REINSURANCE-EFFECT ON INCOME FROM OPERATIONS BEFORE INCOME TAXES ($ IN MILLIONS)
1998 1997 1996 --------- --------- --------- 1991 Agreement Effect on operations $ 24.6 $ 37.1 $ 35.2 Effect of termination 65.7 -- -- Other Agreements Effect on operations (2.1) (1.4) (1.6) --------- --------- --------- Total $ 88.2 $ 35.7 $ 33.6 --------- --------- --------- --------- --------- ---------
Because the 1991 agreement was in effect only through the first nine months of 1998, related net income was correspondingly lower in 1998 than in 1997. Also contributing to the lower 1998 net income from operations from this agreement were proportionately higher death claims in 1998. The effect of terminating this agreement was to further increase 1998 net income by $65.7 million. Neither the net income effect of this agreement's operations nor that of its termination will recur. The termination-related increase in 1998 represents a reasonable approximation of the value of the stream of future earnings that the agreement would have generated had it not been terminated. VARIABLE LIFE PRODUCTS This business includes the sale of individual variable life insurance products, primarily the Company's variable universal life product for the company-owned life insurance ("COLI") market. This product was introduced in late 1997. The Company expects the variable life business to grow and become more significant in the future. CORPORATE SEGMENT This segment includes the capital of the Company, its investments in subsidiaries and items not otherwise attributable to either the Retirement Products and Services and Individual Insurance segments. In 1998, income from operations decreased by $65.3 million to $4.5 million for this segment. This decrease reflected two main factors: - DIVIDENDS FROM SUBSIDIARIES WERE LOWER THAN IN 1997 BY $37.5 MILLION. This decrease mainly resulted from a December 1997 reorganization, in which the Company transferred its ownership of MFS to its parent company. As a result of this reorganization, the Company received no dividends from MFS in 1998. By comparison, it received $33.1 million of MFS dividends in 1997. - Net investment income other than dividends from subsidiaries, was lower than in 1997 by $5.9, reflecting the effect of the Company's December 1997 issuance of a $250 million surplus note to its upstream holding company. Interest expense exceeded investment earnings on the related funds. In 1997, income from operations for this segment decreased by $14.6 million, to $69.8 million. This decrease mainly reflected a decrease, by approximately $9 million, in dividends from subsidiaries. It also reflected higher taxes and expenses. 46 FINANCIAL CONDITION AND LIQUIDITY ASSETS The Company's total assets comprise those held in its general account and those held in its separate accounts. General account assets support general account liabilities. Separate accounts and their assets are of two main types: - Those assets held in a "fixed" separate account, which the Company established for amounts that contract holders allocate to the fixed portion of their combination fixed/variable deferred annuity contracts. Fixed separate account assets are available to fund general account liabilities and general account assets are available to fund the liabilities of this fixed separate account. The Company manages the assets of this fixed separate account according to general account investment policy guidelines. - Those assets held in a number of registered and non-registered "variable" separate accounts as investment vehicles for the Company's variable life and annuity contracts. Policyholders may choose from among various investment options offered under these contracts according to their individual needs and preferences. Policyholders assume the investment risks associated with these choices. General account and fixed separate account assets are not available to fund the liabilities of these variable accounts. The following table summarizes significant changes in asset balances during 1998 and 1997. The changes are discussed below.
ASSETS % CHANGE 1998 1997 1996 1998/1997 1997/1996 ---------- ---------- ---------- ------------ ------------ ($ IN MILLIONS) General account assets $ 2,932.2 $ 4,513.5 $ 4,593.9 (35.0)% (1.75)% Fixed separate account assets 2,195.6 2,343.9 2,108.8 (6.3)% 11.15% ---------- ---------- ---------- ------ ------ $ 5,127.8 $ 6,857.4 $ 6,702.7 (25.2)% 2.31% Variable separate account assets 11,774.8 9,068.0 6,919.2 29.9% 31.06% ---------- ---------- ---------- ------ ------ Total assets $ 16,902.6 $ 15,925.4 $ 13,621.9 6.1% 16.91% ---------- ---------- ---------- ------ ------ ---------- ---------- ---------- ------ ------
General account and fixed separate account assets, taken together, decreased by 25% in 1998, but variable separate account assets increased by 30% that year. In 1997, growth in the general account and fixed separate account was low; variable separate account assets increased by 31%. This growth in variable accounts relative to the general and fixed accounts reflects two main factors: appreciation of the funds held in the variable separate accounts has exceeded that of the funds held in the general and fixed separate accounts; and annuity deposits into variable accounts have increased, while annuity deposits into fixed accounts have slowed. The Company believes this pattern reflects 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 Company's general account are available to support general account liabilities. For management purposes, it is the Company's practice to segment its general account to facilitate the matching of assets and liabilities. General account assets primarily comprise cash and invested assets, which represented 98.7% of general account assets at year-end 1998. Major types of invested asset holdings included bonds, mortgages, real estate and common stock. The Company's bond holdings comprised 60.9% of the Company's portfolio at year-end 1998. Bonds included both public and private issues. It is the Company's policy to acquire only investment-grade securities. As a result, the overall quality of the bond portfolio is high. At year-end 1998, only 5.3% of these securities were rated below-investment-grade; I.E., they had National Association of Insurance Commissioners ("NAIC") ratings lower than "1" or "2." The Company's mortgage holdings amounted to $535.0 million at year-end 1998, representing 18.5% of the total portfolio. All mortgage holdings at year-end 1998 were in good standing. The Company believes that the high quality of its mortgage portfolio is largely attributable to its stringent underwriting standards. At year-end 1998, investment real estate amounted to $78.0 million, 47 representing about 2.7% of the total portfolio. The Company invests in real estate to enhance yields and, because of the long-term nature of these investments, the Company uses them for purposes of matching with products having long-term liability durations. Common stock holdings amounted to $128.4 million, representing about 4.4% of the portfolio. These holdings comprised the Company's ownership shares in subsidiaries. Other general account assets decreased by $1,021.4 million in 1998. This change primarily reflected the effect of terminating the internal reinsurance agreement with the Company's ultimate parent, discussed in "Internal Reinsurance," above. LIABILITIES As with assets, the proportion of variable separate account liabilities to total liabilities has been increasing. Most of the Company's liabilities comprise reserves for life insurance and for annuity contracts and deposit funds. The Company expects the declining trend in general account liabilities to continue, because it believes that net maturities will continue to exceed sales for the fixed contracts associated with these liabilities. This trend stems mainly from the Company's 1997 decision to discontinue selling group pension and GIC contracts and to focus its marketing efforts on its combination fixed/variable annuity products. In December 1997, the Company borrowed $110.0 million from Sun Life Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("U.S. Holdco"), its upstream holding company. The Company repaid this note during the first quarter of 1998. The termination of the internal reinsurance agreement discussed above resulted in a $1.0 billion decrease in liabilities as compared to 1997. CAPITAL MARKETS RISK MANAGEMENT See "Quantitative and Qualitative Disclosures About Market Risk" below for a discussion of the Company's capital markets risk management. CAPITAL RESOURCES CAPITAL ADEQUACY The National Association of Insurance Commissioners ("NAIC") adopted regulations at the end of 1993 that established minimum capitalization requirements for insurance companies, based on risk-based capital ("RBC") formulas. These requirements are intended to identify undercapitalized companies, so that specific regulatory actions can be taken on a timely basis. The RBC formula for life insurance companies sets 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 1998. LIQUIDITY The Company's liquidity requirements are generally met by funds from operations. The Company's main uses of funds are to pay out death benefits and other maturing insurance and annuity contract obligations; to make pay-outs on contract terminations; to purchase new investments; to fund new business ventures; and to pay normal operating expenditures and taxes. The Company's main sources of funds are premiums and deposits on insurance and annuity products; proceeds from the sale of investments; income from investments; and repayments of investment principal. In managing its general account and fixed separate account assets in relation to its liabilities, the Company has segmented these assets by product or by groups of products. The Company manages each segment's assets based on an investment policy that it has established for that segment. Among other matters, this investment policy considers liquidity requirements and provides cash flow estimates. The Company reviews these policies quarterly. 48 The Company's liquidity targets are intended to enable it to meet its day-to-day cash requirements. On a quarterly basis, the Company compares its total "liquifiable" assets to its total demand liabilities. Liquifiable assets comprise cash and assets that could quickly be converted to cash should the need arise. These assets include short-term investments and other current assets and investment-grade bonds. The Company's policy is to maintain a liquidity ratio in excess of 100%, and it did so throughout 1998. Based on its ongoing liquidity analyses, the Company believes that its available liquidity is more than sufficient to meet its liquidity needs. DEMUTUALIZATION On January 27, 1998, Sun Life (Canada) announced that its Board of Directors had requested management world-wide to develop a plan to convert from a mutual life insurance company into a publicly traded stock company through demutualization worldwide. Management has put in place a full time task force which, together with a worldwide team of actuarial, financial and legal advisers, has begun work. The Board will decide later this year whether to proceed with demutualization, following the completion of the plan. Demutualization would require regulatory and policyholder approval. Based on information known to date, the potential demutualization of Sun Life (Canada) is not expected to have any significant impact on the Company. YEAR 2000 COMPLIANCE During the fourth quarter of 1996, the Company, Sun Life (Canada) 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 works with dedicated personnel from all business units and with the legal and audit departments, reports directly to the Company's senior management on a monthly basis. In addition, the Company's Year 2000 project is periodically reviewed by internal and external auditors. To date, relevant systems have been identified and their components inventoried, needed resolutions have been documented, timelines and project plans have been developed, and remediation and testing are in process. Over 90% of the components have been remediated, tested and are certified as Year 2000 compliant. The majority of the remaining components are in the testing phase and are expected to be certified over the course of this year. In mid-1997, the project team contacted all key vendors to obtain either their certification for the products and services provided or their plan to make those products and services compliant. Approximately 95% of these vendors have responded and the project team has reviewed the responses and validated and conducted tests with the vendors where appropriate. In addition, the project team continues to work with critical business partners, such as third-party administrators, investment property managers, investment mortgage correspondents, and others, with the goal that these partners will continue to be able to support the Company's objective of assuring Year 2000 compliance. Non-IT applications, including building security, HVAC systems, and other such systems, will be tested. Compliant client server and mainframe environments have been built which 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 current production. Although the Company expects all critical systems to be Year 2000 compliant before the end of 1999, there can be no assurance that this result will be achieved. Factors giving rise to this uncertainty include possible loss of technical resources to perform the work, failure to identify all susceptible systems, non-compliance by third-parties whose systems and operations affect the Company, and other similar uncertainties. A possible worst-case scenario might include one or more of the Company's significant systems being non-compliant. Such a scenario could result in material disruption to the Company's operations. Consequences of such disruptions could include, among other possibilities, the inability to update customers' accounts, process payments and other financial transactions; and report accurate data to customers, management, regulators, and others. Consequences also could include 49 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 a material 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 failure to achieve planned Year 2000 compliance, the Company has established contingency planning at the business unit and corporate levels. Each business unit has ranked its applications as being of high, medium or low business risk to ensure that the most critical are addressed first. The business units also have developed alternate plans of action where possible, and established dates for the alternate plans to be enacted. On the corporate level, the Company is in the process of enhancing its business continuation plan by identifying minimum requirements for facilities, computing, staffing, and other factors, and it is developing a plan to support those requirements. As of year-end 1998, the Company had expended, cumulatively, approximately $4.2 million on its Year 2000 effort, and it expects to incur a further $1.3 million on this effort in 1999. SALE OF SUBSIDIARY In February 1999, the Company completed the sale of its wholly-owned subsidiary, Massachusetts Casualty Insurance Company ("MCIC"), to Centre Solutions (U.S.) Limited, a wholly-owned subsidiary of Centre Reinsurance Holdings, Limited, for approximately $34 million. MCIC sold individual disability insurance throughout the U.S. This transaction is not expected to have a significant effect on the operations of the Company. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This discussion covers market risks associated with investment portfolios that support the Company's general account liabilities. This discussion does not cover market risks associated with those investment portfolios that support separate account products. For these products, the policyholder, rather than the Company, assumes these market risks. GENERAL The assets of the Company's general account are available to support general account liabilities. For purposes of managing these assets in relation to these liabilities, the Company notionally segments these assets by product or by groups of products. The Company manages each segment's assets based on an investment policy that it has established for that segment. The policy covers the segment's liability characteristics and liquidity requirements, provides cash flow estimates, and sets targets for asset mix, duration, and quality. Each quarter, investment and business unit managers review these policies to ensure that the policies remain appropriate, taking into account each segment's liability characteristics. TYPES OF MARKET RISKS The Company's stringent underwriting standards and practices have resulted in high-quality portfolios and have the effect of limiting credit risk. It is the Company's policy, for example, not to purchase below-investment-grade securities. Also, as a matter of investment policy, the Company assumes no foreign currency or commodity risk; nor does it assume equity price risk except to the extent that it holds real estate in its portfolios. (At year-end 1998, investment real estate holdings represented approximately 3% of its total general account portfolio.) The management of interest rate risk exposure is discussed below. INTEREST RATE RISK MANAGEMENT The Company's fixed interest rate liabilities are primarily supported by well diversified portfolios of fixed interest investments. They are also supported by holdings of real estate and floating rate notes. All of these fixed interest investments are held for other than trading purposes and can include publicly issued and privately placed bonds and commercial mortgage loans. Public bonds can include Treasury 50 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; - 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 Company's Board of Directors on a monthly basis. The counterparties to hedging transactions are major highly rated financial institutions, with respect to which the risk of the Company's incurring losses related to credit exposures is considered remote. Liabilities categorized as financial instruments and held in the Company's general account at December 31, 1998 had a fair value of $1,538.3 million. Fixed income investments supporting those liabilities had a fair value of $2,710.1 million at that date. The Company performed a sensitivity analysis on these interest-sensitive liabilities and assets at December 31, 1998. The analysis showed that if there were an immediate increase of 100 basis points in interest rates, the fair value of the liabilities would show a net decrease of $46.3 million and the corresponding assets would show a net decrease of $113.2 million. By comparison, liabilities categorized as financial instruments and held in the Company's general account at December 31, 1997 had a fair value of $1,986.4 million. Fixed income investments supporting those liabilities had a fair value of $3,276.2 million at that date. The Company performed a sensitivity analysis on these interest-sensitive liabilities and assets at December 31, 1997. 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 $56.0 million and the corresponding assets would show a net decrease of $108.0 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 51 assumptions about future policyholder behavior and asset cash flows. Actual policyholder behavior and asset cash flows could differ from what the models show. As a result, the models' estimates of duration and market values may not reflect what actually will occur. The models are further limited by the fact that they do not provide for the possibility that management action could be taken to mitigate adverse results. The Company believes that this limitation is one of conservatism, that is, it will tend to cause the models to produce estimates that are generally worse than one might actually expect, all other things being equal. Based on its processes for analyzing and managing interest rate risk, the Company believes its exposure to interest rate changes will not materially affect its near-term financial position, results of operations, or cash flows. REINSURANCE The Company has agreements with Sun Life (Canada) which provide that Sun Life (Canada) will reinsure the mortality risks of the individual life insurance contracts previously sold by the Company. Under these agreements, basic death benefits and supplementary benefits are reinsured on a yearly renewable term basis and coinsurance basis, respectively. Reinsurance transactions under these agreements in 1998 had the effect of decreasing net income from operations by $2,128,000. Effective January 1, 1991 the Company entered into an agreement with Sun Life (Canada) under which certain individual life insurance contracts issued by Sun Life (Canada) were reinsured by the Company on a 90% coinsurance basis. Also effective January 1, 1991, the Company entered into an agreement with Sun Life (Canada) which provides that Sun Life (Canada) will reinsure the mortality risks in excess of $500,000 per policy for the individual life insurance contracts assumed by the Company in the reinsurance agreement described above. Death benefits are reinsured on a yearly renewable term basis. The life reinsurance assumed agreement requires the reinsurer to withhold funds in an amount equal to the reserves assumed. These agreements had the effect of increasing income from operations by approximately $24,579,000 for the year ended December 31, 1998. The Company terminated these agreements, effective October 1, 1998, resulting in an increase in income from operations of $65,679,000, which included a cash settlement. The Company has also executed reinsurance agreements with unaffiliated companies. These agreements provide reinsurance of certain individual life insurance contracts on a modified coinsurance basis under which all deficiency reserves are ceded; as well as reinsurance for variable universal life on a yearly renewable term basis for which the Company has a maximum retention of $2,000,000. RESERVES In accordance with the life insurance laws and regulations under which the Company operates, it is obligated to carry on its books, as liabilities, actuarially determined reserves to meet its obligations on its outstanding contracts. Reserves are based on mortality tables in general use in the United States and are computed to equal amounts that, with additions from premiums to be received, and with interest on such reserves compounded annually at certain assumed rates, will be sufficient to meet the Company's policy obligations at their maturities or in the event of an insured's death. In the accompanying Financial Statements, these reserves are determined in accordance with statutory regulations. INVESTMENTS Of the Company's total assets of $16.9 billion at December 31, 1998, 82.7% ($13.98 billion) consisted of unitized and non-unitized separate account assets, 10.4% ($1.76 billion) was invested in bonds and similar securities, 3.2% ($541 million) was invested in mortgages, 0.7 % ($118.3 million) was invested in subsidiaries, 0.6% ($101.4 million) was invested in real estate, and the remaining 2.4% ($405.6 million) was invested in cash and other assets. 52 COMPETITION The Company is engaged in a business that is highly competitive because of the large number of stock and mutual life insurance companies and other entities marketing insurance products. According to a 1998 statistical study, published by A.M. Best, the Company ranked 37th among North American life insurance companies based upon total assets as of December 31, 1997. Its ultimate parent company, Sun Life (Canada), ranked 21st. EMPLOYEES The Company and Sun Life (Canada) have entered into a service agreement which provides that the latter will furnish the Company, as required, with personnel as well as certain services and facilities on a cost reimbursement basis. Expenses under this agreement amounted to approximately $16,344,000 in 1998. As of March 31, 1999, the Company had 392 direct employees employed at its Principal Executive Office in Wellesley Hills, Massachusetts and at its Retirement Products and Services Division in Boston, Massachusetts. PROPERTIES The Company occupies office space owned by it and leased to Sun Life (Canada), and certain unrelated parties for lease terms not exceeding five years. The Company also occupies office space which it leases from unaffiliated parties for various lease terms. Rent received by the Company under the leases amounted to approximately $6,856,000 in 1998. STATE REGULATION The Company is subject to the laws of the State of Delaware governing life insurance companies and to regulation by the Commissioner of Insurance of Delaware. An annual statement is filed with the Commissioner of Insurance on or before March lst in each year relating to the operations of the Company for the preceding year and its financial condition on December 31st of such year. Its books and records are subject to review or examination by the Commissioner or his agents at any time and a full examination of its operations is conducted at periodic intervals. The Company is also subject to the insurance laws and regulations of the other states and jurisdictions in which it is licensed to operate. The laws of the various jurisdictions establish supervisory agencies with broad administrative powers with respect to licensing to transact business, overseeing trade practices, licensing agents, approving policy forms, establishing reserve requirements, fixing maximum interest rates on life insurance policy loans and minimum rates for accumulation of surrender values, prescribing the form and content of required financial statements and regulating the type and amounts of investments permitted. Each insurance company is required to file detailed annual reports with supervisory agencies in each of the jurisdictions in which it does business and its operations and accounts are subject to examination by such agencies at regular intervals. In addition, many states regulate affiliated groups of insurers, such as the Company, its parent and its affiliates, under insurance holding company legislation. Under such laws, inter-company transfers of assets and dividend payments from insurance subsidiaries may be subject to prior notice or approval, depending on the size of such transfers and payments in relation to the financial positions of the companies involved. Under insurance guaranty fund laws in most states, insurers doing business therein can be assessed (up to prescribed limits) for policyholder losses incurred by insolvent companies. The amount of any future assessments of the Company under these laws cannot be reasonably estimated. However, most of these laws do provide that an assessment may be excused or deferred if it would threaten an insurer's own financial strength and many permit the deduction of all or a portion of any such assessment from any future premium or similar taxes payable. Although the federal government generally does not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Current and proposed 53 federal measures which may significantly affect the insurance business include employee benefit regulation, removal of barriers preventing banks from engaging in the insurance business, tax law changes affecting the taxation of insurance companies, the tax treatment of insurance products and its impact on the relative desirability of various personal investment vehicles. LEGAL PROCEEDINGS There are no pending legal proceedings affecting the Variable Account. We and our subsidiaries are engaged in various kinds of routine litigation which, in management's judgment, is not of material importance to our respective total assets or material with respect to the Variable Account. ACCOUNTANTS The financial statements of the Variable Account for the year ended December 31, 1998 included in the Statement of Additional Information and the statutory financial statements of the Company for the years ended December 31, 1998, 1997 and 1996 included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. FINANCIAL STATEMENTS The financial statements of the Company which are included in this Prospectus should be considered only as bearing on the ability of the Company to meet its obligations with respect to amounts allocated to the Fixed Account and with respect to the death benefit and the Company's assumption of the mortality and expense risks. They should not be considered as bearing on the investment performance of the Fund shares held in the Sub-Accounts of the Variable Account. The financial statements of the Variable Account for the year ended December 31, 1998 are included in the Statement of Additional Information. ------------------------ 54 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, 1998 AND 1997 (IN THOUSANDS)
1998 1997 ------------- ------------- ADMITTED ASSETS Bonds $ 1,763,468 $ 1,910,699 Common stocks 128,445 117,229 Mortgage loans on real estate 535,003 684,035 Properties acquired in satisfaction of debt 17,207 22,475 Investment real estate 78,021 78,426 Policy loans 41,944 40,348 Cash and short-term investments 265,226 544,418 Other invested assets 64,177 55,716 Life insurance premiums and annuity considerations due and uncollected -- 9,203 Investment income due and accrued 35,706 39,279 Federal income tax recoverable and interest thereon 1,110 -- Receivable from parent, subsidiaries and affiliates -- 27,136 Funds withheld on reinsurance assumed -- 982,653 Other assets 1,928 1,842 ------------- ------------- General account assets 2,932,235 4,513,459 Separate account assets: Unitized 11,774,745 9,068,021 Non-unitized 2,195,641 2,343,877 ------------- ------------- Total Admitted Assets $ 16,902,621 $ 15,925,357 ------------- ------------- ------------- ------------- LIABILITIES Aggregate reserve for life policies and contracts $ 1,216,107 $ 2,188,243 Supplementary contracts 1,885 2,247 Policy and contract claims 369 2,460 Provision for policyholders' dividends and coupons payable -- 32,500 Liability for premium and other deposit funds 1,000,875 1,450,705 Surrender values on cancelled policies 5 215 Interest maintenance reserve 40,490 33,830 Commissions to agents due or accrued 2,615 2,826 General expenses due or accrued 5,932 6,238 Transfers from Separate Accounts due or accrued (361,863) (284,078) Taxes, licenses and fees due or accrued, excluding FIT 401 105 Federal income taxes due or accrued 25,019 56,384 Unearned investment income 23 34 Amounts withheld or retained by company as agent or trustee 529 47 Remittances and items not allocated 5,176 1,363 Borrowed money -- 110,142 Asset valuation reserve 44,392 47,605 Payable to parent, subsidiaries, and affiliates 30,381 -- Payable for securities 428 27,104 Other liabilities 9,770 2,924 ------------- ------------- General account liabilities 2,022,534 3,680,894 Separate account liabilities: Unitized 11,774,522 9,067,891 Non-unitized 2,195,641 2,343,877 ------------- ------------- Total liabilities 15,992,697 15,092,662 ------------- ------------- CAPITAL STOCK AND SURPLUS Common capital stock 5,900 5,900 ------------- ------------- Surplus notes 565,000 565,000 Gross paid in and contributed surplus 199,355 199,355 Unassigned funds 139,669 62,440 ------------- ------------- Surplus 904,024 826,795 ------------- ------------- Total common capital stock and surplus 909,924 832,695 ------------- ------------- Total Liabilities, Capital Stock and Surplus $ 16,902,621 $ 15,925,357 ------------- ------------- ------------- -------------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS. 55 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) STATUTORY STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN 000'S)
1998 1997 1996 ---------- ---------- ---------- INCOME: Premiums and annuity considerations $ 210,198 $ 254,066 $ 266,942 Deposit-type funds 2,140,604 2,155,297 1,775,230 Considerations for supplementary contracts without life contingencies and dividend accumulations 2,086 1,615 2,340 Net investment income 184,532 270,249 303,753 Amortization of interest maintenance reserve 2,282 1,166 1,557 Income from fees associated with investment management and administration and contract guarantees from Separate Account 141,211 109,757 83,278 Net gain from operations from Separate Account -- 5 -- Other income 87,364 102,889 87,532 ---------- ---------- ---------- Total 2,768,277 2,895,044 2,520,632 ---------- ---------- ---------- BENEFITS AND EXPENSES: Death benefits 15,335 17,284 12,394 Annuity benefits 153,636 148,135 146,654 Disability benefits and benefits under accident and health policies 104 132 105 Surrender benefits and other fund withdrawals 1,933,833 1,854,004 1,507,263 Interest on policy or contract funds (140) 699 2,205 Payments on supplementary contracts without life contingencies and dividend accumulations 2,528 1,687 2,120 Increase (decrease) in aggregate reserves for life and accident and health policies and contracts (972,135) 127,278 162,678 Decrease in liability for premium and other deposit funds (449,831) (447,603) (392,348) Increase (decrease) in reserve for supplementary contracts without life contingencies and for dividend and coupon accumulations (362) 42 327 ---------- ---------- ---------- Total 682,968 1,701,658 1,441,398 Commissions on premiums and annuity considerations (direct business only) 137,718 132,700 109,894 Commissions and expense allowances on reinsurance assumed 13,032 17,951 18,910 General insurance expenses 58,132 46,624 37,206 Insurance taxes, licenses and fees, excluding federal income taxes 7,388 8,267 8,431 Increase (decrease) in loading on and cost of collection in excess of loading on deferred and uncollected premiums (1,663) 523 901 Net transfers to Separate Accounts 722,851 844,130 761,941 Reserve and fund adjustments on reinsurance terminated 1,017,112 -- -- ---------- ---------- ---------- Total 2,637,538 2,751,853 2,378,681 ---------- ---------- ---------- Net gain from operations before dividends to policyholders and Federal Income Taxes 130,739 143,191 141,951 Dividends to policyholders (5,981) 33,316 29,189 ---------- ---------- ---------- Net gain from operations after dividends to policyholders and before Federal Income Taxes 136,720 109,875 112,762 Federal income tax expense (benefit), (excluding tax on capital gains) 11,713 7,339 (5,400) ---------- ---------- ---------- Net gain from operations after dividends to policyholders and federal income taxes and before realized capital gains 125,007 102,536 118,162 Net realized capital gains less capital gains tax and transferred to the IMR 394 26,706 4,862 ---------- ---------- ---------- NET INCOME $ 125,401 $ 129,242 $ 123,024 ---------- ---------- ---------- ---------- ---------- ----------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS. 56 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN 000'S)
1998 1997 1996 ---------- ----------- ----------- Capital and surplus, Beginning of year $ 832,695 $ 567,143 $ 792,452 ---------- ----------- ----------- Net income 125,401 129,242 123,024 Change in net unrealized capital gains (losses) (384) 1,152 (1,715) Change in non-admitted assets and related items (1,086) (463) 67 Change in reserve on account of change in valuation basis -- 39,016 -- Change in asset valuation reserve 3,213 6,307 (11,812) Surplus (contributed to) withdrawn from Separate Accounts during period 82 -- 100 Other changes in surplus in Separate Accounts Statements 10 -- -- Change in surplus notes -- 250,000 (335,000) Dividends to stockholders (50,000) (159,722) -- Aggregate write-ins for gains and losses in surplus (7) 20 27 ---------- ----------- ----------- Net change in capital and surplus for the year 77,229 265,552 (225,309) ---------- ----------- ----------- Capital and surplus, End of year $ 909,924 $ 832,695 $ 567,143 ---------- ----------- ----------- ---------- ----------- -----------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS. 57 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) STATUTORY STATEMENTS OF CASH FLOW YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
1998 1997 1996 ----------- ----------- ----------- Cash Provided by Operations: Premiums, annuity considerations and deposit funds received $ 2,361,669 $ 2,410,919 $ 2,059,577 Considerations for supplementary contracts and dividend accumulations received 2,086 1,615 2,340 Net investment income received 236,944 345,279 324,914 Other income received 253,147 208,223 88,295 ----------- ----------- ----------- Total receipts 2,853,846 2,966,036 2,475,126 ----------- ----------- ----------- Benefits paid (other than dividends) 2,107,736 2,020,747 1,671,483 Insurance expenses and taxes paid (other than federal income and capital gains taxes) 217,023 203,650 172,015 Net cash transferred to Separate Accounts 800,636 895,465 755,605 Dividends paid to policyholders 26,519 28,316 22,689 Federal income tax payments (recoveries),(excluding tax on capital gains) 46,965 1,397 (15,363) Other--net (138) 698 2,205 ----------- ----------- ----------- Total payments 3,198,741 3,150,273 2,608,634 ----------- ----------- ----------- Net cash used in operations (344,895) (184,237) (133,508) ----------- ----------- ----------- Proceeds from long-term investments sold, matured or repaid (after deducting taxes on capital gains of $2,038 for 1998, $750 for 1997 and $1,555 for 1996) 1,261,396 1,343,803 1,768,147 Issuance (repayment) of surplus notes -- 250,000 (335,000) Other cash provided (used) (40,529) 71,095 147,956 ----------- ----------- ----------- Total cash provided 1,220,867 1,664,898 1,581,103 ----------- ----------- ----------- Cash Applied: Cost of long-term investments acquired (967,901) (773,783) (1,318,880) Other cash applied (187,263) (310,519) (177,982) ----------- ----------- ----------- Total cash applied (1,155,164) (1,084,302) (1,496,862) Net change in cash and short-term investments (279,192) 396,359 (49,267) Cash and short-term investments: Beginning of year 544,418 148,059 197,326 ----------- ----------- ----------- End of year $ 265,226 $ 544,418 $ 148,059 ----------- ----------- ----------- ----------- ----------- -----------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS. 58 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL Sun Life Assurance Company of Canada (U.S.) (the "Company") is incorporated as a life insurance company and is currently engaged in the sale of individual variable life insurance, individual fixed and variable annuities, group fixed and variable annuities and group pension contracts. Effective May 1, 1997, the Company became a wholly-owned subsidiary of the newly established Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On December 18, 1997, Life Holdco became a wholly-owned subsidiary of the Sun Life Assurance Company of Canada - U.S. Operations Holdings, Inc. ("US Holdco"). US Holdco is a wholly-owned subsidiary of Sun Life Assurance Company of Canada ("SLOC"). Prior to December 18, 1997, Life Holdco was a direct wholly-owned subsidiary of SLOC. The Company, which is domiciled in the State of Delaware, prepares its financial statements in accordance with statutory accounting practices prescribed or permitted by the State of Delaware Insurance Department. Prescribed accounting practices include practices described in a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations and general administrative rules. Permitted accounting practices encompass all accounting practices not so prescribed. The permitted accounting practices adopted by the Company are not material to the financial statements. Prior to 1996, statutory accounting practices were recognized by the insurance industry and the accounting profession as generally accepted accounting principles for mutual life insurance companies and stock life insurance companies wholly-owned by mutual life insurance companies. In April 1993, the Financial Accounting Standards Board ("FASB") issued an interpretation (the "Interpretation"), that became effective in 1996, which changed the previous practice of mutual life insurance companies (and stock life insurance companies that are wholly-owned subsidiaries of mutual life insurance companies) with respect to utilizing statutory basis financial statements for general purposes, in that it will no longer allow such financial statements to be described as having been prepared in conformity with generally accepted accounting principles ("GAAP"). Consequently, these financial statements prepared in conformity with statutory accounting practices, as described above, vary from and are not intended to present the Company's financial position, results of operations or cash flow in conformity with generally accepted accounting principles. (See Note 20 for further discussion relative to the Company's basis of financial statement presentation.) The effects on the financial statements of the variances between the statutory basis of accounting and GAAP, although not reasonably determinable, are presumed to be material. INVESTED ASSETS Bonds are carried at cost, adjusted for amortization of premium or accrual of discount. Investments in non-insurance subsidiaries are carried on the equity basis. Investments in mortgage backed securities are generally carried at amortized cost. Changes in prepayment assumptions and resulting cash flows are evaluated periodically. The adjusted yield is used to calculate investment income in future periods. If current book value exceeds future undiscounted cash flows, a realized capital loss is recorded and amortized through IMR. Investments in insurance subsidiaries are carried at their statutory surplus values. Mortgage loans acquired at a premium or discount are carried at amortized values and other mortgage loans are carried at the amounts of the unpaid balances. Real estate investments are carried at the lower of cost, adjusted for accumulated depreciation or appraised value, less encumbrances. Short-term investments are carried at amortized cost, which approximates fair value. Depreciation of buildings and improvements is calculated using the straight-line method over the estimated useful life of the property, generally 40 to 50 years. 59 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): POLICY AND CONTRACT RESERVES The reserves for life insurance and annuity contracts, developed by accepted actuarial methods, have been established and maintained on the basis of published mortality tables using assumed interest rates and valuation methods that will provide reserves at least as great as those required by law and contract provisions. INCOME AND EXPENSES For life and annuity contracts, premiums are recognized as revenues over the premium paying period, whereas commissions and other costs applicable to the acquisition of new business are charged to operations as incurred. SEPARATE ACCOUNTS The Company has established unitized separate accounts applicable to various classes of contracts providing for variable benefits. Contracts for which funds are invested in separate accounts include variable life insurance and individual and group qualified and non-qualified variable annuity contracts. Assets and liabilities of the separate accounts, representing net deposits and accumulated net investment earnings less fees, held primarily for the benefit of contract holders, are shown as separate captions in the financial statements. Assets held in the separate accounts are carried at market value as determined by quoted market prices of the underlying investments. The Company has also established a non-unitized separate account for amounts allocated to the fixed portion of certain combination fixed/variable deferred annuity contracts. The assets of this account are available to fund general account liabilities, and general account assets are available to fund liabilities of this account. Gains (losses) from mortality experience and investment experience of the separate accounts, not applicable to contract owners, are transferred to (from) the general account. Accumulated gains (losses) that have not been transferred are recorded as a payable (receivable) to (from) the general account. Amounts payable to the general account of the Company were $361,863,000 in 1998 and $284,078,000 in 1997. CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING As described more fully in Note 10, during 1997 the Company changed certain assumptions used in determining actuarial reserves. In March 1998, the National Association of Insurance Commissioners adopted the Codification of Statutory Accounting Principles ("Codification"). The Codification, which is intended to standardize regulatory accounting and reporting for the insurance industry, is proposed to be effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices and it is uncertain when, or if, the state of Delaware will require adoption of Codification for the preparation of statutory financial statements. The Company has not finalized the quantification of the effects of Codification on its statutory financial statements. OTHER Preparation of the financial statements requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to amounts as presented in the current year. 60 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 2. INVESTMENTS IN SUBSIDIARIES The Company owns all of the outstanding shares of Sun Life Insurance and Annuity Company of New York ("Sun Life (N.Y.)"), Massachusetts Casualty Insurance Company ("MCIC"), Sun Life of Canada (U.S.) Distributors, Inc. (formerly Sun Investment Services Company) ("Sundisco"), New London Trust, F.S.B. ("NLT"), 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 Ltd. ("SLISL"). On February 5, 1999, the Company finalized the sale of MCIC, a disability insurance company which issues primarily individual disability income policies, to Centre Solutions (U.S.) Limited, a wholly-owned subsidiary of Centre Reinsurance Holdings Limited for approximately $34 million. The impact of this sale to the ongoing operations of the Company is not expected to be material. On September 28, 1998, the Company formed SLISL as an offshore technology center for the purpose of completing systems projects for affiliates. On October 30, 1997, the Company established a wholly-owned special purpose corporation, SPE 97-1, for the purpose of engaging in activities incidental to securitizing mortgage loans. On December 31, 1997, the Company purchased from Massachusetts Financial Services ("MFS") all of the outstanding shares of Clarendon, a registered broker-dealer that acts as the general distributor of certain annuity and life insurance contracts issued by the Company and its affiliates. Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares of MFS. On December 24, 1997, the Company transferred all of its shares of MFS to Life Holdco in the form of a dividend valued at $159,722,000. As a result of this transaction, the Company realized a gain of $21,195,000 of undistributed earnings. MFS, a registered investment adviser, serves as investment adviser to the mutual funds in the MFS family of funds as well as certain mutual funds and separate accounts established by the Company. The MFS Asset Management Group provides investment advice to substantial private clients. Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity contracts and group life and disability insurance contracts in the State of New York. Sundisco is a registered investment adviser and broker-dealer. NLT is a federally chartered savings bank. SLFSL serves as the marketing administrator for the distribution of the offshore products of Sun Life Assurance Company of Canada (Bermuda), an affiliate. Sun Capital is a registered investment adviser. Sunfinco and Sunbesco are currently inactive. On September 28, 1998 a $500,000 note was issued by SLISL to the Company at a rate of 6.0%, maturing on September 28, 2002. A $110,000,000 note was issued to the Company by MFS on February 11, 1998 at an interest rate of 6.0% due February 11, 1999. Another $110,000,000 note was issued to the Company by MFS on December 22, 1998 at an interest rate of 5.55% due February 11, 1999. 61 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 2. INVESTMENTS IN SUBSIDIARIES (CONTINUED): On December 23, 1997, the Company issued a $110,000,000 note to US Holdco at an interest rate of 5.80%, which was repaid on March 1, 1998. A $110,000,000 note was also issued to the Company by MFS on December 23, 1997 at an interest rate of 5.85% and was repaid on February 11, 1998. On December 31, 1996, the Company issued a $58,000,000 note to SLOC at an interest rate of 5.70% which was repaid on February 10, 1997. Also on December 31, 1996, the Company was issued a $58,000,000 note by MFS at an interest rate of 5.76%. This note was repaid to the Company on February 10, 1997. On December 31, 1998, 1997 and 1996, the Company had an additional $20,000,000 in notes issued by MFS, scheduled to mature in 2000. During 1998, 1997, and 1996, the Company contributed capital in the following amounts to its subsidiaries:
1998 1997 1996 --------- --------- --------- (IN THOUSANDS) MCIC -- $ 2,000 $ 10,000 SLFSL $ 750 1,000 1,500 SPE 97-1 -- 20,377 -- Sundisco 10,000 -- -- Sun Capital 500 -- -- Clarendon 10 -- -- SLISL 502 -- --
Summarized combined financial information of the Company's subsidiaries as of December 31, 1998, 1997 and 1996 and for the years then ended, follows:
1998 1997 1996 ------------- ------------- ------------- (IN THOUSANDS) Intangible assets $ -- $ -- $ 9,646 Other assets 1,315,317 1,190,951 1,376,014 Liabilities (1,186,872) (1,073,966) (1,241,617) ------------- ------------- ------------- Total net assets $ 128,445 $ 116,985 $ 144,043 ------------- ------------- ------------- ------------- ------------- ------------- Total revenues $ 222,853 $ 750,364 $ 717,280 Operating expenses (221,933) (646,896) (624,199) Income tax expense (1,222) (43,987) (42,820) ------------- ------------- ------------- Net income (loss) $ (302) $ 59,481 $ 50,261 ------------- ------------- ------------- ------------- ------------- -------------
On December 24, 1997, the Company transferred all of its shares of MFS to its parent, Life Holdco. 62 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 3. BONDS Investments in debt securities are as follows:
DECEMBER 31, 1998 ---------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS (LOSSES) VALUE ------------ ----------- ----------- ------------ (IN THOUSANDS) Long-term bonds: United States government and government agencies and authorities $ 140,417 $ 7,635 $ (177) $ 147,875 States, provinces and political subdivisions 16,632 2,219 -- 18,851 Public utilities 397,670 38,740 (238) 436,172 Transportation 197,207 22,481 (18) 219,670 Finance 144,958 12,542 (494) 157,006 All other corporate bonds 866,584 50,814 (6,419) 910,979 ------------ ----------- ----------- ------------ Total long-term bonds 1,763,468 134,431 (7,346) 1,890,553 ------------ ----------- ----------- ------------ Short-term bonds: U.S. Treasury Bills, bankers acceptances and commercial paper 43,400 -- -- 43,400 Affiliates 220,000 -- -- 220,000 ------------ ----------- ----------- ------------ Total short-term bonds 263,400 -- -- 263,400 ------------ ----------- ----------- ------------ Total bonds $ 2,026,868 $ 134,431 $ (7,346) $ 2,153,953 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
DECEMBER 31, 1997 ---------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS (LOSSES) VALUE ------------ ----------- ----------- ------------ (IN THOUSANDS) Long-term bonds: United States government and government agencies and authorities $ 126,923 $ 5,529 $ -- $ 132,452 States, provinces and political subdivisions 22,361 2,095 -- 24,456 Public utilities 398,939 35,338 (91) 434,186 Transportation 214,130 22,000 (390) 235,740 Finance 157,891 5,885 (120) 163,656 All other corporate bonds 990,455 52,678 (5,456) 1,037,677 ------------ ----------- ----------- ------------ Total long-term bonds 1,910,699 123,525 (6,057) 2,028,167 ------------ ----------- ----------- ------------ Short-term bonds: U.S. Treasury Bills, bankers acceptances and commercial paper 431,032 -- -- 431,032 Affiliates 110,000 -- -- 110,000 ------------ ----------- ----------- ------------ Total short-term bonds 541,032 -- -- 541,032 ------------ ----------- ----------- ------------ Total bonds $ 2,451,731 $ 123,525 $ (6,057) $ 2,569,199 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
63 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 3. BONDS (CONTINUED): The amortized cost and estimated fair value of bonds at December 31, 1998 are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call and/or prepayment penalties.
DECEMBER 31, 1998 -------------------------- AMORTIZED ESTIMATED COST FAIR VALUE ------------ ------------ (IN THOUSANDS) Maturities: Due in one year or less $ 459,631 $ 460,787 Due after one year through five years 329,625 336,516 Due after five years through ten years 264,372 283,840 Due after ten years 703,341 781,253 ------------ ------------ 1,756,969 1,862,396 Mortgage-backed securities 269,899 291,557 ------------ ------------ Total bonds $ 2,026,868 $ 2,153,953 ------------ ------------ ------------ ------------
Proceeds from sales and maturities of investments in debt securities during 1998, 1997, and 1996 were $1,016,811,000, $980,264,000, and $1,554,016,000, gross gains were $17,025,000, $10,732,000, and $16,975,000 and gross losses were $866,000, $2,446,000, and $10,885,000, respectively. Bonds included above with an amortized cost of approximately $2,572,000, $2,578,000 and $2,060,000 at December 31, 1998, 1997 and 1996, respectively, were on deposit with governmental authorities as required by law. Excluding investments in U.S. government and agencies securities, the Company is not exposed to significant concentration of credit risk in its portfolio. 4. SECURITIES LENDING The Company has a securities lending program operated on its behalf by the Company's primary custodian, Chase Manhattan Bank of New York. The custodian has indemnified the Company against losses arising from this program. There were no securities out on loan as of December 31, 1998 and 1997. Income resulting from this program was $94,000, $200,000 and $137,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 5. MORTGAGE LOANS The Company invests in commercial first mortgage loans throughout the United States. The Company monitors the condition of the mortgage loans in its portfolio. In those cases where mortgages have been restructured, appropriate allowances for losses have been made. In those cases where, in management's judgment, the mortgage loans' values are impaired, appropriate losses are recorded. 64 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 5. MORTGAGE LOANS (CONTINUED): The following table shows the geographical distribution of the mortgage loan portfolio.
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- (IN THOUSANDS) California $ 82,397 $ 119,122 Massachusetts 53,528 58,981 Michigan 34,357 42,912 New York 21,190 45,696 Ohio 36,171 51,862 Pennsylvania 93,587 97,949 Washington 36,548 54,948 All other 177,225 212,565 ---------- ---------- $ 535,003 $ 684,035 ---------- ---------- ---------- ----------
The Company has restructured mortgage loans totaling $30,743,000 and $26,284,000 at December 31, 1998 and 1997, respectively, against which there are allowances for losses of $2,120,000 and $3,026,000, respectively. The Company has made commitments of mortgage loans on real estate into the future. The outstanding commitments for these mortgages amount to $18,005,000 and $12,300,000 at December 31, 1998 and 1997, respectively. 6. INVESTMENT GAINS AND LOSSES
YEARS ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 ---------- ---------- --------- (IN THOUSANDS) Net realized gains (losses): Bonds $ 5,659 $ 2,882 $ 5,631 Common stock of affiliates -- 21,195 -- Common stocks 48 Mortgage loans 2,374 3,837 763 Real estate 955 2,912 599 Other invested assets (3,827) (717) 567 ---------- ---------- --------- Subtotal 5,209 30,109 7,560 Capital gains tax expense 4,815 3,403 2,698 ---------- ---------- --------- Total $ 394 $ 26,706 $ 4,862 ---------- ---------- --------- ---------- ---------- --------- Changes in unrealized gains (losses): Common stock of affiliates $ (302) $ (2,894) $ (5,739) Mortgage loans (1,312) 1,524 (600) Real estate 403 3,377 4,624 Other invested assets 827 (855) -- ---------- ---------- --------- Total $ (384) $ 1,152 $ (1,715) ---------- ---------- --------- ---------- ---------- ---------
Realized capital gains and losses on bonds and mortgages and interest rate swaps which relate to changes in levels of interest rates are charged or credited to an interest maintenance reserve ("IMR") and amortized into income over the remaining contractual life of the security sold. The net realized capital 65 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 6. INVESTMENT GAINS AND LOSSES (CONTINUED): gains credited to the interest maintenance reserve were $8,943,000 in 1998, $6,321,000 in 1997, and $7,710,000 in 1996. All gains and losses are transferred net of applicable income taxes. 7. NET INVESTMENT INCOME Net investment income consisted of:
YEARS ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- (IN THOUSANDS) Interest income from bonds $ 167,436 $ 188,924 $ 178,695 Income from investment in common stock of affiliates 3,675 41,181 50,408 Interest income from mortgage loans 53,269 76,073 92,591 Real estate investment income 15,932 17,161 16,249 Interest income from policy loans 2,881 3,582 2,790 Other investment income (loss) (641) (193) 1,710 ---------- ---------- ---------- Gross investment income 242,552 326,728 342,443 ---------- ---------- ---------- Interest on surplus notes and notes payable (44,903) (42,481) (23,061) Investment expenses (13,117) (13,998) (15,629) ---------- ---------- ---------- Net investment income $ 184,532 $ 270,249 $ 303,753 ---------- ---------- ---------- ---------- ---------- ----------
8. DERIVATIVES The Company uses derivative instruments for interest rate risk management purposes, including hedges against specific interest rate risk and to minimize the Company's exposure to fluctuations in interest rates. The Company's use of derivatives has included U.S. Treasury futures, conventional interest rate swaps, and forward spread lock interest rate swaps. In the case of interest rate futures, gains or losses on contracts that qualify as hedges are deferred until the earliest of the completion of the hedging transaction, determination that the transaction will no longer take place, or determination that the hedge is no longer effective. Upon completion of the hedge, where it is impractical to allocate gains or losses to specific hedged assets or liabilities, gains or losses are deferred in IMR and amortized over the remaining life of the hedged assets. At December 31, 1998 and 1997 there were no futures contracts outstanding. In the case of interest rate and foreign currency swap agreements and forward spread lock interest rate swap agreements, gains or losses on terminated swaps are deferred in the IMR and amortized over the shorter of the remaining life of the hedged asset sold or the remaining term of the swap contract. The net differential to be paid or received on interest rate swaps is recorded monthly as interest rates change. 66 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 8. DERIVATIVES (CONTINUED): Options are used to hedge the stock market interest exposure in the mortality and expense risk charges and guaranteed minimum death benefit features of the Company's variable annuities. The Company's open positions are as follows:
SWAPS OUTSTANDING AT DECEMBER 31, 1998 --------------------------------- NOTIONAL MARKET VALUE PRINCIPAL AMOUNTS OF POSITIONS ------------------ ------------- (IN THOUSANDS) Conventional interest rate swaps $ 45,000 $ 508 Foreign currency swap 1,178 263
SWAPS OUTSTANDING AT DECEMBER 31, 1997 --------------------------------- NOTIONAL MARKET VALUE PRINCIPAL AMOUNTS OF POSITIONS ------------------ ------------- (IN THOUSANDS) Conventional interest rate swaps $ 80,000 $ (2,891) Foreign currency swap 1,700 208 Forward spread lock swaps 50,000 274 Asian Put Option S & P 500 75,000 693
The market value of swaps is the estimated amount that the Company would receive or pay on termination or sale, taking into account current interest rates and the current credit worthiness of the counterparties. The Company is exposed to potential credit loss in the event of nonperformance by counterparties. The counterparties are major financial institutions and management believes that the risk of incurring losses related to credit risk is remote. 9. LEVERAGED LEASES The Company is a lessor in a leveraged lease agreement entered into on October 21, 1994, under which equipment having an estimated economic life of 25-40 years was leased for a term of 9.75 years. The Company's equity investment represented 22.9% of the purchase price of the equipment. The balance of the purchase price was furnished by third-party long-term debt financing, collateralized by the equipment and non-recourse to the Company. At the end of the lease term, the Master Lessee may exercise a fixed price purchase option to purchase the equipment. 67 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 9. LEVERAGED LEASES (CONTINUED): The Company's net investment in leveraged leases is composed of the following elements:
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- (IN THOUSANDS) Lease contracts receivable $ 78,937 $ 92,605 Less non-recourse debt (78,920) (92,589) ---------- ---------- 17 16 Estimated residual value of leased assets 41,150 41,150 Less unearned and deferred income (8,932) (10,324) ---------- ---------- Investment in leveraged leases 32,235 30,842 Less fees (138) (163) ---------- ---------- Net investment in leveraged leases $ 32,097 $ 30,679 ---------- ---------- ---------- ----------
The net investment is included in "other invested assets" on the balance sheet. 10. REINSURANCE The Company has agreements with SLOC which provide that SLOC will reinsure the mortality risks of the individual life insurance contracts sold by the Company. Under these agreements basic death benefits and supplementary benefits are reinsured on a yearly renewable term basis and coinsurance basis, respectively. Reinsurance transactions under these agreements had the effect of decreasing income from operations by approximately $2,128,000, $1,381,000 and $1,603,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Effective January 1, 1991, the Company entered into an agreement with SLOC under which certain individual life insurance contracts issued by SLOC were reinsured by the Company on a 90% coinsurance basis. During 1997 SLOC changed certain assumptions used in determining the gross and the ceded reserve balance. The Company reflected the effect of the changes in assumptions to its assumed reserves as a direct credit to surplus. The effect of the change was a $39,016,000 decrease in reserves. Also, the agreement required SLOC to reinsure the mortality risks in excess of $500,000 per policy for the individual life insurance contracts assumed by the Company. Such death benefits are reinsured on a yearly renewable term basis. The life reinsurance assumed agreement required the reinsurer to withhold funds in amounts equal to the reserves assumed. These agreements had the effect of increasing income from operations by approximately $24,579,000, $37,050,000 and $35,161,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company terminated this agreement effective October 1, 1998, resulting in an increase in income from operations of $65,679,000 which included a cash settlement. 68 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 10. REINSURANCE (CONTINUED): The following are summarized pro-forma results of operations of the Company for the years ended December 31, 1998, 1997 and 1996 before the effect of reinsurance transactions with SLOC:
YEARS ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ (IN THOUSANDS) Income: Premiums, annuity deposits and other revenues $ 2,377,364 $ 2,340,733 $ 1,941,423 Net investment income and realized gains 187,208 298,120 310,172 ------------ ------------ ------------ Subtotal 2,564,572 2,638,853 2,251,595 ------------ ------------ ------------ Benefits and Expenses: Policyholder benefits 2,312,247 2,350,354 2,011,998 Other expenses 203,238 187,591 155,531 ------------ ------------ ------------ Subtotal 2,515,485 2,537,945 2,167,529 ------------ ------------ ------------ Income from operations $ 49,087 $ 100,908 $ 84,066 ------------ ------------ ------------ ------------ ------------ ------------
The Company has an agreement with an unrelated company which provides reinsurance of certain individual life insurance contracts on a modified coinsurance basis and under which all deficiency reserves related to these contracts are reinsured. Reinsurance transactions under this agreement had the effect of increasing income from operations by $3,008,000 in 1998, and decreasing income from operations by $2,658,000 in 1997 and $46,000 in 1996. 11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT LIABILITIES The withdrawal characteristics of general account and separate account annuity reserves and deposits are as follows:
DECEMBER 31, 1998 ----------------------------- AMOUNT % OF TOTAL ------------- -------------- (IN THOUSANDS) Subject to discretionary withdrawal-with adjustment: With market value adjustment $ 2,896,529 19 At book value less surrender charges (surrender charge >5%) 10,227,212 66 At book value (minimal or no charge or adjustment) 1,264,453 8 Not subject to discretionary withdrawal provision 1,106,197 7 ------------- --- Total annuity actuarial reserves and deposit liabilities $ 15,494,391 100 ------------- --- ------------- ---
DECEMBER 31, 1997 ----------------------------- AMOUNT % OF TOTAL ------------- -------------- (IN THOUSANDS) Subject to discretionary withdrawal-with adjustment: With market value adjustment $ 3,415,394 25 At book value less surrender charges (surrender charge >5%) 7,672,211 57 At book value (minimal or no charge or adjustment) 1,259,698 9 Not subject to discretionary withdrawal provision 1,164,651 9 ------------- --- Total annuity actuarial reserves and deposit liabilities $ 13,511,954 100 ------------- --- ------------- ---
69 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 12. SEGMENT INFORMATION The Company offers financial products and services such as fixed and variable annuities, retirement plan services and life insurance on an individual basis. Within these areas, the Company conducts business principally in two operating segments and maintains a corporate segment to provide for the capital needs of the various operating segments and to engage in other financing related activities. The Individual Insurance 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 Retirement Products and Services ("RPS") segment markets and administers individual and group variable annuity products, individual and group fixed annuity products which include market value adjusted annuities, and other retirement benefit products. The following amounts pertain to the various business segments:
FEDERAL TOTAL TOTAL PRETAX INCOME TOTAL (IN THOUSANDS) REVENUES EXPENDITURES* INCOME TAXES ASSETS - ----------------------------------------------------- ------------ -------------- ---------- ---------- ------------- 1998 Individual Insurance $ 229,710 $ 144,800 $ 84,910 $ (4,148) $ 199,683 RPS 2,527,608 2,483,715 43,893 12,486 16,123,905 Corporate 10,959 3,042 7,917 3,375 579,033 ------------ -------------- ---------- ---------- ------------- Total $ 2,768,277 $ 2,631,557 $ 136,720 $ 11,713 $ 16,902,621 ------------ -------------- ---------- ---------- ------------- 1997 Individual Insurance 304,141 272,333 31,808 13,825 1,143,697 RPS 2,533,006 2,507,591 25,414 10,667 14,043,221 Corporate 57,897 5,244 52,653 (17,153) 738,439 ------------ -------------- ---------- ---------- ------------- Total $ 2,895,044 $ 2,785,169 $ 109,875 $ 7,339 $ 15,925,357 ------------ -------------- ---------- ---------- ------------- 1996 Individual Insurance 281,309 255,846 25,463 13,931 817,115 RPS 2,174,602 2,151,126 23,476 1,203 12,057,572 Corporate 64,721 898 63,823 (20,534) 689,266 ------------ -------------- ---------- ---------- ------------- Total $ 2,520,632 $ 2,407,870 $ 112,762 $ (5,400) $ 13,563,953 ------------ -------------- ---------- ---------- -------------
- ------------------------ * Total expenditures include dividends to policyholders of $(5,981) for 1998, $33,316 for 1997 and $29,189 for 1996. 13. RETIREMENT PLANS The Company participates with SLOC in a noncontributory defined benefit pension plan covering essentially all employees. The benefits are based on years of service and compensation. The funding policy for the pension plan is to contribute an amount which at least satisfies the minimum amount required by ERISA; currently, the plan is fully funded. The Company is charged for its share of the pension cost based upon its covered participants. Pension plan assets consist principally of separate accounts of SLOC. The Company's share of the group's accrued pension cost was $1,178,000 and $593,000 at December 31, 1998 and 1997, respectively. The Company's share of net periodic pension cost was $586,000, $146,000 and $27,000, for 1998, 1997 and 1996, respectively. 70 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 13. RETIREMENT PLANS (CONTINUED): The Company also participates with SLOC and certain affiliates in a 401(k) savings plan for which substantially all employees are eligible. The Company matches, up to specified amounts, employees' contributions to the plan. Company contributions were $231,000, $259,000 and $233,000 for the years ended December 31, 1998, 1997 and 1996, respectively. OTHER POST-RETIREMENT BENEFIT PLANS In addition to pension benefits the Company provides certain health, dental, and life insurance benefits ("post-retirement benefits") for retired employees and dependents. Substantially all employees may become eligible for these benefits if they reach normal retirement age while working for the Company, or retire early upon satisfying an alternate age plus service condition. Life insurance benefits are generally set at a fixed amount. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106 requires an accrual of the estimated cost of retiree benefit payments during the years the employee provides services. SFAS No. 106 allows recognition of the cumulative effect of the liability in the year of adoption or the amortization of the obligation over a period of up to 20 years. The obligation of approximately $455,000 is recognized over a period of ten years. The Company's cash flows are not affected by implementation of this standard, but implementation decreased net income by $95,000, $117,000, and $8,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The Company's post retirement health, dental and life insurance benefits currently are not funded. 71 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 13. RETIREMENT PLANS (CONTINUED): OTHER POST-RETIREMENT BENEFIT PLANS CONTINUED The following table sets forth the change in the pension and other postretirement benefit plans' benefit obligations and assets as well as the plans' funded status reconciled with the amount shown in the Company's financial statements at December 31:
PENSION BENEFITS OTHER BENEFITS 1998 1997 1998 1997 ---------- ---------- ---------- --------- (IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of year $ 79,684 $ 70,848 $ 9,845 $ 9,899 Service cost 4,506 4,251 240 306 Interest cost 6,452 5,266 673 725 Amendments -- 1,000 -- -- Actuarial loss (gain) 21,975 -- 308 (801) Benefits paid (1,825) (1,681) (647) (284) ---------- ---------- ---------- --------- Benefit obligation at end of year $ 110,792 $ 79,684 $ 10,419 $ 9,845 ---------- ---------- ---------- --------- ---------- ---------- ---------- --------- The Company's share: Benefit obligation at beginning of year $ 5,094 $ 4,529 $ 385 $ 384 Benefit obligation at end of year $ 9,125 $ 5,094 $ 416 $ 385 Change in plan assets: Fair value of plan assets at beginning of year $ 136,610 $ 122,807 $ -- $ -- Actual return on plan assets 16,790 15,484 -- -- Employer contribution -- -- 647 284 Benefits paid (1,825) (1,681) (647) (284) ---------- ---------- ---------- --------- Fair value of plan assets at end of year $ 151,575 $ 136,610 $ -- $ -- ---------- ---------- ---------- --------- ---------- ---------- ---------- --------- Funded status $ 40,783 $ 56,926 $ (10,419) $ (9,845) Unrecognized net actuarial gain (loss) (2,113) (18,147) 586 257 Unrecognized transition obligation (asset) (24,674) (26,730) 185 230 Unrecognized prior service cost 7,661 8,241 -- -- ---------- ---------- ---------- --------- Prepaid (accrued) benefit cost $ 21,657 $ 20,290 $ (9,648) $ (9,358) ---------- ---------- ---------- --------- ---------- ---------- ---------- --------- The Company's share of accrued benefit cost $ (1,178) $ (593) $ (195) $ (102) Weighted-average assumptions as of December 31: Discount rate 6.75% 7.50% 6.75% 7.50% Expected return on plan assets 8.00% 7.50% N/A N/A Rate of compensation increase 4.50% 4.50% N/A N/A
72 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 13. RETIREMENT PLANS (CONTINUED): For measurement purposes, a 10.1% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998 (5.7% for dental benefits). The rates were assumed to decrease gradually to 5% for 2005 and remain at that level thereafter.
1998 1997 1998 1997 ---------- --------- --------- --------- Components of net periodic benefit cost: Service cost $ 4,506 $ 4,251 $ 240 $ 306 Interest cost 6,452 5,266 673 725 Expected return on plan assets (10,172) (9,163) -- -- Amortization of transition obligation (asset) (2,056) (2,056) 45 45 Amortization of prior service cost 580 517 -- -- Recognized net actuarial (gain) loss (677) (789) (20) 71 ---------- --------- --------- --------- Net periodic benefit cost $ (1,367) $ (1,974) $ 938 $ 1,147 ---------- --------- --------- --------- ---------- --------- --------- --------- The Company's share of net periodic benefit cost $ 586 $ 146 $ 95 $ 117 ---------- --------- --------- --------- ---------- --------- --------- ---------
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT INCREASE DECREASE ------------------- ------------------- (IN THOUSANDS) Effect on total of service and interest cost components $ 210 $ (170) Effect on postretirement benefit obligation 2,026 (1,697)
73 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1998 and 1997:
DECEMBER 31, 1998 --------------------------------------- CARRYING AMOUNT ESTIMATED FAIR VALUE ----------------- -------------------- (IN THOUSANDS) ASSETS: Bonds $ 2,026,868 $ 2,153,953 Mortgages 535,003 556,143 Derivatives -- 771 LIABILITIES: Insurance reserves $ 121,100 $ 121,100 Individual annuities 274,448 271,849 Pension products 1,104,489 1,145,351 DECEMBER 31, 1997 --------------------------------------- CARRYING AMOUNT ESTIMATED FAIR VALUE ----------------- -------------------- (IN THOUSANDS) ASSETS: Bonds $ 2,451,731 $ 2,569,199 Mortgages 684,035 706,975 LIABILITIES: Insurance reserves $ 123,128 $ 123,128 Individual annuities 307,668 302,165 Pension products 1,527,433 1,561,108 Derivatives -- (1,716)
The major methods and assumptions used in estimating the fair values of financial instruments are as follows: The fair values of short-term bonds are estimated to be the amortized cost. The fair values of long-term bonds which are publicly traded are based upon market prices or dealer quotes. For privately placed bonds, fair values are estimated by taking into account prices for publicly traded bonds of similar credit risk and maturity and repayment and liquidity characteristics. The fair values of the Company's general account insurance reserves and liabilities under investment-type contracts (insurance, annuity and pension contracts that do not involve mortality or morbidity risks) are estimated using discounted cash flow analyses or surrender values. Those contracts that are deemed to have short-term guarantees have a carrying amount equal to the estimated market value. The fair values of mortgages are estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair values of derivative financial instruments are estimated using the process described in Note 8. 15. STATUTORY INVESTMENT VALUATION RESERVES The asset valuation reserve ("AVR") provides a reserve for losses from investments in bonds, stocks, mortgage loans, real estate and other invested assets with related increases or decreases being recorded directly to surplus. 74 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 15. STATUTORY INVESTMENT VALUATION RESERVES (CONTINUED): Realized capital gains and losses on bonds and mortgages which relate to changes in levels of interest rates are charged or credited to an interest maintenance reserve ("IMR") and amortized into income over the remaining contractual life of the security sold. The table shown below presents changes in the major elements of the AVR and IMR.
YEARS ENDED DECEMBER 31, 1998 1997 -------------------- -------------------- AVR IMR AVR IMR --------- --------- --------- --------- (IN THOUSANDS) Balance, beginning of year $ 47,605 $ 33,830 $ 53,911 $ 28,675 Net realized investment gains, net of tax 256 8,942 17,400 6,321 Amortization of net investment gains -- (2,282) -- (1,166) Unrealized investment losses (6,550) -- (2,340) -- Required by formula 3,081 -- (21,366) -- --------- --------- --------- --------- Balance, end of year $ 44,392 $ 40,490 $ 47,605 $ 33,830 --------- --------- --------- --------- --------- --------- --------- ---------
16. FEDERAL INCOME TAXES The Company and its subsidiaries file a consolidated federal income tax return. Federal income taxes are calculated for the consolidated group based upon amounts determined to be payable as a result of operations within the current year. No provision is recognized for timing differences which may exist between financial statement and taxable income. Such timing differences include reserves, depreciation and accrual of market discount on bonds. Cash payments for federal income taxes were approximately $48,144,000, $31,000,000 and $19,264,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company is currently undergoing an audit by the Internal Revenue Service. The Company believes that there will be no material audit adjustments for the periods under examination. 17. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE) On December 22, 1997, the Company issued a $250,000,000 surplus note to Life Holdco. This note has an interest rate of 8.625% and is due on or after November 6, 2027. On May 9, 1997, the Company issued a short-term note of $600,000,000 to Life Holdco at an interest rate of 5.10%, which was extended at various interest rates. This note was repaid on December 22, 1997. On December 19, 1995, the Company issued surplus notes totaling $315,000,000 to an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and 7.25%. Of these notes, $157,500,000 will mature in the year 2007 and $157,500,000 will mature in the year 2015. Interest on these notes is payable semiannually. Principal and interest on surplus notes are payable only to the extent that the Company meets specified requirements regarding free surplus exclusive of the principal amount and accrued interest, if any, on these notes and with the consent of the Delaware Insurance Commissioner. The Company accrued $4,259,000 and $ 964,000 for interest on surplus notes for the years ended December 31, 1998 and 1997, respectively. The Company accrued $4,259,000 and $964,000 for interest on surplus notes for the years ended December 31, 1998 and 1997, respectively. 75 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.) NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 17. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE) (CONTINUED): The Company expensed $44,903,000, $42,481,000 and $23,061,000 for interest on surplus notes and notes payable for the years ended December 31, 1998, 1997 and 1996, respectively. 18. 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 $16,344,000 in 1998, $15,997,000 in 1997, and $20,192,000 in 1996. The Company leases office space to SLOC under lease agreements with terms expiring in September, 1999 and options to extend the terms for each of thirteen successive five-year terms at fair market rental not to exceed 125% of the fixed rent for the term which is ending. Rent received by the Company under the leases for 1998 amounted to approximately $6,856,000. 19. RISK-BASED CAPITAL Effective December 31, 1993, the NAIC adopted risk-based capital requirements for life insurance companies. The risk-based capital requirements provide a method for measuring the minimum acceptable amount of adjusted capital that a life insurer should have, as determined under statutory accounting practices, taking into account the risk characteristics of its investments and products. The Company has met the minimum risk-based capital requirements at December 31, 1998, 1997 and 1996. 20. ACCOUNTING POLICIES AND PRINCIPLES The financial statements of the Company have been prepared on the basis of statutory accounting practices which, prior to 1996, were considered by the insurance industry and the accounting profession to be in accordance with GAAP for mutual life insurance companies. The primary differences between statutory accounting practices and GAAP are described as follows. Under statutory accounting practices, financial statements are not consolidated and investments in subsidiaries are shown at net equity value. Accordingly, the assets, liabilities and results of operations of the Company's subsidiaries are not consolidated with the assets, liabilities and results of operations, respectively, of the Company. Changes in net equity value of the common stock of the Company's United States life insurance subsidiaries are directly reflected in the Company's surplus. Changes in the net equity value of the common stock of all other subsidiaries are directly reflected in the Company's Asset Valuation Reserve. Dividends paid by subsidiaries to the Company are included in the Company's net investment income. Other differences between statutory accounting practices and GAAP include the following: statutory accounting practices do not recognize the following assets or liabilities which are reflected under GAAP: deferred policy acquisition costs, deferred federal income taxes and statutory nonadmitted assets. Asset Valuation Reserves and Interest Maintenance Reserves are established under statutory accounting practices but not under GAAP. Methods for calculating real estate depreciation and investment valuation allowances differ under statutory accounting practices and GAAP. Actuarial assumptions and reserving methods differ under statutory accounting practices and GAAP. Premiums for universal life and investment-type products are recognized as income for statutory purposes and as deposits to policyholders' accounts for GAAP. Because the Company's management uses financial information prepared in conformity with accounting principles generally accepted in Canada in the normal course of business, the management of Sun Life Assurance Company of Canada (U.S.) has determined that the cost of complying with Statement No. 120, "Accounting and Reporting by Mutual Insurance Enterprises and by Insurance Enterprises for Certain Long Duration Participating Contracts", exceeds the benefits that the Company, or the users of its financial statements, would experience. Consequently, the Company has elected not to apply such standards in the preparation of these financial statements. 76 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) We have audited the accompanying statutory statements of admitted assets, liabilities and capital stock and surplus of Sun Life Assurance Company of Canada (U.S.) (the "Company") as of December 31, 1998 and 1997, and the related statutory statements of operations, changes in capital stock and surplus, and cash flow for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described more fully in Notes 1 and 20 to the financial statements, the Company prepared these financial statements using accounting practices prescribed or permitted by the Insurance Department of the State of Delaware, which is a comprehensive basis of accounting other than generally accepted accounting principles. The effects on the financial statements of the differences between the statutory basis of accounting and generally accepted accounting principles, although not reasonably determinable, are presumed to be material. In our opinion, the statutory financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities, and capital stock and surplus of Sun Life Assurance Company of Canada (U.S.) as of December 31, 1998 and 1997, and the results of its operations and its cash flow for each of the three years in the period ended December 31, 1998 on the basis of accounting described in Notes 1 and 20. However, because of the differences between the two bases of accounting referred to in the second preceding paragraph, in our opinion, the statutory financial statements referred to above do not present fairly, in conformity with generally accepted accounting principles, the financial position of Sun Life Assurance Company of Canada (U.S.) as of December 31, 1998 and 1997 or the results of its operations or its cash flow for each of the three years in the period ended December 31, 1998. As management has stated in Note 20, because the Company's management uses financial information prepared in accordance with accounting principles generally accepted in Canada in the normal course of business, the management of Sun Life Assurance Company of Canada (U.S.) has determined that the cost of complying with Statement No. 120, ACCOUNTING AND REPORTING BY MUTUAL LIFE INSURANCE ENTERPRISES AND BY INSURANCE ENTERPRISES FOR CERTAIN LONG-DURATION PARTICIPATING CONTRACTS, would exceed the benefits that the Company, or the users of its financial statements, would experience. Consequently, the Company has elected not to apply such standards in the preparation of these financial statements. DELOITTE & TOUCHE LLP Boston, Massachusetts February 5, 1999 77 TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION Calculation of Performance Data -- Average Annual Total Return....................... Non-Standardized Investment Performance.............................................. Advertising and Sales Literature..................................................... Calculations......................................................................... Example of Variable Accumulation Unit Value Calculation............................ Example of Variable Annuity Unit Calculation....................................... Example of Variable Annuity Payment Calculation.................................... Calculation of Annuity Unit Values................................................. Distribution of the Contracts........................................................ Designation and Change of Beneficiary................................................ Custodian............................................................................ Financial Statements.................................................................
78 This Prospectus sets forth information about the Contracts and the Variable Account that a prospective purchaser should know before investing. Additional information about the Contracts and the Variable Account has been filed with the Securities and Exchange Commission in a Statement of Additional Information dated May 1, 1999 which is incorporated herein by reference. The Statement of Additional Information is available upon request and without charge from Sun Life Assurance Company of Canada (U.S.). To receive a copy, return this request form to the address shown below or telephone (617) 348-9600 or (888) 786-2435. - -------------------------------------------------------------------------------- To: Sun Life Assurance Company of Canada (U.S.) Annuity Service Mailing Address: c/o Retirement Products and Services P.O. Box 9133 Boston, Massachusetts 02117 Please send me a Statement of Additional Information for Futurity II Variable and Fixed Annuity Sun Life of Canada (U.S.) Variable Account F. Name - -------------------------------------------------------------- Address - -------------------------------------------------------------- - ------------------------------------------------------------------------- City - ------------------------------------ State - -------------- Zip - ------ Telephone - ---------------------------------------------------------------- 79 APPENDIX A GLOSSARY The following terms as used in this Prospectus have the indicated meanings: ACCOUNT or PARTICIPANT ACCOUNT: An account established for each Participant to which Net Purchase Payments are credited. ACCOUNT VALUE: The Variable Accumulation Value, if any, plus the Fixed Accumulation Value, if any, of your Account for any Valuation Period. ACCOUNT YEAR AND ACCOUNT ANNIVERSARY: Your first Account Year is the period of (a) 12 full calendar months plus (b) the part of the calendar month in which we issue your Contract (if not on the first day of the month), beginning with the Contract Date. Your Account Anniversary is the first day immediately after the end of an Account Year. Each Account Year after the first is the 12 calendar month period that begins on your Account Anniversary. If, for example, the Contract Date is in March, the first Account Year will be determined from the Contract Date but will end on the last day of March in the following year; your Account Anniversary is April 1 and all Account Years after the first will be measured from April 1. ACCUMULATION PHASE: The period before the Annuity Commencement Date and during the lifetime of the Annuitant during which you make Purchase Payments under the Contract. This is called the "Accumulation Period" in the Contract. ANNUITANT: The person or persons to whom the first annuity payment is made. If the Annuitant dies prior to the Annuity Commencement Date, the new Annuitant will be the Co-Annuitant, if any. If the Co-Annuitant dies or if no Co-Annuitant is named, the Participant becomes the Annuitant upon the Annuitant's death prior to the Annuity Commencement Date. If you have not named a sole Annuitant on the 30th day before the Annuity Commencement Date and both the Annuitant and Co-Annuitant are living, the Co-Annuitant will be the sole Annuitant during the Income Phase *ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment under each Contract is to be made. *ANNUITY OPTION: The method you choose for making annuity payments. ANNUITY UNIT: A unit of measure used in the calculation of the amount of the second and each subsequent variable annuity payment from the Variable Account. APPLICATION: The document signed by you or other evidence acceptable to us that serves as your application for participation under a Group Contract or purchase of an Individual Contract. *BENEFICIARY: Prior to the Annuity Commencement Date, the person or entity having the right to receive the death benefit and, for Non-Qualified Contracts, who, in the event of the Participant's death, is the "designated beneficiary" for purposes of Section 72(s) of the Internal Revenue Code. After the Annuity Commencement Date, the person or entity having the right to receive any payments due under the Annuity Option elected, if applicable, upon the death of the Payee. BUSINESS DAY: Any day the New York Stock Exchange is open for trading. CERTIFICATE: The document for each Participant which evidences the coverage of the Participant under a Group Contract. COMPANY: Sun Life Assurance Company of Canada (U.S.). CONTRACT DATE: The date on which we issue your Contract. This is called the "Date of Coverage" in the Contract. DEATH BENEFIT DATE: If you have elected a death benefit payment option before your death that remains in effect, the date on which we receive Due Proof of Death. If your Beneficiary elects the * You specify these items on the Contract Specifications page or Certificate Specifications page and may change them, as we describe in this Prospectus. 80 death benefit payment option, the later of (a) the date on which we receive the Beneficiary's election and (b) the date on which we receive Due Proof of Death. If we do not receive the Beneficiary's election within 60 days after we receive Due Proof of Death, the Death Benefit Date will be the last day of the 60 day period and we will pay the death benefit in cash. DUE PROOF OF DEATH: An original certified copy of an official death certificate, an original certified copy of a decree of a court of competent jurisdiction as to the finding of death, or any other proof satisfactory to the Company. EXPIRATION DATE: The last day of a Guarantee Period. FIXED ACCOUNT: The general account of the Company, consisting of all assets of the Company other than those allocated to a separate account of the Company. FIXED ACCOUNT VALUE: The value of that portion of your Account allocated to the Fixed Account. FIXED ANNUITY: An annuity with payments which do not vary as to dollar amount. FUND: A registered management investment company, or series thereof, in which assets of a Sub-Account may be invested. GROUP CONTRACT: A Contract issued by the Company on a group basis. GUARANTEE AMOUNT: Each separate allocation of your Account Value allocated to a particular Guarantee Period (including interest earned thereon). GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is credited. GUARANTEED INTEREST RATE: The rate of interest we credit on a compound annual basis during any Guarantee Period. INCOME PHASE: The period on and after the Annuity Commencement Date and during the lifetime of the Annuitant during which we make annuity payments under the Contract. INDIVIDUAL CONTRACT: A Contract issued by the Company on an individual basis. NET INVESTMENT FACTOR: An index applied to measure the investment performance of a Sub-Account from one Valuation Period to the next. The Net Investment Factor may be greater or less than or equal to one. NET PURCHASE PAYMENT: The portion of a Purchase Payment which remains after the deduction of any applicable premium tax or similar tax. NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement plan that does not receive favorable federal income tax treatment under Sections 401, 403, 408, or 408A of the Internal Revenue Code. The Participant's interest in the Contract must be owned by a natural person or agent for a natural person for the Contract to receive favorable income tax treatment as an annuity. OWNER: The person, persons or entity entitled to the ownership rights stated in a Group Contract and in whose name or names the Group Contract is issued. The Owner may designate a trustee or custodian of a retirement plan which meets the requirements of Section 401, Section 408(c), Section 408(k), Section 408(p) or Section 408A of the Internal Revenue Code to serve as legal owner of assets of a retirement plan, but the term "Owner," as used herein, shall refer to the organization entering into the Group Contract. PARTICIPANT: In the case of an Individual Contract, the owner of the Contract. In the case of a Group Contract, the person named in the Contract who is entitled to exercise all rights and privileges of ownership under the Contract, except as reserved by the Owner. PAYEE: A recipient of payments under a Contract. The term includes an Annuitant or a Beneficiary who becomes entitled to benefits upon the death of the Participant. 81 PURCHASE PAYMENT (PAYMENT): An amount paid to the Company as consideration for the benefits provided by a Contract. QUALIFIED CONTRACT: A Contract used in connection with a retirement plan which may receive favorable federal income tax treatment under Sections 401, 403, 408 or 408A of the Internal Revenue Code of 1986, as amended. SERIES FUND: MFS/Sun Life Series Trust. SEVEN-YEAR ANNIVERSARY: The seventh Account Anniversary and each succeeding Account Anniversary occurring at any seven year interval thereafter; for example, the 14th, 21st and 28th Account Anniversaries. SUB-ACCOUNT: That portion of the Variable Account which invests in shares of a specific Fund or series of a Fund. VALUATION PERIOD: The period of time from one determination of Variable Accumulation Unit or Annuity Unit values to the next subsequent determination of these values. Value determinations are made as of the close of the New York Stock Exchange on each day that the Exchange is open for trading. VARIABLE ACCOUNT: Variable Account F of the Company, which is a separate account of the Company consisting of assets set aside by the Company, the investment performance of which is kept separate from that of the general assets of the Company. VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of Variable Account Value. VARIABLE ACCOUNT VALUE: The value of that portion of your Account allocated to the Variable Account. VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount in relation to the investment performance of the Variable Account. 82 APPENDIX B CONDENSED FINANCIAL INFORMATION - ACCUMULATION UNIT VALUES The following information should be read in conjunction with the Variable Account's Financial Statements appearing the Statement of Additional Information. All of the Variable Account's Financial Statements have been audited by Deloitte & Touche LLP, independent certified public accountants.
PERIOD ENDED DECEMBER 31, 1998* -------------------- AIM V.I. CAPITAL APPRECIATION FUND Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 11.2991 Units outstanding at end of period........................................................ 100 AIM V.I. GROWTH FUND Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 11.3293 Units outstanding at end of period........................................................ 1,049 AIM V.I. GROWTH AND INCOME FUND Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 11.0655 Units outstanding at end of period........................................................ 1,704 AIM V.I. INTERNATIONAL EQUITY FUND Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.5553 Units outstanding at end of period........................................................ 2,553 ALGER AMERICAN GROWTH PORTFOLIO Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 11.1993 Units outstanding at end of period........................................................ 2,044 ALGER AMERICAN INCOME AND GROWTH PORTFOLIO Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 11.0273 Units outstanding at end of period........................................................ 1,785 ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 11.3603 Units outstanding at end of period........................................................ 100 GOLDMAN SACHS CORE LARGE CAP GROWTH FUND Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 11.0085 Units outstanding at end of period........................................................ 786 GOLDMAN SACHS CORE SMALL CAP EQUITY FUND Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.8679 Units outstanding at end of period........................................................ 100
83
PERIOD ENDED DECEMBER 31, 1998* -------------------- GOLDMAN SACHS CORE U.S. EQUITY FUND Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.8370 Units outstanding at end of period........................................................ 2,341 GOLDMAN SACHS GROWTH AND INCOME FUND Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.3642 Units outstanding at end of period........................................................ 100 GOLDMAN SACHS INTERNATIONAL EQUITY FUND Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.5999 Units outstanding at end of period........................................................ 578 J.P. MORGAN SERIES TRUST II EQUITY PORTFOLIO Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.7114 Units outstanding at end of period........................................................ 474 J.P. MORGAN SERIES TRUST II INTERNATIONAL OPPORTUNITIES PORTFOLIO Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.5058 Units outstanding at end of period........................................................ 100 J.P. MORGAN SERIES TRUST II SMALL COMPANY PORTFOLIO Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.8537 Units outstanding at end of period........................................................ 100 LORD ABBETT SERIES FUND GROWTH AND INCOME PORTFOLIO Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.5917 Units outstanding at end of period........................................................ 1,763 MFS/SUN LIFE CAPITAL APPRECIATION SERIES Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 11.1244 Units outstanding at end of period........................................................ 2,367 MFS/SUN LIFE EMERGING GROWTH SERIES Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 11.2723 Units outstanding at end of period........................................................ 3,662 MFS/SUN LIFE GOVERNMENT SECURITIES SERIES Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 9.9595 Units outstanding at end of period........................................................ 1,027
84
PERIOD ENDED DECEMBER 31, 1998* -------------------- MFS/SUN LIFE HIGH YIELD SERIES Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 9.9916 Units outstanding at end of period........................................................ 729 MFS/SUN LIFE UTILITIES SERIES Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.5369 Units outstanding at end of period........................................................ 821 OCC ACCUMULATION TRUST EQUITY PORTFOLIO Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.5784 Units outstanding at end of period........................................................ 1,517 OCC ACCUMULATION TRUST MANAGED PORTFOLIO Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.5329 Units outstanding at end of period........................................................ 100 OCC ACCUMULATION TRUST MID CAP PORTFOLIO Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.6171 Units outstanding at end of period........................................................ 150 OCC ACCUMULATION TRUST SMALL CAP PORTFOLIO Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.3520 Units outstanding at end of period........................................................ 100 SUN CAPITAL MONEY MARKET FUND Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.0143 Units outstanding at end of period........................................................ 200 SUN CAPITAL INVESTMENT GRADE BOND FUND Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 9.9809 Units outstanding at end of period........................................................ 1,806 SUN CAPITAL REAL ESTATE FUND Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.0837 Units outstanding at end of period........................................................ 705
85
PERIOD ENDED DECEMBER 31, 1998* -------------------- WARBURG PINCUS TRUST EMERGING MARKETS PORTFOLIO Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.4931 Units outstanding at end of period........................................................ 100 WARBURG PINCUS TRUST INTERNATIONAL EQUITY PORTFOLIO Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 10.3709 Units outstanding at end of period........................................................ 100 WARBURG PINCUS TRUST POST-VENTURE CAPITAL PORTFOLIO Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 11.2546 Units outstanding at end of period........................................................ 100 WARBURG PINCUS TRUST SMALL COMPANY GROWTH PORTFOLIO Unit Value: Beginning of Period..................................................................... $ 10.0000 End of Period........................................................................... $ 11.0954 Units outstanding at end of period........................................................ 100
- ------------------------ * From commencement of operations on December 9, 1998 to December 31, 1998. 86 APPENDIX C WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT PART 1: VARIABLE ACCOUNT (THE MARKET VALUE ADJUSTMENT DOES NOT APPLY TO THE VARIABLE ACCOUNT) WITHDRAWAL CHARGE CALCULATION: FULL WITHDRAWAL: Assume a Purchase Payment of $40,000 is made on the Contract Date, no additional Purchase Payments are made and there are no partial withdrawals. The table below presents four examples of the withdrawal charge resulting from a full withdrawal of your Account, based on hypothetical Account Values.
HYPOTHETICAL FREE NEW WITHDRAWAL WITHDRAWAL ACCOUNT ACCOUNT WITHDRAWAL PAYMENTS CHARGE CHARGE YEAR VALUE AMOUNT WITHDRAWN PERCENTAGE AMOUNT --------------- ------------ ----------- ----------- --------------- ----------- (a) 1 $ 41,000 $ 4,000 $ 37,000 6.00% $ 2,220 (b) 3 $ 52,000 $ 12,000 $ 40,000 5.00% $ 2,000 (c) 7 $ 80,000 $ 28,000 $ 40,000 3.00% $ 1,200 (d) 9 $ 98,000 $ 68,000 0 0.00% 0
(a) The free withdrawal amount in any Account Year is equal to (1) the Annual Withdrawal Allowance for that year (i.e., 10% of all Purchase Payments made in the last seven Account Years ("New Payments")); plus (2) any unused Annual Withdrawal Allowances from previous years; plus (3) any Purchase Payments made before the last seven Account Years ("Old Payments") not previously withdrawn. In Account Year 1, the free withdrawal amount is $4,000 (the Annual Withdrawal Allowance for that year) because there are no unused Annual Withdrawal Allowances from previous years and no Old Payments. The $41,000 full withdrawal is attributed first to the $4,000 free withdrawal amount. The remaining $37,000 is withdrawn from the Purchase Payment made in Account Year 1 and is subject to the withdrawal charge. (b) In Account Year 3, the free withdrawal amount is $12,000 (the $4,000 Annual Withdrawal Allowance for the current year plus the unused $4,000 Annual Withdrawal Allowances for each of Account Years 1 and 2). The $52,000 full withdrawal is attributed first to the free withdrawal amount and the remaining $40,000 is withdrawn from the Purchase Payment made in Account Year 1. (c) In Account Year 7, the free withdrawal amount is $28,000 (the $4,000 Annual Withdrawal Allowance for the current Account Year plus the unused Annual Withdrawal Allowance of $4,000 for each of Account Years 1 through 6). The $80,000 full withdrawal is attributed first to the free withdrawal amount. The next $40,000 is withdrawn from the Purchase Payment made in Account Year 1 and is subject to the withdrawal charge. The remaining $12,000 exceeds the total of the free withdrawal amount plus all New Payments not previously withdrawn, so it is not subject to the withdrawal charge. (d) In Account Year 9, the free withdrawal amount is $68,000, calculated as follows. There are no Annual Withdrawal Allowances for Account Years 8 or 9 because there are no New Payments in those years. The $40,000 Purchase Payment made in Account Year 1 is now an Old Payment that constitutes a portion of the free withdrawal amount. In addition, the unused Annual Withdrawal Allowances of $4,000 for each of Account Years 1 through 7 are carried forward and available for use in Account Year 9. The $98,000 full withdrawal is attributed first to the free withdrawal amount. Because the remaining $30,000 is not withdrawn from New Payments, this part of the withdrawal also will not be subject to the withdrawal charge. PARTIAL WITHDRAWAL: Assume a single Purchase Payment of $40,000 is made on the Contract Date, no additional Purchase Payments are made, no partial withdrawals have been taken prior to the fifth Account Year, 87 and there are a series of three partial withdrawals made during the fifth Account Year of $9,000, $12,000, and $15,000.
HYPOTHETICAL PARTIAL FREE NEW WITHDRAWAL WITHDRAWAL ACCOUNT WITHDRAWAL WITHDRAWAL PAYMENTS CHARGE CHARGE VALUE AMOUNT AMOUNT WITHDRAWN PERCENTAGE AMOUNT ------------ ----------- ----------- ----------- --------------- ------------- (a) $ 64,000 $ 9,000 $ 20,000 $ 0 4.00% $ 0 (b) $ 56,000 $ 12,000 $ 11,000 $ 1,000 4.00% $ 40 (c) $ 40,000 $ 15,000 $ 0 $ 15,000 4.00% $ 600
(a) In the fifth Account Year, the free withdrawal amount is equal to $20,000 (the $4,000 Annual Withdrawal Allowance for the current year, plus the unused $4,000 for each of the Account Years 1 through 4). The partial withdrawal amount ($9,000) is less than the free withdrawal amount so no New Payments are withdrawn and no withdrawal charge applies. (b) Since a partial withdrawal of $9,000 was taken, the remaining free withdrawal amount is equal to $11,000. The $12,000 partial withdrawal will first be applied against the $11,000 free withdrawal amount. The remaining $1,000 will be withdrawn from the $40,000 New Payment, incurring a withdrawal charge of $40. (c) The free withdrawal amount is zero since the previous partial withdrawals have already used the free withdrawal amount. The entire partial withdrawal amount will result in New Payments being withdrawn and will incur a withdrawal charge. PART 2 -- FIXED ACCOUNT -- EXAMPLES OF THE MARKET VALUE ADJUSTMENT ("MVA") The MVA Factor is: N/12 1 + I ( -------- ) -1 1 + J + b
These examples assume the following: 1) The Guarantee Amount was allocated to a five year Guarantee Period with a Guaranteed Interest Rate of 6% or .06. 2) The date of surrender is two years from the Expiration Date (N = 24). 3) The value of the Guarantee Amount on the date of surrender is $11,910.16. 4) The interest earned in the current Account Year is $674.16. 5) No transfers or partial withdrawals affecting this Guarantee Amount have been made. 6) Withdrawal charges, if any, are calculated in the same manner as shown in the examples in Part 1. EXAMPLE OF A NEGATIVE MVA: Assume that on the date of surrender, the current rate (J) is 8% or .08 and the b factor is zero. N/12 1 + I The MVA factor = ( -------- ) -1 1 + J + b
24/12 1 + .06 = ( ------ ) -1 1 + .08 = (.981)(2) -1 = .963 -1 = - .037
88 The value of the Guarantee Amount less interest credited to the Guarantee Amount in the current Account Year is multiplied by the MVA factor to determine the MVA: ($11,910.16 - $674.16) X (-.037) = -$415.73 -$415.73 represents the MVA that will be deducted from the value of the Guarantee Amount before the deduction of any withdrawal charge. For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA would be ($2,000.00 - $674.16) X (-.037) = -$49.06. -$49.06 represents the MVA that will be deducted from the partial withdrawal amount before the deduction of any withdrawal charge. EXAMPLE OF A POSITIVE MVA: Assume that on the date of surrender, the current rate (J) is 5% or .05 and the b factor is zero. N/12 1 + I The MVA factor = ( -------- ) -1 1 + J + b
24/12 1 + .06 = ( ------ ) -1 1 + .05 = (1.010)(2) -1 = 1.019 -1 = .019
The value of the Guarantee Amount less interested credit to the Guarantee Amount in the current Account Year is multiplied by the MVA factor to determine the MVA ($11,910.16 - $674.16) X .019 = $213.48 $213.48 represents the MVA that would be added to the value of the Guarantee Amount before the deduction of any withdrawal charge. For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA would be ($2,000.00 - $674.16) X .019 = $25.19. $25.19 represents the MVA that would be added to the value of the partial withdrawal amount before the deduction of any withdrawal charge. 89 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) ANNUITY SERVICE MAILING ADDRESS: C/O RETIREMENT PRODUCTS AND SERVICES P.O. BOX 9133 BOSTON, MASSACHUSETTS 02117 TELEPHONE: Toll Free (888) 786-2435 In Massachusetts (617) 348-9600 GENERAL DISTRIBUTOR Clarendon Insurance Agency, Inc. One Sun Life Executive Park Wellesley Hills, Massachusetts 02481 AUDITORS Deloitte Touche LLP 125 Summer Street Boston, Massachusetts 02110 FUT II 5/99
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION Attached hereto and made a part hereof is the Statement of Additional Information dated May 1, 1999 for each of the following: MFS Regatta Platinum MFS Regatta Gold Futurity II May 1, 1999 MFS REGATTA PLATINUM VARIABLE AND FIXED ANNUITY STATEMENT OF ADDITIONAL INFORMATION SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F TABLE OF CONTENTS Calculation of Performance Data ................................................ Advertising and Sales Literature ............................................... Calculations ................................................................... Example of Variable Accumulation Unit Value Calculation.................... Example of Variable Annuity Unit Calculation .............................. Example of Variable Annuity Payment Calculation ........................... Calculation of Annuity Values ............................................. Distribution of the Contracts .................................................. Designation and Change of Beneficiary .......................................... Custodian ...................................................................... Financial Statements ........................................................... The Statement of Additional Information sets forth information which may be of interest to prospective purchasers of MFS Regatta Platinum Variable and Fixed Annuity Contracts (the "Contracts") issued by Sun Life Assurance Company of Canada (U.S.) (the "Company") in connection with Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") which is not included in the Prospectus dated May 1, 1999. This Statement of Additional Information should be read in conjunction with the Prospectus, a copy of which may be obtained without charge from the Company at its Annuity Service Mailing Address, c/o Sun Life Assurance Company of Canada (U.S.), Retirement Products and Services, P.O. Box 1024, Boston, Massachusetts 02103, or by telephoning (617) 348-9600 or (800)-752-7215. The terms used in this Statement of Additional Information have the same meanings as in the Prospectus. - -------------------------------------------------------------------------------- THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE PURCHASERS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS. -2- CALCULATION OF PERFORMANCE DATA STANDARDIZED AVERAGE ANNUAL TOTAL RETURN: The table below shows, for various Sub-Accounts of the Variable Account, the Standardized Average Annual Total Return for the stated periods (or shorter period indicated in the note below), based upon a hypothetical initial Purchase Payment of $1,000, calculated in accordance with the formula set out below. For purposes of determining these investment results, the actual investment performance of each Series of MFS/Sun Life Series Trust is reflected from the date the Variable Account was established, or such later date that the Series commenced operations (the "Commencement Date"), although the Contracts have been offered only since _______, 1998. No information is shown for the Bond Series, Equity Income Series, Massachusetts Investors Growth Stock Series, New Discovery Series, Research International Series or Strategic Income Series as such Series had been in operation for less than one year as of December 31, 1998. STANDARDIZED AVERAGE ANNUAL TOTAL RETURN PERIOD ENDING DECEMBER 31, 1998
1 YEAR 5 YEAR 10 YEAR COMMENCEMENT PERIOD PERIOD PERIOD LIFE DATE ----------- ----------- ----------- ---------------- ---------------------- Capital Appreciation Series............. 20.73% 17.88% -- 15.99% July 13, 1989 Capital Opportunities Series*........... 19.14% -- -- 21.94% June 3, 1996 Emerging Growth Series.................. 25.81% -- -- 24.67% May 1, 1995 Global Asset Allocation Series (1)...... (0.62)% -- -- 10.92% November 7, 1994 Global Governments Series (2)........... 7.89% 3.72% -- 7.14% July 13, 1989 Global Growth Series (3)................ 6.97% 10.07% -- 11.15% November 16, 1993 Global Total Return Series (4).......... 10.71% -- -- 13.19% November 7, 1994 Government Securities Series............ 1.31% 4.59% -- 6.51% July 13, 1989 High Yield Series....................... (6.24)% 5.73% -- 7.68% July 13, 1989 International Growth Series*............ (4.96)% -- -- (3.36)% June 3, 1996 International Growth and Income Series................................. 13.93% -- -- 7.53% October 2, 1995 Managed Sectors Series.................. 4.77% 14.40% -- 13.39% July 13, 1989 Massachusetts Investors Trust Series (5) 15.58% 20.52% -- 15.89% July 13, 1989 MFS/Foreign & Colonial Emerging Markets Equity Series*......................... (34.46)% -- -- (11.85)% June 5, 1996 Money Market Series..................... (2.06)% 2.80% -- 3.46% July 13, 1989 Research Series......................... 15.69% -- -- 22.49% November 7, 1994 Research Growth and Income Series....... 14.44% -- -- 14.86% May 12, 1997 Total Return Series..................... 3.93% 11.79% -- 10.95% July 13, 1989 Utilities Series........................ 9.82% 16.59% -- 16.13% November 16, 1993
- ------------------------ *Actual returns, not annualized. (1) Formerly, the World Asset Allocation Series. (2) Formerly, the World Governments Series. (3) Formerly, the World Growth Series. (4) Formerly, the World Total Return Series. (5) Formerly, the Conservative Growth Series. The length of the period and the last day of each period used in the above table are set out in the table heading and in the footnotes above. The Average Annual Total Return for each period was determined by finding the average annual compounded rate of return over each period that would equate the initial amount invested to the ending redeemable value for that period, in accordance with the following formula: n P(l + T) = ERV Where: P = a hypothetical initial Purchase Payment of $1,000 T = average annual total return for the period n = number of years ERV = redeemable value (as of the end of the period) of a hypothetical $1,000 Purchase Payment made at the beginning of the 1-year, 5-year, or 10-year period (or fractional portion thereof) The formula assumes that: 1) all recurring fees have been deducted from the Participant's Account; 2) all applicable non-recurring Contract charges are deducted at the end of the period, and 3) there will be a full surrender at the end of the period. The $35 annual Account Fee will be allocated among the Sub-Accounts so that each Sub-Account's allocated portion of the Account Fee is proportional to the percentage of the number of Individual Contracts and Certificates that have amounts allocated to that Sub-Account. Because the impact of Account Fees on a particular Contract may differ from those assumed in the computation due to differences between actual allocations and the assumed ones, the total return that would have been experienced by an actual Contract over these same time periods may have been different from that shown above. -3- NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN: The table below shows, for various Sub-Accounts of the Variable Account, the Non-Standardized Average Annual Total Return for the stated periods (or shorter period indicated in the note below), based upon a hypothetical initial Purchase Payment of $1,000, calculated in accordance with the formula set out under "Standardized Average Annual Total Return." For purposes of determining these investment results, the actual investment performance of each Series of MFS/Sun Life Series Trust is reflected from the date such Series commenced operations ("Inception"), although the Contracts have been offered only since __________, 1998. No information is shown for the Bond Series, Equity Income Series, Massachusetts Investors Growth Stock Series, New Discovery Series, Research International Series or Strategic Income Series as such Series had been in operation less than one year as of December 31, 1998. NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN PERIOD ENDING DECEMBER 31, 1998
1 YEAR 5 YEAR 10 YEAR DATE OF PERIOD PERIOD PERIOD LIFE* INCEPTION ----------- ----------- ----------- ----------- ---------------------- Capital Appreciation Series............. 20.73% 17.88% 18.36% 16.04% August 13, 1985 Capital Opportunities Series**.......... 19.14% -- -- 21.94% June 3, 1996 Emerging Growth Series.................. 25.81% -- -- 24.67% May 1, 1995 Government Securities Series............ 1.31% 4.59% 6.99% 7.16% August 12, 1985 High Yield Series....................... (6.24)% 5.73% 7.86% 8.02% August 13, 1985 International Growth Series**........... (4.96)% -- -- (3.36)% June 3, 1996 International Growth and Income Series.. 13.93% -- -- 7.53% October 2, 1995 Managed Sectors Series.................. 4.77% 14.40% 15.83% 15.28% May 27, 1988 Massachusetts Investors Trust Series.... 15.58% 20.52% 17.32% 14.34% December 5, 1986 MFS/Foreign & Colonial Emerging Markets Equity Series**........................ (34.46)% -- -- (11.85)% June 5, 1996 Money Market Series..................... (2.06)% 2.80% 3.67% 3.93% August 29, 1985 Research Series......................... 15.69% -- -- 22.49% November 7, 1994 Research Growth and Income Series....... 14.44% -- -- 14.86% May 12, 1997 Total Return Series..................... 3.93% 11.79% 11.58% 11.34% May 16, 1988 Utilities Series........................ 9.82% 16.59% -- 16.13% November 16, 1993 Global Asset Allocation Series.......... (0.62)% -- -- 10.92% November 7, 1994 Global Governments Series............... 7.89% 3.72% 6.91% 6.81% May 16, 1988 Global Growth Series.................... 6.97% 10.07% -- 11.15% November 16, 1993 Global Total Return Series.............. 10.71% -- -- 13.19% November 7, 1994
- ------------------------ *From commencement of investment operations **Actual returns, not annualized. -4- NON-STANDARDIZED COMPOUND GROWTH RATE The table below shows, for various Sub-Accounts of the Variable Account, the Non-Standardized Compound Growth Rate for the stated periods (or shorter period indicated in the note below), based upon a hypothetical investment, calculated in accordance with the formula set out under "Standardized Average Annual Return," except that no withdrawal charges or annual Account Fees have been deducted. If withdrawal charges or Account Fees were reflected, returns would be lower (see "Standardized Average Annual Total Return" and "Non Standardized Average Annual Return"). For purposes of determining these investment results, the actual investment performance of each Series of MFS/Sun Life Series Trust is reflected from the date such Series commenced operations ("Inception"), although the Contracts have been offered only since ________, 1998. No information is shown for the Bond Series, Equity Income Series, Massachusetts Investors Growth Stock Series, New Discovery Series, Research International Series or Strategic Income Series as such Series had been in operation less than one year as of December 31, 1998. NON-STANDARDIZED COMPOUND GROWTH RATE PERIOD ENDING DECEMBER 31, 1998
1 YEAR 5 YEAR 10 YEAR DATE OF PERIOD PERIOD PERIOD LIFE* INCEPTION ----------- ----------- ----------- ----------- ---------------------- Capital Appreciation Series............. 26.96% 18.42% 18.45% 16.12% August 13, 1985 Capital Opportunities Series**.......... 25.23% -- -- 23.45% June 3, 1996 Emerging Growth Series.................. 32.04% -- -- 25.56% May 1, 1995 Government Securities Series............ 7.26% 5.23% 7.11% 7.27% August 12, 1985 High Yield Series....................... (0.76)% 6.40% 7.99% 8.14% August 13, 1985 International Growth Series**........... 0.53% -- -- (1.94)% June 3, 1996 International Growth and Income Series.. 19.96% -- -- 8.82% October 2, 1995 Managed Sectors Series.................. 10.80% 14.97% 15.91% 15.36% May 27, 1988 Massachusetts Investors Trust Series.... 22.15% 21.05% 17.42% 14.45% December 5, 1986 MFS/Foreign & Colonial Emerging Markets Equity Series**........................ (30.90)% -- -- (10.75)% June 5, 1996 Money Market Series..................... 3.60% 3.39% 3.80% 4.06% August 29, 1985 Research Series......................... 21.95% -- -- 23.15% November 7, 1994 Research Growth and Income Series....... 20.51% -- -- 18.27% May 12, 1997 Total Return Series..................... 10.23% 12.44% 11.70% 11.47% May 16, 1988 Utilities Series........................ 15.99% 17.14% -- 16.69% November 16, 1993 Global Asset Allocation Series.......... 5.10% -- -- 11.70% November 7, 1994 Global Governments Series............... 13.90% 4.34% 7.02% 6.92% May 16, 1988 Global Growth Series.................... 12.99% 10.72% -- 11.75% November 16, 1993 Global Total Return Series.............. 16.74% -- -- 13.93% November 7, 1994
- ------------------------ *From commencement of investment operations **Actual returns, not annualized. ADDITIONAL NON-STANDARDIZED INVESTMENT PERFORMANCE: The Variable Account may illustrate its results over various periods and compare its results to indices and other variable annuities in sales materials including advertisements, brochures and sports. Such results may be computed on a "cumulative" and/or "annualized" basis. "Cumulative" quotations are arrived at by calculating the change in the Accumulation Unit value of a Sub-Account between the first and last day of the base period being measured, and expressing the difference as a percentage of the Accumulation Unit value at the beginning of the base period. "Annualized" quotations (described in the following table as "Compound Growth Rate") are calculated by applying a formula which determines the level rate of return which, if earned over the entire base period, would produce the cumulative return. -5- ADVERTISING AND SALES LITERATURE As set forth in the Prospectus, the Company may refer to the following organizations (and others) in its marketing materials: A.M. BEST'S RATING SYSTEM is designed to evaluate the various factors affecting the overall performance of an insurance company in order to provide an opinion as to an insurance company's relative financial strength and ability to meet its contractual obligations. The procedure includes both a quantitative and qualitative review of each company. DUFF & PHELPS CREDIT RATING Company's Insurance Company Claims Paying Ability Rating is an independent evaluation by a nationally accredited rating organization of an insurance company's ability to meet its future obligations under the contracts and products it sells. The rating takes into account both quantitative and qualitative factors. LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a publisher of statistical data covering the investment company industry in the United States and overseas. Lipper is recognized as the leading source of data on open-end and closed-end funds. Lipper currently tracks the performance of over 5,000 investment companies and publishes numerous specialized reports, including reports on performance and portfolio analysis, fee and expense analysis. STANDARD & POOR's insurance claims-paying ability rating is an opinion of an operating insurance company's financial capacity to meet obligations of its insurance policies in accordance with their terms. VARDS (Variable Annuity Research Data Service) provides a comprehensive guide to variable annuity contract features and historical fund performance. The service also provides a readily understandable analysis of the comparative characteristics and market performance of funds inclusive in variable contracts. MOODY'S Investors Services, Inc.'s insurance claims-paying rating is a system of rating an insurance company's financial strength, market leadership, and ability to meet financial obligations. The purpose of Moody's ratings is to provide investors with a simple system of gradation by which the relative quality of insurance companies may be noted. STANDARD & POOR'S INDEX - broad-based measurement of changes in stock-market conditions based on the average performance of 500 widely held common stocks; commonly known as the Standard & Poor's 500 (S&P 500). The selection of stocks, their relative weightings to reflect differences in the number of outstanding shares, and publication of the index itself are services of Standard & Poor's Corporation, a financial advisory, securities rating, and publishing firm. The index tracks 400 industrial company stocks, 20 transportation stocks, 40 financial company stocks, and 40 public utilities. -6- NASDAQ-OTC Price Index - this index is based on the National Association of Securities Dealers Automated Quotations (NASDAQ) and represents all domestic over-the-counter stocks except those traded on exchanges and those having only one market maker, a total of some 3,500 stocks. It is market valueweighted and was introduced with a base of 100.00 on February 5, 1971. DOW JONES INDUSTRIAL AVERAGE (DJIA) - price-weighted average of 30 actively traded blue chip stocks, primarily industrials, but including American Express Company and American Telephone and Telegraph Company. Prepared and Published by Dow Jones & Company, it is the oldest and most widely quoted of all the market indicators. The average is quoted in points, not dollars. MORNINGSTAR, Inc. is an independent financial publisher offering comprehensive statistical and analytical coverage of open-end and closed-end funds and variable annuities. This coverage for mutual funds includes, among other information, performance analysis rankings, risk rankings (e.g. aggressive, moderate or conservative), and "style box" matrices. Style box matrices display, for equity funds, the investment philosophy and size of the companies in which the fund invests and, for fixed-income funds, interest rate sensitivity and credit quality of the investment instruments. IBBOTSON ASSOCIATES, Inc. is a consulting firm that provides a variety of historical data, including total return, capital appreciation and income, on the stock market as well as other investment asset classes, and inflation. This information will be used primarily for comparative purposes and to illustrate general financial planning principles. In its advertisements and other sales literature for the Variable Account and the Series Fund, the Company intends to illustrate the advantages of the Contracts in a number of ways: DOLLAR COST AVERAGING ILLUSTRATIONS. These illustrations will generally discuss the price-leveling effect of making regular investments in the same Sub-Accounts over a period of time, to take advantage of the trends in market prices of the portfolio securities purchased by those Sub-Accounts. SYSTEMATIC WITHDRAWAL PROGRAM. A service provided by the Company, through which a Participant may take any distribution allowed by Internal Revenue Code Section 401 (a) (9) in the case of Qualified Contracts, or permitted under Internal Revenue Code Section 72 in the case of Non-Qualified Contracts, by way of a series of partial withdrawals. Withdrawals under this program may be fully or partially includible in income and may be subject to a 10% penalty tax. Consult your tax advisor. THE COMPANY'S OR MFS' CUSTOMERS. Sales literature for the Variable Account and the Funds may refer to the number of clients which they serve. THE COMPANY'S OR MFS' ASSETS, SIZE. The Company may discuss its general financial condition (see, for example, the references to Standard & Poor's, Duff & Phelps and A.M. Best Company above); it may refer to its assets; it may also discuss its -7- relative size and/or ranking among companies in the industry or among any sub-classification of those companies, based upon recognized evaluation criteria. For example, at December 31, 1997 the Company was the 37th largest U.S. life insurance company based upon overall assets and its ultimate parent company, Sun Life Assurance Company of Canada, was the 21st largest. COMPOUND INTEREST ILLUSTRATIONS. These will emphasize several advantages of the variable annuity contract. For example, but not by way of limitation, the literature may emphasize the potential savings through tax deferral; the potential advantage of the Variable Account over the Fixed Account; and the compounding effect when a participant makes regular deposits to his or her account. The Company may use hypothetical illustrations of the benefits of tax deferral, including but not limited to the following chart: The chart below assumes an initial investment of $10,000 which remains fully invested for the entire time period, an 8% annual return, and a 33% combined federal and state income tax rate. It compares how three different investments might fare over 10, 20, and 30 years. The first example illustrates an investment in a non-tax-deferred account and assumes that taxes are paid annually out of that account. The second example illustrates how the same investment would grow in a tax-deferred investment, such as an annuity. And the third example illustrates the net value of the tax-deferred investment after paying taxes on the full account value.
- -------------------------------------------------------------------------------- 10 YEARS 20 YEARS 30 YEARS - -------------------------------------------------------------------------------- Non-Tax-Deferred Account $16,856 $28,413 $ 47,893 - -------------------------------------------------------------------------------- Tax-Deferred Account $21,589 $46,610 $100,627 - -------------------------------------------------------------------------------- Tax-Deferred Account After $17,765 $34,528 $ 70,720 - -------------------------------------------------------------------------------- Paying Taxes - --------------------------------------------------------------------------------
THIS ILLUSTRATION IS HYPOTHETICAL AND DOES NOT REPRESENT THE PROJECTED PERFORMANCE OF THE MFS REGATTA PLATINUM VARIABLE ANNUITY OR ANY OF ITS INVESTMENT OPTIONS. THE ILLUSTRATION DOES NOT REFLECT THE DEDUCTION OF ANY CHARGES OR FEES RELATED TO PORTFOLIO MANAGEMENT, MORTALITY AND EXPENSE, OR ACCOUNT ADMINISTRATION. TAXES ON EARNINGS WITHIN AN ANNUITY ARE DUE UPON WITHDRAWAL. WITHDRAWALS MAY ALSO BE SUBJECT TO SURRENDER CHARGES AND, IF MADE PRIOR TO AGE 59 1/2, A 10% FEDERAL PENALTY TAX. -8- CALCULATIONS EXAMPLE OF VARIABLE ACCUMULATION UNIT VALUE CALCULATION Suppose the net asset value of a Series Fund share at the end of the current valuation period is $18.38; at the end of the immediately preceding valuation period was $18.32; the Valuation Period is one day; and no dividends or distributions caused Series Fund shares to go "ex-dividend" during the current Valuation Period. $18.38 divided by $18.32 is 1.00327511. Subtracting the one day risk factor for mortality and expense risks and the administrative expense charge of .00003863 (the daily equivalent of the current maximum charge of 1.40% on an annual basis) gives a net investment factor of 1.00323648. If the value of the variable accumulation unit for the immediately preceding valuation period had been 14.5645672, the value for the current valuation period would be 14.6117051 (14.5645672 X 1.00323648). EXAMPLE OF VARIABLE ANNUITY UNIT CALCULATION Suppose the circumstances of the first example exist, and the value of an annuity unit for the immediately preceding valuation period had been 12.3456789. If the first variable annuity payment is determined by using an annuity payment based on an assumed interest rate of 3% per year, the value of the annuity unit for the current valuation period would be 12.3846325 (12.3456789 X 1.00323648 (the Net Investment Factor) X 0.99991902). 0.99991902 is the factor, for a one day Valuation Period, that neutralizes the assumed interest rate of 3% per year used to establish the Annuity Payment Rates found in certain Contracts. (The factor that neutralizes the assumed interest rate of 3% per year used to establish the Annuity Payment Rates found in other Contracts is 0.99991902). EXAMPLE OF VARIABLE ANNUITY PAYMENT CALCULATION Suppose that a Participant Account is credited with 8,765.4321 variable accumulation units of a particular Sub-Account but is not credited with any fixed accumulation units; that the variable accumulation unit value and the annuity unit value for the particular Sub-Account for the valuation period which ends immediately preceding the annuity commencement date are 14.5645672 and 12.3456789 respectively; that the annuity payment rate for the age and option elected is $6.78 per $1,000; and that the annuity unit value on the day prior to the second variable annuity payment date is 12.3846325. The first variable annuity payment would be $865.57 (8,765.4321 X 14.5845672 X 6.78 divided by 1,000). The number of annuity units credited would be 70.1112 ($865.57 divided by 12.3456789) and the second variable annuity payment would be $868.28 (70.1112 X 12.3846325). CALCULATION OF ANNUITY VALUES The Fixed Annuity Unit Value for each Sub-Account is $10.00 for the first Valuation Period of the Sub-Account. For subsequent Valuation periods, the Variable Annuity Unit Value for the Sub-Account is the previous Variable Annuity Unit Value times the Net Investment Factor for the Sub-Account. DISTRIBUTION OF THE CONTRACTS We offer the Contracts on a continuous basis. The Contracts are sold by licensed insurance agents in those states where the Contracts may be lawfully sold. Such agents will be registered representatives of broker-dealers registered under the Securities Exchange Act of 1934 who are members of the National Association of Securities Dealers, Inc. and who have entered into distribution agreements with the Company and the general distributor and principal underwriter of the Contracts, Clarendon Insurance Agency, Inc. ("Clarendon"), One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. Clarendon is a wholly-owned subsidiary of the Company. Clarendon is registered with the SEC under the Securities Exchange Act of 1934 as broker-dealer and is a member of the National Association of Securities Dealers, Inc. Clarendon also acts as the general distributor of certain other annuity contracts issued by the Company and its wholly-owned subsidiary, Sun Life Insurance and Annuity Company of New York, and variable life insurance contracts issued by the Company. Commissions and other distribution compensation will be paid by the Company to the selling agents and will not be more than 7.34% of Purchase Payments. In addition, after the first Account Year, broker-dealers who have entered into distribution agreements with the Company may receive an annual renewal commission of no more than 1.00% of the Participant's Account Value. In addition to commissions, the Company may, from time to time, pay or allow additional promotional incentives, in the form of cash or other compensation. The Company reserves the right to offer these additional incentives only to certain -9- broker-dealers that sell or are expected to sell during specified time periods certain minimum amounts of the Contracts or Certificates or other contracts offered by the Company. Promotional incentives may change at any time. Commissions will not be paid with respect to Participant Accounts established for the personal account of employees of the Company or any of its affiliates, or of persons engaged in the distribution of the Contracts, or of immediate family members of such employees or persons. In addition, commissions may be waived or reduced in connection with certain transactions described in the Prospectus under the heading "Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest Rates." DESIGNATION AND CHANGE OF BENEFICIARY The Beneficiary designation in the Application will remain in effect until changed. Subject to the rights of an irrevocably designated Beneficiary, you may change or revoke the designation of Beneficiary by filing the change or revocation with us in the form we require. The change or revocation will not be binding on us until we receive it. When we receive it, the change or revocation will be effective as of the date on which it was signed, but the change or revocation will be without prejudice to us on account of any payment we make or any action we take before receiving the change or revocation. Please refer to the terms of your particular retirement plan and any applicable legislation for any restrictions on the beneficiary designation. CUSTODIAN We are the Custodian of the assets of the Variable Account. We will purchase Series Fund shares at net asset value in connection with amounts allocated to the Sub-Accounts in accordance with your instructions, and we will redeem Series Fund shares at net asset value for the purpose of meeting the contractual obligations of the Variable Account, paying charges relative to the Variable Account or making adjustments for annuity reserves held in the Variable Account. FINANCIAL STATEMENTS The Financial Statements of Sun Life of Canada (U.S.) Variable Account F for the year ended December 31, 1998 included in this Statement of Additional Information have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. -10- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF CONDITION -- December 31, 1998
Assets: Investment in MFS/Sun Life Series Trust: Shares Cost Value ----------- -------------- -------------- Bond Series ("BDS").............................................................. 1,833,052 $ 19,308,754 $ 19,594,756 Capital Appreciation Series ("CAS").............................................. 32,535,812 1,207,116,273 1,494,454,468 Capital Opportunities Series ("COS")............................................. 11,033,845 154,891,892 187,374,642 Conservative Growth Series ("CGS")............................................... 45,143,592 1,273,801,516 1,726,636,223 Emerging Growth Series ("EGS")................................................... 30,106,934 505,953,776 700,846,932 Equity Income Series ("EIS")..................................................... 808,548 7,896,401 8,491,757 MFS/Foreign & Colonial Emerging Markets Equity Series ("FCE").................... 2,266,785 22,335,481 16,977,985 International Growth Series ("FCI").............................................. 3,626,435 35,824,144 35,304,699 International Growth and Income Series ("FCG")................................... 5,453,761 65,412,844 71,908,458 Government Securities Series ("GSS")............................................. 29,861,826 385,880,145 399,987,008 High Yield Series ("HYS")........................................................ 31,251,222 294,351,362 286,371,075 Managed Sectors Series ("MSS")................................................... 11,831,026 317,435,697 334,165,044 Massachusetts Investors Growth Stock Series ("MIS").............................. 6,724,723 69,779,820 81,191,995 Money Market Series ("MMS")...................................................... 417,135,145 417,135,145 417,135,145 New Discovery Series ("NWD")..................................................... 1,250,089 11,775,479 13,279,492 Research Series ("RES").......................................................... 41,174,957 725,772,331 947,967,793 Research Growth & Income Series ("RGS").......................................... 2,708,382 32,789,497 36,276,888 Research International Series ("RSS")............................................ 373,636 3,392,628 3,519,310 Strategic Income Series ("SIS").................................................. 774,644 7,563,923 7,781,098 Total Return Series ("TRS")...................................................... 85,415,374 1,568,357,466 1,816,228,173 Utilities Series ("UTS")......................................................... 12,363,259 176,926,102 211,219,612 World Asset Allocation Series ("WAA")............................................ 8,540,141 119,915,782 123,362,461 World Governments Series ("WGS")................................................. 7,341,822 83,199,514 89,769,321 World Growth Series ("WGR")...................................................... 16,637,922 227,100,556 260,469,628 World Total Return Series ("WTR")................................................ 5,736,216 80,641,108 95,255,576 -------------- -------------- $7,814,557,636 $9,385,569,539 -------------- -------------- Receivable from Sponsor......................................................................................... 124,848 -------------- Net Assets................................................................................................ $9,385,694,387 -------------- --------------
Applicable to Owners of Reserve Deferred Variable Annuity Contracts for ------------------------------------- Variable NET ASSETS APPLICABLE TO CONTRACT OWNERS: Units Unit Value Value Annuities Total ---------- ---------- ------------ ---------- -------------- MFS REGATTA CONTRACTS: CAS -- Level 1......................... 464,349 $38.0799 $ 17,690,821 $ 128,185 $ 17,819,006 CAS -- Level 2......................... 9,053,993 15.3711 139,037,017 502,016 139,539,033 GSS -- Level 1......................... 325,241 17.8992 5,834,948 85,153 5,920,101 GSS -- Level 2......................... 2,656,978 11.4928 30,519,539 186,149 30,705,688 HYS -- Level 1......................... 73,632 21.8836 1,617,626 4,912 1,622,538 HYS -- Level 2......................... 1,320,379 11.1015 14,660,653 65,418 14,726,071 MSS -- Level 1......................... 196,463 30.2227 5,814,583 64,763 5,879,346 MSS -- Level 2......................... 2,730,897 13.6177 37,269,491 76,615 37,346,106 MMS -- Level 1......................... 268,447 13.6495 3,851,232 27,783 3,879,015 MMS -- Level 2......................... 3,722,758 10.7906 39,934,531 3,596 39,938,127 TRS -- Level 1......................... 898,137 26.5642 23,875,313 222,411 24,097,724 TRS -- Level 2......................... 12,506,430 13.3189 166,507,969 1,042,925 167,550,894 WGS -- Level 1......................... 89,328 18.6916 1,681,850 39,205 1,721,055 WGS -- Level 2......................... 834,010 11.2037 9,329,126 36,551 9,365,677 ------------ ---------- -------------- $497,624,699 $2,485,682 $ 500,110,381 ------------ ---------- --------------
See notes to financial statements -11- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF CONDITION -- December 31, 1998 -- continued
Applicable to Owners of Reserve Deferred Variable Annuity Contracts for NET ASSETS APPLICABLE TO CONTRACT OWNERS --------------------------------------- Variable (CONTINUED): Units Unit Value Value Annuities Total ---------- ---------- -------------- ---------- -------------- MFS REGATTA GOLD CONTRACTS: BDS.................................... 1,182,239 $10.5921 $ 12,523,169 $ 148,957 $ 12,672,126 CAS.................................... 37,500,481 34.7871 1,304,369,755 6,496,774 1,310,866,529 COS.................................... 10,262,282 17.2085 176,609,581 303,057 176,912,638 CGS.................................... 51,880,765 31.7109 1,645,157,266 5,065,107 1,650,222,373 EGS.................................... 28,900,957 23.0408 665,946,545 1,249,399 667,195,944 EIS.................................... 528,238 10.4065 5,496,893 -- 5,496,893 FCE.................................... 2,147,348 7.4615 16,021,601 19,295 16,040,896 FCI.................................... 3,290,043 9.5047 31,272,468 50,802 31,323,270 FCG.................................... 5,214,558 13.1538 68,597,649 89,079 68,686,728 GSS.................................... 23,218,234 15.0941 350,499,319 1,093,255 351,592,574 HYS.................................... 14,190,817 18.0207 255,739,789 889,807 256,629,596 MSS.................................... 11,245,144 25.4406 285,790,341 972,779 286,763,120 MIS.................................... 4,121,518 11.9635 49,306,625 88,325 49,394,950 MMS.................................... 29,387,086 12.2282 359,428,914 1,587,715 361,016,629 NWD.................................... 794,859 10.5258 8,366,403 37,385 8,403,788 RES.................................... 38,553,986 23.7119 913,668,029 2,442,962 916,110,991 RGS.................................... 2,408,676 13.1605 31,700,558 131,422 31,831,980 RSS.................................... 190,267 9.3330 1,776,592 -- 1,776,592 SIS.................................... 622,914 9.9530 6,199,328 -- 6,199,328 TRS.................................... 71,102,020 22.1273 1,573,134,778 4,410,143 1,577,544,921 UTS.................................... 9,023,102 22.0489 198,939,550 710,512 199,650,062 WAA.................................... 7,576,691 15.8203 119,890,942 617,113 120,508,055 WGS.................................... 5,048,219 15.2422 76,964,930 444,193 77,409,123 WGR.................................... 14,522,129 17.6676 256,577,775 663,609 257,241,384 WTR.................................... 5,354,633 17.1741 91,961,363 521,228 92,482,591 -------------- ---------- -------------- $8,505,940,163 $28,032,918 $8,533,973,081 -------------- ---------- --------------
See notes to financial statements -12- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF CONDITION -- December 31, 1998 -- continued
Applicable to Owners of Reserve Deferred Variable Annuity Contracts for NET ASSETS APPLICABLE TO CONTRACT OWNERS --------------------------------------- Variable (CONTINUED): Units Unit Value Value Annuities Total ---------- ---------- -------------- ---------- -------------- MFS REGATTA CLASSIC CONTRACTS: BDS.................................... 35,123 $10.4200 $ 365,971 $ -- $ 365,971 CAS.................................... 465,812 15.2806 7,116,057 -- 7,116,057 COS.................................... 277,518 15.9773 4,429,393 -- 4,429,393 CGS.................................... 1,213,193 15.7220 19,066,338 701 19,067,039 EGS.................................... 959,802 15.2416 14,625,520 -- 14,625,520 EIS.................................... 12,113 10.6318 128,778 -- 128,778 FCE.................................... 43,654 7.8620 343,375 -- 343,375 FCI.................................... 83,820 9.8139 822,725 -- 822,725 FCG.................................... 90,582 12.7274 1,152,339 -- 1,152,339 GSS.................................... 297,310 11.5012 3,424,501 -- 3,424,501 HYS.................................... 342,363 11.2212 3,840,819 -- 3,840,819 MSS.................................... 140,324 13.2363 1,856,704 -- 1,856,704 MIS.................................... 232,788 11.9830 2,790,662 -- 2,790,662 MMS.................................... 270,417 10.7995 2,919,832 -- 2,919,832 NWD.................................... 29,182 10.5430 307,881 -- 307,881 RES.................................... 872,289 14.3354 12,502,110 -- 12,502,110 RGS.................................... 33,882 12.9744 439,317 -- 439,317 RSS.................................... 2,234 11.0101 24,596 -- 24,596 SIS.................................... 2,577 9.8850 25,477 -- 25,477 TRS.................................... 1,731,292 13.1773 22,813,315 1,386 22,814,701 UTS.................................... 178,136 14.8587 2,640,990 -- 2,640,990 WAA.................................... 53,167 11.5822 616,156 -- 616,156 WGS.................................... 40,074 11.4588 459,164 -- 459,164 WGR.................................... 121,297 12.8959 1,563,449 -- 1,563,449 WTR.................................... 91,253 13.0681 1,192,112 723 1,192,835 -------------- ---------- -------------- $ 105,467,581 $ 2,810 $ 105,470,391 -------------- ---------- --------------
See notes to financial statements -13- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF CONDITION -- December 31, 1998 -- continued
Applicable to Owners of Deferred Variable Annuity Contracts Reserve for NET ASSETS APPLICABLE TO CONTRACT OWNERS ------------------------------------- Variable (CONTINUED): Units Unit Value Value Annuities Total -------- ---------- -------------- ----------- -------------- MFS REGATTA PLATINUM CONTRACTS: BDS.................................... 628,000 $10.4201 $ 6,543,991 $ -- $ 6,543,991 CAS.................................... 1,683,164 11.3405 19,087,857 21,268 19,109,125 COS.................................... 556,955 10.8048 6,017,955 -- 6,017,955 CGS.................................... 5,331,018 10.7939 57,543,942 58,386 57,602,328 EGS.................................... 1,651,404 11.5819 19,126,029 -- 19,126,029 EIS.................................... 272,362 10.5234 2,866,086 -- 2,866,086 FCE.................................... 72,586 8.1616 592,467 -- 592,467 FCI.................................... 338,938 9.3254 3,160,703 -- 3,160,703 FCG.................................... 199,346 10.3378 2,060,785 -- 2,060,785 GSS.................................... 816,102 10.4116 8,497,341 -- 8,497,341 HYS.................................... 1,000,705 9.5030 9,509,687 9,324 9,519,011 MSS.................................... 211,044 10.5861 2,234,121 21,614 2,255,735 MIS.................................... 2,428,134 11.9094 28,917,948 87,345 29,005,293 MMS.................................... 886,479 10.1878 9,031,808 119,936 9,151,744 NWD.................................... 436,178 10.4124 4,541,543 23,912 4,565,455 RES.................................... 1,751,713 11.0189 19,301,999 96,452 19,398,451 RGS.................................... 387,080 10.3415 4,002,882 -- 4,002,882 RSS.................................... 181,131 9.4845 1,718,122 -- 1,718,122 SIS.................................... 157,634 9.8713 1,556,293 -- 1,556,293 TRS.................................... 2,318,847 10.2907 23,862,327 210,689 24,073,016 UTS.................................... 819,649 10.9233 8,953,383 10,545 8,963,928 WAA.................................... 228,839 9.7081 2,221,401 -- 2,221,401 WGS.................................... 76,270 11.2639 858,944 -- 858,944 WGR.................................... 162,856 10.2820 1,674,403 -- 1,674,403 WTR.................................... 152,857 10.4567 1,598,349 697 1,599,046 -------------- ----------- -------------- $ 245,480,366 $ 660,168 $ 246,140,534 -------------- ----------- -------------- Net Assets............................. $9,354,512,809 $31,181,578 $9,385,694,387 -------------- ----------- -------------- -------------- ----------- --------------
See notes to financial statements -14- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF OPERATIONS -- Year Ended December 31, 1998
BDS CAS COS CGS Sub-Account* Sub-Account Sub-Account Sub-Account --------------- ------------ ------------ ------------- INCOME AND EXPENSES: Dividend income and capital gain distributions received.......... $ -- $145,840,372 $ 5,578,765 $ 93,714,906 Mortality and expense risk charges......................... (73,456) (15,736,721) (1,733,280) (17,202,966) Distribution expense charges..... -- (84,682) -- -- Administrative expense charges... (8,815) (1,803,725) (207,994) (2,064,356) --------------- ------------ ------------ ------------- Net investment income (loss)... $ (82,271) $128,215,244 $ 3,637,491 $ 74,447,584 --------------- ------------ ------------ ------------- REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains (losses) on investment transactions Proceeds from sales............ $5,147,887 $333,053,338 $ 18,663,825 $ 67,989,586 Cost of investments sold....... (4,931,477) (266,350,843) (13,493,338) (34,336,835) --------------- ------------ ------------ ------------- Net realized gains (losses).................... $ 216,410 $ 66,702,495 $ 5,170,487 $ 33,652,751 --------------- ------------ ------------ ------------- Net unrealized appreciation (depreciation) on investments End of year.................... $ 286,002 $287,338,195 $ 32,482,750 $ 452,834,707 Beginning of year.............. -- 165,968,995 11,851,082 285,383,733 --------------- ------------ ------------ ------------- Change in unrealized appreciation (depreciation).............. $ 286,002 $121,369,200 $ 20,631,668 $ 167,450,974 --------------- ------------ ------------ ------------- Realized and unrealized gains (losses)...................... $ 502,412 $188,071,695 $ 25,802,155 $ 201,103,725 --------------- ------------ ------------ ------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS................... $ 420,141 $316,286,939 $ 29,439,646 $ 275,551,309 --------------- ------------ ------------ ------------- --------------- ------------ ------------ ------------- EGS EIS FCE Sub-Account Sub-Account* Sub-Account ------------- ------------ ------------ INCOME AND EXPENSES: Dividend income and capital gain distributions received.......... $ 18,895,299 $-- $ 747,426 Mortality and expense risk charges......................... (6,840,338) (28,468) (249,740) Distribution expense charges..... -- -- -- Administrative expense charges... (820,840) (3,416) (29,969) ------------- ------------ ------------ Net investment income (loss)... $ 11,234,121 $(31,884) $ 467,717 ------------- ------------ ------------ REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains (losses) on investment transactions Proceeds from sales............ $ 67,761,609 3,$017,698 $ 16,258,903 Cost of investments sold....... (45,241,707) (3,135,184) (20,682,560) ------------- ------------ ------------ Net realized gains (losses).................... $ 22,519,902 ($117,486) $ (4,423,657) ------------- ------------ ------------ Net unrealized appreciation (depreciation) on investments End of year.................... $ 194,893,156 $595,356 $ (5,357,496) Beginning of year.............. 69,992,703 -- (1,673,420) ------------- ------------ ------------ Change in unrealized appreciation (depreciation).............. $ 124,900,453 $595,356 $ (3,684,076) ------------- ------------ ------------ Realized and unrealized gains (losses)...................... $ 147,420,355 $477,870 $ (8,107,733) ------------- ------------ ------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS................... $ 158,654,476 $445,986 $ (7,640,016) ------------- ------------ ------------ ------------- ------------ ------------
*For the period May 6, 1998 (commencement of operations of Sub-Account) through December 31, 1998. See notes to financial statements -15- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF OPERATIONS -- Year Ended December 31, 1998 -- continued
FCI FCG GSS HYS MSS MIS Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account* ----------- -------------- ----------- ------------ ------------ -------------- INCOME AND EXPENSES: Dividend income and capital gain distributions received............... $ 317,696 1$,908,465 $20,116,757 $ 17,576,410 $ 49,435,052 $ -- Mortality and expense risk charges.... (374,634) (770,139) (4,519,127) (3,406,720) (3,954,559) (248,138) Distribution expense charges.......... -- -- (23,267) (11,390) (25,353) -- Administrative expense charges........ (44,956) (92,417) (519,028) (397,417) (449,194) (29,777) ----------- -------------- ----------- ------------ ------------ -------------- Net investment income (loss)...... $ (101,894) 1$,045,909 $15,055,335 $ 13,760,883 $ 45,005,946 $(277,915) ----------- -------------- ----------- ------------ ------------ -------------- REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains (losses) on investment transactions Proceeds from sales................. $6,476,662 39$,966,952 $141,956,429 $127,769,004 $ 83,847,621 5$,759,463 Cost of investments sold............ (6,610,768) (34,355,430) (134,011,602) (123,024,988) (72,366,519) (5,468,843) ----------- -------------- ----------- ------------ ------------ -------------- Net realized gains (losses)....... $ (134,106) 5$,611,522 $ 7,944,827 $ 4,744,016 $ 11,481,102 $290,620 ----------- -------------- ----------- ------------ ------------ -------------- Net unrealized appreciation (depreciation) on investments End of year......................... $ (519,445) 6$,495,614 $14,106,863 $ (7,980,287) $ 16,729,347 11$,412,175 Beginning of year................... (418,012) 2,425,793 11,293,081 12,659,920 40,525,807 -- ----------- -------------- ----------- ------------ ------------ -------------- Change in unrealized appreciation (depreciation)................... $ (101,433) 4$,069,821 $ 2,813,782 $(20,640,207) $(23,796,460) 11$,412,175 ----------- -------------- ----------- ------------ ------------ -------------- Realized and unrealized gains (losses)........................... $ (235,539) 9$,681,343 $10,758,609 $(15,896,191) $(12,315,358) 11$,702,795 ----------- -------------- ----------- ------------ ------------ -------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS............................. $ (337,433) 10$,727,252 $25,813,944 $ (2,135,308) $ 32,690,588 11$,424,880 ----------- -------------- ----------- ------------ ------------ -------------- ----------- -------------- ----------- ------------ ------------ -------------- MMS Sub-Account ------------ INCOME AND EXPENSES: Dividend income and capital gain distributions received............... $ 17,312,637 Mortality and expense risk charges.... (4,328,735) Distribution expense charges.......... (17,272) Administrative expense charges........ (502,176) ------------ Net investment income (loss)...... $ 12,464,454 ------------ REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains (losses) on investment transactions Proceeds from sales................. $648,695,089 Cost of investments sold............ (648,695,089) ------------ Net realized gains (losses)....... $ -- ------------ Net unrealized appreciation (depreciation) on investments End of year......................... $ -- Beginning of year................... -- ------------ Change in unrealized appreciation (depreciation)................... $ -- ------------ Realized and unrealized gains (losses)........................... $ -- ------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS............................. $ 12,464,454 ------------ ------------
*For the period May 6, 1998 (commencement of operations of Sub-Account) through December 31, 1998. See notes to financial statements -16- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF OPERATIONS -- Year Ended December 31, 1998 -- continued
NWD RES RGS RSS SIS Sub-Account* Sub-Account Sub-Account Sub-Account* Sub-Account* ------------ ------------- ------------ ----------- ------------ INCOME AND EXPENSES: Dividend income and capital gain distributions received.......... $-- $ 34,036,093 $76,267 $-- $-- Mortality and expense risk charges......................... (49,668) (9,949,193) (243,948) (13,748) (33,096) Distribution expense charges..... -- -- -- -- -- Administrative expense charges... (5,960) (1,193,903) (29,274) (1,650) (3,971) ------------ ------------- ------------ ----------- ------------ Net investment income (loss)...................... $(55,628) $ 22,892,997 ($196,955) ($15,398) $(37,067) ------------ ------------- ------------ ----------- ------------ REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains(losses) on investment transactions Proceeds from sales............ 1,$614,329 $ 55,466,811 6,$084,512 5$50,369 3,$456,275 Cost of investments sold....... (1,692,255) (33,492,897) (5,571,502) (645,339) (3,545,101) ------------ ------------- ------------ ----------- ------------ Net realized gains (losses).... $(77,926) $ 21,973,914 $513,010 ($94,970) $(88,826) ------------ ------------- ------------ ----------- ------------ Net unrealized appreciation on investments End of year.................... 1,$504,013 $ 222,195,462 3,$487,391 1$26,682 $217,175 Beginning of year.............. -- 111,290,775 263,416 -- -- ------------ ------------- ------------ ----------- ------------ Change in unrealized appreciation................ 1,$504,013 $ 110,904,687 3,$223,975 1$26,682 $217,175 ------------ ------------- ------------ ----------- ------------ Realized and unrealized gains......................... 1,$426,087 $ 132,878,601 3,$736,985 $31,712 $128,349 ------------ ------------- ------------ ----------- ------------ INCREASE IN NET ASSETS FROM OPERATIONS........................ 1,$370,459 $ 155,771,598 3,$540,030 $16,314 $91,282 ------------ ------------- ------------ ----------- ------------ ------------ ------------- ------------ ----------- ------------ TRS UTS Sub-Account Sub-Account ------------- -------------- INCOME AND EXPENSES: Dividend income and capital gain distributions received.......... $ 187,021,256 $ 17,526,264 Mortality and expense risk charges......................... (21,072,561) (1,979,657) Distribution expense charges..... (122,533) -- Administrative expense charges... (2,406,174) (237,559) ------------- -------------- Net investment income (loss)...................... $ 163,419,988 $ 15,309,048 ------------- -------------- REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains(losses) on investment transactions Proceeds from sales............ $ 285,917,310 $ 9,858,290 Cost of investments sold....... (234,220,673) (6,719,351) ------------- -------------- Net realized gains (losses).... $ 51,696,637 $ 3,138,939 ------------- -------------- Net unrealized appreciation on investments End of year.................... $ 247,870,707 $ 34,293,510 Beginning of year.............. 297,846,753 28,380,652 ------------- -------------- Change in unrealized appreciation................ $ (49,976,046) $ 5,912,858 ------------- -------------- Realized and unrealized gains......................... $ 1,720,591 $ 9,051,797 ------------- -------------- INCREASE IN NET ASSETS FROM OPERATIONS........................ $ 165,140,579 $ 24,360,845 ------------- -------------- ------------- --------------
*For the period May 6, 1998 (commencement of operations of Sub-Account) through December 31, 1998. See notes to financial statements -17- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF OPERATIONS -- Year Ended December 31, 1998 -- continued
WAA WGS WGR WTR Sub-Account Sub-Account Sub-Account Sub-Account Total ------------ ------------ ------------ ------------ ------------- INCOME AND EXPENSES: Dividend income and capital gain distributions received............... $ 9,239,610 $ 1,161,945 $ 18,963,375 $ 3,790,536 $ 643,259,131 Mortality and expense risk charges.... (1,568,686) (1,115,945) (3,101,995) (1,031,335) (99,626,853) Distribution expense charges.......... -- (8,707) -- -- (293,204) Administrative expense charges........ (188,242) (125,206) (372,239) (123,760) (11,662,018) ------------ ------------ ------------ ------------ ------------- Net investment income (loss)...... $ 7,482,682 $ (87,913) $ 15,489,141 $ 2,635,441 $ 531,677,056 ------------ ------------ ------------ ------------ ------------- REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains (losses) on investment transactions Proceeds from sales................. $ 28,323,513 $ 36,276,075 $ 47,578,064 $ 15,451,732 $2,056,941,346 Cost of investments sold............ (24,630,654) (36,774,597) (35,986,240) (11,648,715) (1,807,632,507) ------------ ------------ ------------ ------------ ------------- Net realized gains (losses)....... $ 3,692,859 $ (498,522) $ 11,591,824 $ 3,803,017 $ 249,308,839 ------------ ------------ ------------ ------------ ------------- Net unrealized appreciation (depreciation) on investments End of year......................... $ 3,446,679 $ 6,569,807 $ 33,369,072 $ 14,614,468 $1,571,011,903 Beginning of year................... 9,486,253 (5,701,264) 31,911,034 8,223,467 1,079,710,768 ------------ ------------ ------------ ------------ ------------- Change in unrealized appreciation (depreciation)................... $ (6,039,574) $ 12,271,071 $ 1,458,038 $ 6,391,001 $ 491,301,135 ------------ ------------ ------------ ------------ ------------- Realized and unrealized gains (losses)........................... $ (2,346,715) $ 11,772,549 $ 13,049,862 $ 10,194,018 $ 740,609,974 ------------ ------------ ------------ ------------ ------------- INCREASE IN NET ASSETS FROM OPERATIONS............................. $ 5,135,967 $ 11,684,636 $ 28,539,003 $ 12,829,459 $1,272,287,030 ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------ -------------
See notes to financial statements -18- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS
BDS CAS COS Sub-Account Sub-Account Sub-Account ------------ -------------------------------- --------------------------- Year Ended Year Ended Year Ended Year Ended Year Ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1998* 1998 1997 1998 1997 ------------ --------------- --------------- ------------- ------------ OPERATIONS: Net investment income (loss)..... $ (82,271) $ 128,215,244 $ 74,369,495 $ 3,637,491 $ (375,236) Net realized gains............... 216,410 66,702,495 86,668,781 5,170,487 337,679 Net unrealized gains............. 286,002 121,369,200 32,342,322 20,631,668 11,106,441 ------------ --------------- --------------- ------------- ------------ Increase in net assets from operations.................. $ 420,141 $ 316,286,939 $ 193,380,598 $ 29,439,646 $ 11,068,884 ------------ --------------- --------------- ------------- ------------ CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received..... $ 9,875,456 $ 107,933,141 $ 191,209,464 $ 38,230,487 $ 29,587,412 Net transfers between Sub-Accounts and Fixed Account....................... 9,534,568 47,848,492 28,967,751 40,051,430 31,786,583 Withdrawals, surrenders, annuitizations and contract charges....................... (395,676) (114,794,853) (177,738,789) (7,541,790) (2,199,052) ------------ --------------- --------------- ------------- ------------ Net accumulation activity.... $ 19,014,348 $ 40,986,780 $ 42,438,426 $ 70,740,127 $ 59,174,943 ------------ --------------- --------------- ------------- ------------ Annuitization Activity: Annuitizations................. $ 164,170 $ 1,220,067 $ 1,367,156 $ 142,386 $ 136,454 Annuity payments and contract charges....................... (3,903) (1,025,009) (736,487) (46,545) (15,580) Net Transfers between Sub-Accounts.................. -- (41,318) 40,842 25,440 -- Adjustments to annuity reserves...................... (12,668) (88,123) (64,938) (10,400) (4,256) ------------ --------------- --------------- ------------- ------------ Net annuitization activity..... $ 147,599 $ 65,617 $ 606,573 $ 110,881 $ 116,618 ------------ --------------- --------------- ------------- ------------ Increase in net assets from contract owner transactions..... $ 19,161,947 $ 41,052,397 $ 43,044,999 $ 70,851,008 $ 59,291,561 ------------ --------------- --------------- ------------- ------------ Increase in net assets......... $ 19,582,088 $ 357,339,336 $ 236,425,597 $ 100,290,654 $ 70,360,445 ------------ --------------- --------------- ------------- ------------ NET ASSETS: Beginning of year................ -- 1,137,110,414 900,684,817 87,069,332 16,708,887 ------------ --------------- --------------- ------------- ------------ End of year...................... $ 19,582,088 $ 1,494,449,750 $ 1,137,110,414 $ 187,359,986 $ 87,069,332 ------------ --------------- --------------- ------------- ------------ ------------ --------------- --------------- ------------- ------------ CGS Sub-Account -------------------------------- Year Ended Year Ended Dec. 31, Dec. 31, 1998 1997 --------------- --------------- OPERATIONS: Net investment income (loss)..... $ 74,447,584 $ 24,679,106 Net realized gains............... 33,652,751 9,412,903 Net unrealized gains............. 167,450,974 162,512,568 --------------- --------------- Increase in net assets from operations.................. $ 275,551,309 $ 196,604,577 --------------- --------------- CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received..... $ 265,107,890 $ 211,472,643 Net transfers between Sub-Accounts and Fixed Account....................... 206,082,223 176,163,947 Withdrawals, surrenders, annuitizations and contract charges....................... (88,307,981) (42,133,444) --------------- --------------- Net accumulation activity.... $ 382,882,132 $ 345,503,146 --------------- --------------- Annuitization Activity: Annuitizations................. $ 2,012,633 $ 947,612 Annuity payments and contract charges....................... (713,563) (271,967) Net Transfers between Sub-Accounts.................. (116,539) 354,557 Adjustments to annuity reserves...................... 265,082 52,749 --------------- --------------- Net annuitization activity..... $ 1,447,613 $ 1,082,951 --------------- --------------- Increase in net assets from contract owner transactions..... $ 384,329,745 $ 346,586,097 --------------- --------------- Increase in net assets......... $ 659,881,054 $ 543,190,674 --------------- --------------- NET ASSETS: Beginning of year................ 1,067,010,686 523,820,012 --------------- --------------- End of year...................... $ 1,726,891,740 $ 1,067,010,686 --------------- --------------- --------------- ---------------
*For the period May 6, 1998 (commencement of operations of Sub-Account) through December 31, 1998. See notes to financial statements -19- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
EGS EIS FCE Sub-Account Sub-Account Sub-Account ---------------------------- ------------ -------------------------- Year Ended Year Ended Year Ended Year Ended Year Ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1998 1997 1998* 1998 1997 ------------- ------------- ------------ ------------ ------------ OPERATIONS: Net investment income (loss)..... $ 11,234,121 $ (3,455,859) $ (31,884) $ 467,717 $ (230,489) Net realized gains (losses)...... 22,519,902 8,307,222 (117,486) (4,423,657) 974,141 Net unrealized gains (losses).... 124,900,453 53,637,553 595,356 (3,684,076) (1,720,809) ------------- ------------- ------------ ------------ ------------ Increase (decrease) in net assets from operations...... $ 158,654,476 $ 58,488,916 $ 445,986 $ (7,640,016) $ (977,157) ------------- ------------- ------------ ------------ ------------ CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received..... $ 90,838,283 $ 95,095,489 $ 4,758,335 $ 2,734,886 $ 9,918,873 Net transfers between Sub-Accounts and Fixed Account....................... 40,488,353 57,336,795 3,493,264 (1,032,098) 12,522,767 Withdrawals, surrenders, annuitizations and contract charges....................... (30,769,813) (16,909,470) (205,828) (897,534) (953,005) ------------- ------------- ------------ ------------ ------------ Net accumulation activity.... $ 100,556,823 $ 135,522,814 $ 8,045,771 $ 805,254 $ 21,488,635 ------------- ------------- ------------ ------------ ------------ Annuitization Activity: Annuitizations................. $ 453,478 $ 158,875 $ -- $ 3,586 $ 39,195 Annuity payments and contract charges....................... (113,219) (58,246) -- (7,084) (5,864) Net transfers between Sub-Accounts.................. (5,495) 21,015 -- -- -- Adjustments to annuity reserves...................... 128,245 7,823 -- 218 (1,465) ------------- ------------- ------------ ------------ ------------ Net annuitization activity... $ 463,009 $ 129,467 $ -- $ (3,280) $ 31,866 ------------- ------------- ------------ ------------ ------------ Increase in net assets from contract owner transactions..... $ 101,019,832 $ 135,652,281 $ 8,045,771 $ 801,974 $ 21,520,501 ------------- ------------- ------------ ------------ ------------ Increase (decrease) in net assets........................ $ 259,674,308 $ 194,141,197 $ 8,491,757 $ (6,838,042) $ 20,543,344 ------------- ------------- ------------ ------------ ------------ NET ASSETS: Beginning of year................ 441,273,185 247,131,988 -- 23,814,780 3,271,436 ------------- ------------- ------------ ------------ ------------ End of year...................... $ 700,947,493 $ 441,273,185 $ 8,491,757 $ 16,976,738 $ 23,814,780 ------------- ------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------ FCI Sub-Account -------------------------- Year Ended Year Ended Dec. 31, Dec. 31, 1998 1997 ------------ ------------ OPERATIONS: Net investment income (loss)..... $ (101,894) $ (193,476) Net realized gains (losses)...... (134,106) (156,246) Net unrealized gains (losses).... (101,433) (353,885) ------------ ------------ Increase (decrease) in net assets from operations...... $ (337,433) $ (703,607) ------------ ------------ CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received..... $ 8,231,578 $ 10,356,882 Net transfers between Sub-Accounts and Fixed Account....................... 5,579,377 8,764,120 Withdrawals, surrenders, annuitizations and contract charges....................... (1,479,723) (683,649) ------------ ------------ Net accumulation activity.... $ 12,331,232 $ 18,437,353 ------------ ------------ Annuitization Activity: Annuitizations................. $ 1,716 $ 55,177 Annuity payments and contract charges....................... (5,621) (2,405) Net transfers between Sub-Accounts.................. -- -- Adjustments to annuity reserves...................... 2,415 (416) ------------ ------------ Net annuitization activity... $ (1,490) $ 52,356 ------------ ------------ Increase in net assets from contract owner transactions..... $ 12,329,742 $ 18,489,709 ------------ ------------ Increase (decrease) in net assets........................ $ 11,992,309 $ 17,786,102 ------------ ------------ NET ASSETS: Beginning of year................ 23,314,389 5,528,287 ------------ ------------ End of year...................... $ 35,306,698 $ 23,314,389 ------------ ------------ ------------ ------------
*For the period May 6, 1998 (commencement of operations of Sub-Account) through December 31, 1998. See notes to financial statements -20- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
FCG GSS Sub-Account Sub-Account -------------------------- ---------------------------- Year Ended Year Ended Year Ended Year Ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1998 1998 1997 1998 ------------ ------------ ------------- ------------- OPERATIONS: Net investment income (loss)..... $ 1,045,909 $ (87,178) $ 15,055,335 $ 16,257,472 Net realized gains (losses)...... 5,611,522 575,848 7,944,827 (320,218) Net unrealized gains (losses).... 4,069,821 1,624,106 2,813,782 5,893,925 ------------ ------------ ------------- ------------- Increase (decrease) in net assets from operations...... $ 10,727,252 $ 2,112,776 $ 25,813,944 $ 21,831,179 ------------ ------------ ------------- ------------- CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received..... $ 7,721,923 $ 8,465,356 $ 33,941,912 $ 45,924,248 Net transfers between Sub-Accounts and Fixed Account....................... 8,246,837 5,802,185 49,410,266 9,720,766 Withdrawals, surrenders, annuitizations and contract charges....................... (4,121,150) (2,204,864) (40,854,521) (58,612,247) ------------ ------------ ------------- ------------- Net accumulation activity.... $ 11,847,610 $ 12,062,677 $ 42,497,657 $ (2,967,233) ------------ ------------ ------------- ------------- Annuitization Activity: Annuitizations................. $ 34,551 $ 45,941 $ 1,080,791 $ 142,666 Annuity payments and contract charges....................... (28,601) (6,247) (563,274) (181,979) Net transfers between Sub-Accounts.................. (17,030) -- (10,317) (55,523) Adjustments to annuity reserves...................... (10,148) 62 17,162 111,855 ------------ ------------ ------------- ------------- Net annuitization activity... $ (21,228) $ 39,756 $ 524,362 $ 17,019 ------------ ------------ ------------- ------------- Increase (decrease) in net assets from contract owner transactions.................... $ 11,826,382 $ 12,102,433 $ 43,022,019 $ (2,950,214) ------------ ------------ ------------- ------------- Increase in net assets......... $ 22,553,634 $ 14,215,209 $ 68,835,963 $ 18,880,965 ------------ ------------ ------------- ------------- NET ASSETS: Beginning of year................ 49,346,218 35,131,009 331,304,242 312,423,277 ------------ ------------ ------------- ------------- End of year...................... $ 71,899,852 $ 49,346,218 $ 400,140,205 $ 331,304,242 ------------ ------------ ------------- ------------- ------------ ------------ ------------- ------------- HYS Sub-Account ---------------------------- Year Ended Year Ended Dec. 31, Dec. 31, 1998 1997 ------------- ------------- OPERATIONS: Net investment income (loss)..... $ 13,760,883 $ 9,894,976 Net realized gains (losses)...... 4,744,016 6,191,967 Net unrealized gains (losses).... (20,640,207) 5,472,328 ------------- ------------- Increase (decrease) in net assets from operations...... $ (2,135,308) $ 21,559,271 ------------- ------------- CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received..... $ 54,795,963 $ 56,445,474 Net transfers between Sub-Accounts and Fixed Account....................... 20,587,340 35,346,824 Withdrawals, surrenders, annuitizations and contract charges....................... (24,841,987) (37,189,764) ------------- ------------- Net accumulation activity.... $ 50,541,316 $ 54,602,534 ------------- ------------- Annuitization Activity: Annuitizations................. $ 514,021 $ 403,156 Annuity payments and contract charges....................... (301,855) (164,426) Net transfers between Sub-Accounts.................. -- -- Adjustments to annuity reserves...................... 44,449 2,369 ------------- ------------- Net annuitization activity... $ 256,615 $ 241,099 ------------- ------------- Increase (decrease) in net assets from contract owner transactions.................... $ 50,797,931 $ 54,843,633 ------------- ------------- Increase in net assets......... $ 48,662,623 $ 76,402,904 ------------- ------------- NET ASSETS: Beginning of year................ 237,675,412 161,272,508 ------------- ------------- End of year...................... $ 286,338,035 $ 237,675,412 ------------- ------------- ------------- -------------
See notes to financial statements -21- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
MSS MIS Sub-Account Sub-Account ---------------------------- ------------ Year Ended Year Ended Year Ended Dec. 31, Dec. 31, Dec. 31, 1998 1997 1998* ------------- ------------- ------------ OPERATIONS: Net investment income (loss)..... $ 45,005,946 $ 25,345,850 $ (277,915) Net realized gains (losses)...... 11,481,102 19,553,090 290,620 Net unrealized gains (losses).... (23,796,460) 11,613,272 11,412,175 ------------- ------------- ------------ Increase in net assets from operations.................. $ 32,690,588 $ 56,512,212 $ 11,424,880 ------------- ------------- ------------ CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received..... $ 22,720,393 $ 56,177,555 $ 42,898,409 Net transfers between Sub-Accounts and Fixed Account....................... (5,210,223) 12,554,894 27,944,745 Withdrawals, surrenders, annuitizations and contract charges....................... (28,997,564) (57,321,938) (1,223,987) ------------- ------------- ------------ Net accumulation activity.... $ (11,487,394) $ 11,410,511 $ 69,619,167 ------------- ------------- ------------ Annuitization Activity: Annuitizations................. $ 360,666 $ 558,077 $ 158,201 Annuity payments and contract charges....................... (278,169) (166,248) (10,253) Net transfers between Sub-Accounts.................. (6,870) -- -- Adjustments to annuity reserves...................... (3,336) (43,539) (1,090) ------------- ------------- ------------ Net annuitization activity... $ 72,291 $ 348,290 $ 146,858 ------------- ------------- ------------ Increase (decrease) in net assets from contract owner transactions.................... $ (11,415,103) $ 11,758,801 $ 69,766,025 ------------- ------------- ------------ Increase (decrease) in net assets........................ $ 21,275,485 $ 68,271,013 $ 81,190,905 ------------- ------------- ------------ NET ASSETS: Beginning of year................ 312,825,526 244,554,513 -- ------------- ------------- ------------ End of year...................... $ 334,101,011 $ 312,825,526 $ 81,190,905 ------------- ------------- ------------ ------------- ------------- ------------ MMS NWD Sub-Account Sub-Account ---------------------------- ------------ Year Ended Year Ended Year Ended Dec. 31, Dec. 31, Dec. 31, 1998 1997 1998* ------------- ------------- ------------ OPERATIONS: Net investment income (loss)..... $ 12,464,454 $ 12,238,449 $ (55,628) Net realized gains (losses)...... -- -- (77,926) Net unrealized gains (losses).... -- -- 1,504,013 ------------- ------------- ------------ Increase in net assets from operations.................. $ 12,464,454 $ 12,238,449 $ 1,370,459 ------------- ------------- ------------ CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received..... $ 84,539,955 $ 151,523,026 $ 5,928,260 Net transfers between Sub-Accounts and Fixed Account....................... 205,348,459 (1,240,893) 6,269,724 Withdrawals, surrenders, annuitizations and contract charges....................... (180,586,976) (229,658,956) (345,722) ------------- ------------- ------------ Net accumulation activity.... $ 109,301,438 $ (79,376,823) $ 11,852,262 ------------- ------------- ------------ Annuitization Activity: Annuitizations................. $ 1,223,366 $ 79,534 $ 59,889 Annuity payments and contract charges....................... (267,886) (200,563) (3,118) Net transfers between Sub-Accounts.................. (4,847) (312,207) -- Adjustments to annuity reserves...................... (38,667) (31,750) (2,368) ------------- ------------- ------------ Net annuitization activity... $ 911,966 $ (464,986) $ 54,403 ------------- ------------- ------------ Increase (decrease) in net assets from contract owner transactions.................... $ 110,213,404 $ (79,841,809) $ 11,906,665 ------------- ------------- ------------ Increase (decrease) in net assets........................ $ 122,677,858 $ (67,603,360) $ 13,277,124 ------------- ------------- ------------ NET ASSETS: Beginning of year................ 294,227,489 361,830,849 -- ------------- ------------- ------------ End of year...................... $ 416,905,347 $ 294,227,489 $ 13,277,124 ------------- ------------- ------------ ------------- ------------- ------------
*For the period May 6, 1998 (commencement of operations of Sub-Account) through December 31, 1998. See notes to financial statements -22- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
RES RGS Sub-Account Sub-Account ---------------------------- ------------------------- Year Ended Year Ended Year Ended Year Ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1998 1997 1998 1997** ------------- ------------- ------------ ----------- OPERATIONS: Net investment income (loss).................... $ 22,892,997 $ 5,840,008 $ (196,955) $ (21,782) Net realized gains (losses)..................... 21,973,914 5,057,991 513,010 8,741 Net unrealized gains............................ 110,904,687 68,490,719 3,223,975 263,416 ------------- ------------- ------------ ----------- Increase in net assets from operations...... $ 155,771,598 $ 79,388,718 $ 3,540,030 $ 250,375 ------------- ------------- ------------ ----------- CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received.................... $ 103,921,694 $ 153,316,348 $ 13,378,132 $ 2,950,897 Net transfers between Sub-Accounts and Fixed Account...................................... 82,986,033 119,233,197 14,755,314 2,726,224 Withdrawals, surrenders, annuitizations and contract charges............................. (44,188,615) (24,008,616) (1,413,449) (29,969) ------------- ------------- ------------ ----------- Net accumulation activity................... $ 142,719,112 $ 248,540,929 $ 26,719,997 $ 5,647,152 ------------- ------------- ------------ ----------- Annuitization Activity: Annuitizations................................ $ 452,588 $ 415,748 $ 73,112 $ -- Annuity payments and contract charges......... (211,454) (139,282) (12,398) -- Net transfers between Sub-Accounts............ 34,374 12,992 58,620 -- Adjustments to annuity reserves............... (35,852) (40,528) (2,709) -- ------------- ------------- ------------ ----------- Net annuitization activity.................. $ 239,656 $ 248,930 $ 116,625 $ -- ------------- ------------- ------------ ----------- Increase in net assets from contract owner transactions................................... $ 142,958,768 $ 248,789,859 $ 26,836,622 $ 5,647,152 ------------- ------------- ------------ ----------- Increase in net assets........................ $ 298,730,366 $ 328,178,577 $ 30,376,652 $ 5,897,527 ------------- ------------- ------------ ----------- NET ASSETS: Beginning of year............................... 649,281,186 321,102,609 5,897,527 -- ------------- ------------- ------------ ----------- End of year..................................... $ 948,011,552 $ 649,281,186 $ 36,274,179 $ 5,897,527 ------------- ------------- ------------ ----------- ------------- ------------- ------------ ----------- RSS SIS Sub-Account Sub-Account ------------ ----------- Year Ended Year Ended Dec. 31, Dec. 31, 1998* 1998* ------------ ----------- OPERATIONS: Net investment income (loss).................... $ (15,398) $ (37,067) Net realized gains (losses)..................... (94,970) (88,826) Net unrealized gains............................ 126,682 217,175 ------------ ----------- Increase in net assets from operations...... $ 16,314 $ 91,282 ------------ ----------- CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received.................... $2,275,775 $3,255,808 Net transfers between Sub-Accounts and Fixed Account...................................... 1,268,571 4,501,699 Withdrawals, surrenders, annuitizations and contract charges............................. (41,350) (67,691) ------------ ----------- Net accumulation activity................... $3,502,996 $7,689,816 ------------ ----------- Annuitization Activity: Annuitizations................................ $ -- $ -- Annuity payments and contract charges......... -- -- Net transfers between Sub-Accounts............ -- -- Adjustments to annuity reserves............... -- -- ------------ ----------- Net annuitization activity.................. $ -- $ -- ------------ ----------- Increase in net assets from contract owner transactions................................... $3,502,996 $7,689,816 ------------ ----------- Increase in net assets........................ $3,519,310 $7,781,098 ------------ ----------- NET ASSETS: Beginning of year............................... -- -- ------------ ----------- End of year..................................... $3,519,310 $7,781,098 ------------ ----------- ------------ -----------
* For the period May 6, 1998 (commencement of operations of Sub-Account) through December 31, 1998. ** For the period July 7, 1997 (commencement of operations of Sub-Account) through December 31, 1997. See notes to financial statements -23- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
TRS UTS Sub-Account Sub-Account -------------------------------- ---------------------------- Year Ended Year Ended Year Ended Year Ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1998 1997 1998 1997 --------------- --------------- ------------- ------------- OPERATIONS: Net investment income........................... $ 163,419,988 $ 116,769,728 $ 15,309,048 $ 7,729,340 Net realized gains.............................. 51,696,637 66,640,057 3,138,939 2,083,741 Net unrealized gains (losses)................... (49,976,046) 74,650,982 5,912,858 14,781,219 --------------- --------------- ------------- ------------- Increase in net assets from operations...... $ 165,140,579 $ 258,060,767 $ 24,360,845 $ 24,594,300 --------------- --------------- ------------- ------------- CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received.................... $ 144,694,740 $ 260,379,742 $ 39,799,198 $ 16,090,619 Net transfers between Sub-Accounts and Fixed Account...................................... 99,107,901 90,568,461 40,165,423 13,552,388 Withdrawals, surrenders, annuitizations and contract charges............................. (174,048,588) (276,158,725) (10,679,491) (5,005,318) --------------- --------------- ------------- ------------- Net accumulation activity................... $ 69,754,053 $ 74,789,478 $ 69,285,130 $ 24,637,689 --------------- --------------- ------------- ------------- Annuitization Activity: Annuitizations................................ $ 2,556,048 $ 1,271,371 $ 357,771 $ 165,628 Annuity payments and contract charges......... (1,415,164) (935,550) (266,331) (60,528) Net transfers between Sub-Accounts............ 104,077 87,811 93,575 28,886 Adjustments to annuity reserves............... 157,679 (136,590) 117,915 2,804 --------------- --------------- ------------- ------------- Net annuitization activity.................. $ 1,402,640 $ 287,042 $ 302,930 $ 136,790 --------------- --------------- ------------- ------------- Increase (decrease) in net assets from contract owner transactions............................. $ 71,156,693 $ 75,076,520 $ 69,588,060 $ 24,774,479 --------------- --------------- ------------- ------------- Increase in net assets........................ $ 236,297,272 $ 333,137,287 $ 93,948,905 $ 49,368,779 --------------- --------------- ------------- ------------- NET ASSETS: Beginning of year............................... 1,579,783,984 1,246,646,697 117,306,075 67,937,296 --------------- --------------- ------------- ------------- End of year..................................... $ 1,816,081,256 $ 1,579,783,984 $ 211,254,980 $ 117,306,075 --------------- --------------- ------------- ------------- --------------- --------------- ------------- ------------- WAA Sub-Account ---------------------------- Year Ended Year Ended Dec. 31, Dec. 31, 1998 1997 ------------- ------------- OPERATIONS: Net investment income........................... $ 7,482,682 $ 3,255,293 Net realized gains.............................. 3,692,859 2,612,317 Net unrealized gains (losses)................... (6,039,574) 2,483,575 ------------- ------------- Increase in net assets from operations...... $ 5,135,967 $ 8,351,185 ------------- ------------- CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received.................... $ 8,860,816 $ 23,232,543 Net transfers between Sub-Accounts and Fixed Account...................................... (4,974,353) 17,783,698 Withdrawals, surrenders, annuitizations and contract charges............................. (6,184,345) (5,742,891) ------------- ------------- Net accumulation activity................... $ (2,297,882) $ 35,273,350 ------------- ------------- Annuitization Activity: Annuitizations................................ $ 196,381 $ 167,170 Annuity payments and contract charges......... (88,583) (51,214) Net transfers between Sub-Accounts............ 1,087 79,307 Adjustments to annuity reserves............... (39,140) 487 ------------- ------------- Net annuitization activity.................. $ 69,745 $ 195,750 ------------- ------------- Increase (decrease) in net assets from contract owner transactions............................. $ (2,228,137) $ 35,469,100 ------------- ------------- Increase in net assets........................ $ 2,907,830 $ 43,820,285 ------------- ------------- NET ASSETS: Beginning of year............................... 120,437,782 76,617,497 ------------- ------------- End of year..................................... $ 123,345,612 $ 120,437,782 ------------- ------------- ------------- -------------
See notes to financial statements -24- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
WGS WGR WTR Sub-Account Sub-Account Sub-Account ---------------------------- ---------------------------- -------------------------- Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1998 1997 1998 1997 1998 1997 ------------- ------------- ------------- ------------- ------------ ------------ OPERATIONS: Net investment income (loss).......... $ (87,913) $ 2,978,724 $ 15,489,141 $ 1,724,285 $ 2,635,441 $ 518,499 Net realized gains (losses)........... (498,522) (5,597,019) 11,591,824 8,571,645 3,803,017 1,518,827 Net unrealized gains (losses)......... 12,271,071 (269,307) 1,458,038 16,669,581 6,391,001 4,352,747 ------------- ------------- ------------- ------------- ------------ ------------ Increase (decrease) in net assets from operations.................. $ 11,684,636 $ (2,887,602) $ 28,539,003 $ 26,965,511 $ 12,829,459 $ 6,390,073 ------------- ------------- ------------- ------------- ------------ ------------ CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received.......... $ 3,786,224 $ 11,552,959 $ 15,688,080 $ 26,811,741 $ 8,845,349 $ 15,459,554 Net transfers between Sub-Accounts and Fixed Account.................. (12,675,687) (19,473,409) (6,628,067) 3,906,046 8,428,546 13,106,711 Withdrawals, surrenders, annuitizations and contract charges............................ (11,908,423) (17,997,612) (14,148,887) (13,503,627) (4,603,063) (2,840,427) ------------- ------------- ------------- ------------- ------------ ------------ Net accumulation activity......... $ (20,797,886) $ (25,918,062) $ (5,088,874) $ 17,214,160 $ 12,670,832 $ 25,725,838 ------------- ------------- ------------- ------------- ------------ ------------ Annuitization Activity: Annuitizations...................... $ 158,700 $ 101,934 $ 107,920 $ 112,909 $ 134,223 $ 215,870 Annuity payments and contract charges............................ (130,085) (132,080) (104,706) (92,720) (61,120) (28,925) Net transfers between Sub-Accounts....................... -- (8,188) (114,522) (249,492) -- -- Adjustments to annuity reserves..... 3,766 (5,055) (5,286) (31,480) 16,790 (3,240) ------------- ------------- ------------- ------------- ------------ ------------ Net annuitization activity........ $ 32,381 $ (43,389) $ (116,594) $ (260,783) $ 89,893 $ 183,705 ------------- ------------- ------------- ------------- ------------ ------------ Increase (decrease) in net assets from contract owner transactions.......... $ (20,765,505) $ (25,961,451) $ (5,205,468) $ 16,953,377 $ 12,760,725 $ 25,909,543 ------------- ------------- ------------- ------------- ------------ ------------ Increase (decrease) in net assets... $ (9,080,869) $ (28,849,053) $ 23,333,535 $ 43,918,888 $ 25,590,184 $ 32,299,616 ------------- ------------- ------------- ------------- ------------ ------------ NET ASSETS: Beginning of year..................... 98,894,832 127,743,885 237,145,701 193,226,813 69,684,288 37,384,672 ------------- ------------- ------------- ------------- ------------ ------------ End of year........................... $ 89,813,963 $ 98,894,832 $ 260,479,236 $ 237,145,701 $ 95,274,472 $ 69,684,288 ------------- ------------- ------------- ------------- ------------ ------------ ------------- ------------- ------------- ------------- ------------ ------------
See notes to financial statements -25- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
Total --------------------------------- Year Ended Year Ended Dec. 31, Dec. 31, 1998 1997 --------------- --------------- OPERATIONS: Net investment income.................................................................. $ 531,677,056 $ 297,237,205 Net realized gains..................................................................... 249,308,839 212,441,467 Net unrealized gains................................................................... 491,301,135 463,550,753 --------------- --------------- Increase in net assets from operations............................................. 1,272,287,030 $ 973,229,425 --------------- --------------- CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received........................................................... 1,124,762,687 $ 1,375,970,825 Net transfers between Sub-Accounts and Fixed Account................................. 891,578,137 619,129,055 Withdrawals, surrenders, annuitizations and contract charges......................... (792,649,007) (970,892,363) --------------- --------------- Net accumulation activity.......................................................... $ 1,223,691,817 $ 1,024,207,517 --------------- --------------- Annuitization Activity: Annuitizations....................................................................... 11,466,264 $ 6,384,473 Annuity payments and contract charges................................................ (5,657,941) (3,250,311) Net transfers between Sub-Accounts................................................... 235 -- Adjustments to annuity reserves...................................................... 503,934 (185,108) --------------- --------------- Net annuitization activity......................................................... $ 6,312,492 $ 2,949,054 --------------- --------------- Increase in net assets from contract owner transactions................................ $ 1,230,004,309 $ 1,027,156,571 --------------- --------------- Increase in net assets............................................................... $ 2,502,291,339 $ 2,000,385,996 --------------- --------------- NET ASSETS: Beginning of year...................................................................... 6,883,403,048 4,883,017,052 --------------- --------------- End of year............................................................................ $ 9,385,694,387 $ 6,883,403,048 --------------- --------------- --------------- ---------------
See notes to financial statements -26- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F NOTES TO FINANCIAL STATEMENTS (1) ORGANIZATION Sun Life of Canada (U.S.) Variable Account F (the "Variable Account"), a separate account of Sun Life Assurance Company of Canada (U.S.), (the "Sponsor"), was established on July 13, 1989 as a funding vehicle for the variable portion of Regatta contracts, Regatta Gold contracts, Regatta Classic contracts, Regatta Platinum contracts (collectively, the "Contracts") and certain other fixed and variable annuity contracts issued by the Sponsor. The Variable Account is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 as a unit investment trust. The assets of the Variable Account are divided into Sub-Accounts. Each Sub-Account attributable to the Contracts is invested in shares of a specific corresponding series of MFS/Sun Life Series Trust (the "Series Trust"), an open-end management investment company registered under the Investment Company Act of 1940. Massachusetts Financial Services Company ("MFS"), an affiliate of the Sponsor, is the investment adviser to the Series Trust. (2) SIGNIFICANT ACCOUNTING POLICIES GENERAL The preparation of financial statements in conformity with generally accepted accounting principles requires the Sponsor's 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 amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENT VALUATIONS Investments in shares of the Series Trust are recorded at their net asset value. Realized gains and losses on sales of shares of the Series Trust are determined on the identified cost basis. Dividend income and capital gain distributions received by the Sub-Accounts are reinvested in additional Series Trust shares and are recognized on the ex-dividend date. Exchanges between Sub-Accounts requested by participants under the Contracts are recorded in the new Sub-Account upon receipt of the redemption proceeds. FEDERAL INCOME TAX STATUS The operations of the Variable Account are part of the operations of the Sponsor and are not taxed separately. The Variable Account is not taxed as a regulated investment company. The Sponsor qualifies for the federal income tax treatment granted to life insurance companies under Subchapter L of the Internal Revenue Code. Under existing federal income tax law, investment income and capital gains earned by the Variable Account on contract owner reserves are not taxable and, therefore, no provision has been made for federal income taxes. -27- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F NOTES TO FINANCIAL STATEMENTS -- continued (3) CONTRACT CHARGES A mortality and expense risk charge based on the value of the Variable Account is deducted from the Variable Account at the end of each valuation period for the mortality and expense risks assumed by the Sponsor. The deductions are transferred periodically to the Sponsor. Currently, the deduction is at an effective annual rate of 1.25% for Regatta, Regatta Gold and Regatta Platinum contracts and 1.00% for Regatta Classic contracts. Each year on the account anniversary, an account administration fee ("Account Fee") equal to the lesser of $30 or 2% of the participant's account value in the case of Regatta and Regatta Gold contracts, $35 in the case of Regatta Platinum contracts and $50 in the case of Regatta Classic contracts is deducted from the participant's account to reimburse the Sponsor for certain administrative expenses. After the annuity commencement date, the Account Fee will be deducted pro rata from each variable annuity payment made during the year. The Sponsor does not deduct a sales charge from purchase payments. However, in the case of Regatta, Regatta Gold and Regatta Platinum, a withdrawal charge (contingent deferred sales charge) of up to 6% of certain amounts withdrawn, when applicable, may be deducted to cover certain expenses relating to the sale of the contracts and certificates. In the case of Regatta Classic, a withdrawal charge of 1% is applied to purchase payments withdrawn which have been credited to a participant's account for less than one year. For assuming the risk that withdrawal charges may be insufficient to compensate it for the costs of distributing the Regatta contracts, the Sponsor makes a deduction from the Variable Account at the end of each valuation period for the first seven account years at an effective annual rate of 0.15% of the net assets attributable to such contracts. No deduction for the distribution expense charge is made after the seventh account anniversary. As reimbursement for administrative expenses attributable to Regatta Gold, Regatta Classic and Regatta Platinum contracts, which exceed the revenues received from the Account Fees described above derived from such contracts, the Sponsor makes a deduction from the Variable Account at the end of each valuation period at an effective annual rate of 0.15% of the net assets attributable to such contracts. (4) ANNUITY RESERVES Annuity reserves are calculated using the 1983 Individual Annuitant Mortality Table and an assumed interest rate of 4% or 3%, as stated in each participant's contract or certificate, as applicable. Required adjustments to the reserves are accomplished by transfers to or from the Sponsor. -28- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F NOTES TO FINANCIAL STATEMENTS -- continued (5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS
Units Transferred Between Sub-Accounts and Units Outstanding Units Fixed Accumulation Beginning of Year Purchased Account --------------------- -------------- ---------------------- Year Ended Year Ended Year Ended December 31, December 31, December 31, 1998 1997 1998 1997 1998 1997 --------- ---------- ----- ------- ---------- ---------- MFS REGATTA CONTRACTS: ------------------------------ CAS -- Level 1................ 2,993,020 6,316,305 -- 860 (2,286,027) (2,421,311) CAS -- Level 2................ 5,390,680 58,968 -- 624,374 5,658,421 6,542,104 GSS -- Level 1................ 1,462,222 3,362,650 -- -- (932,035) (1,340,875) GSS -- Level 2................ 1,514,633 55,891 -- 265,628 1,951,275 2,012,610 HYS -- Level 1................ 537,033 1,204,380 -- -- (384,324) (510,706) HYS -- Level 2*............... 975,126 -- -- 64,893 742,028 1,416,411 MSS -- Level 1................ 941,686 2,202,213 -- 881 (678,909) (924,959) MSS -- Level 2................ 2,022,757 14,270 -- 240,391 1,359,567 2,378,532 MMS -- Level 1................ 1,518,722 3,859,738 12,315 1,948 1,824,176 3,301,197 MMS -- Level 2................ 1,845,809 59,562 8,252 310,378 6,810,959 6,074,695 TRS -- Level 1................ 5,756,653 12,461,003 4,933 1,598 (4,180,220) (4,580,966) TRS -- Level 2................ 7,838,741 32,548 2,056 815,196 8,389,482 10,202,663 WGS -- Level 1................ 700,338 1,460,289 -- -- (536,114) (584,950) WGS -- Level 2................ 483,253 3,325 -- 34,073 702,569 686,256 Units Withdrawn, Surrendered, and Units Outstanding Annuitized End of Year ---------------------- -------------------- Year Ended Year Ended December 31, December 31, 1998 1997 1998 1997 ---------- ---------- --------- --------- MFS REGATTA CONTRACTS: ------------------------------ CAS -- Level 1................ (242,644) (902,834) 464,349 2,993,020 CAS -- Level 2................ (1,995,108) (1,834,766) 9,053,993 5,390,680 GSS -- Level 1................ (204,946) (559,553) 325,241 1,462,222 GSS -- Level 2................ (808,930) (819,496) 2,656,978 1,514,633 HYS -- Level 1................ (79,077) (156,641) 73,632 537,033 HYS -- Level 2*............... (396,775) (506,178) 1,320,379 975,126 MSS -- Level 1................ (66,314) (336,449) 196,463 941,686 MSS -- Level 2................ (651,427) (610,436) 2,730,897 2,022,757 MMS -- Level 1................ (3,086,766) (5,644,161) 268,447 1,518,722 MMS -- Level 2................ (4,942,262) (4,598,826) 3,722,758 1,845,809 TRS -- Level 1................ (683,229) (2,124,982) 898,137 5,756,653 TRS -- Level 2................ (3,723,849) (3,211,666) 12,506,430 7,838,741 WGS -- Level 1................ (74,896) (175,001) 89,328 700,338 WGS -- Level 2................ (351,812) (240,401) 834,010 483,253
*For the period January 6, 1997 (commencement of operations of Sub-Account) through December 31, 1997. -29- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F NOTES TO FINANCIAL STATEMENTS -- continued (5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS -- continued
Units Transferred Between Sub-Accounts and Units Outstanding Fixed Accumulation Beginning of Year Units Purchased Account ---------------------- ---------------------- ---------------------- Year Ended Year Ended Year Ended December 31, December 31, December 31, 1998 1997 1998 1997 1998 1997 ---------- ---------- ---------- -------------------- ---------- MFS REGATTA GOLD CONTRACTS: ------------ BDS+.......................... -- -- 437,383 -- 776,227 -- CAS........................... 35,528,897 32,796,793 2,963,417 4,171,857 1,606,290 753,855 COS........................... 6,175,224 1,520,787 2,085,178 2,333,873 2,487,753 2,499,269 CGS........................... 40,709,531 26,199,975 7,531,155 8,951,992 6,682,559 7,405,405 EGS........................... 25,039,986 16,998,044 3,519,560 5,826,649 1,929,406 3,279,517 EIS+.......................... -- -- 235,337 -- 312,512 -- FCE........................... 2,159,228 329,630 203,168 815,491 (114,376) 1,097,883 FCI........................... 2,390,056 564,742 532,412 997,740 520,640 902,857 FCG........................... 4,441,911 3,360,596 449,506 760,057 655,503 531,069 GSS........................... 20,508,844 19,714,114 1,760,124 1,627,923 2,891,419 723,328 HYS........................... 11,699,195 8,424,289 2,333,919 2,340,052 1,143,802 1,768,446 MSS........................... 11,326,719 10,541,726 838,284 1,191,194 (135,303) 289,858 MIS+.......................... -- -- 2,049,150 -- 2,166,812 -- MMS........................... 21,463,139 27,275,583 5,295,611 7,818,118 9,723,034 (8,894,337) NWD+.......................... -- -- 252,432 -- 573,525 -- RES........................... 35,654,917 19,577,745 1,299,737 10,988,440 3,631,861 6,437,281 RGS........................... 533,928 -- 857,568 276,177 1,134,366 260,605 RSS+.......................... -- -- 83,591 -- 110,312 -- SIS+.......................... -- -- 207,182 -- 423,614 -- TRS........................... 66,303,467 59,508,016 5,585,984 7,069,596 4,374,616 4,111,016 UTS........................... 6,101,638 4,671,192 1,559,584 966,544 1,878,542 773,360 WAA........................... 7,928,833 5,539,010 440,970 1,565,894 (400,015) 1,218,708 WGS........................... 6,127,641 7,510,766 199,740 324,862 (782,796) (1,252,245) WGR........................... 15,058,757 13,989,946 815,222 1,725,746 (504,727) 242,250 WTR........................... 4,676,853 2,836,079 458,384 1,085,978 506,340 962,291 Units Withdrawn, Surrendered, and Units Outstanding Annuitized End of Year ---------------------- ---------------------- Year Ended Year Ended December 31, December 31, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- MFS REGATTA GOLD CONTRACTS: ------------ BDS+.......................... (31,371) -- 1,182,239 -- CAS........................... (2,598,123) (2,193,608) 37,500,481 35,528,897 COS........................... (485,873) (178,705) 10,262,282 6,175,224 CGS........................... (3,042,480) (1,847,841) 51,880,765 40,709,531 EGS........................... (1,587,995) (1,064,224) 28,900,957 25,039,986 EIS+.......................... (19,611) -- 528,238 -- FCE........................... (100,672) (83,776) 2,147,348 2,159,228 FCI........................... (153,065) (75,283) 3,290,043 2,390,056 FCG........................... (332,362) (209,811) 5,214,558 4,441,911 GSS........................... (1,942,153) (1,556,521) 23,218,234 20,508,844 HYS........................... (986,099) (833,592) 14,190,817 11,699,195 MSS........................... (784,556) (696,059) 11,245,144 11,326,719 MIS+.......................... (94,444) -- 4,121,518 -- MMS........................... (7,094,698) (4,736,225) 29,387,086 21,463,139 NWD+.......................... (31,098) -- 794,859 -- RES........................... (2,032,529) (1,348,549) 38,553,986 35,654,917 RGS........................... (117,186) (2,854) 2,408,676 533,928 RSS+.......................... (3,636) -- 190,267 -- SIS+.......................... (7,882) -- 622,914 -- TRS........................... (5,162,047) (4,385,161) 71,102,020 66,303,467 UTS........................... (516,662) (309,458) 9,023,102 6,101,638 WAA........................... (393,097) (394,779) 7,576,691 7,928,833 WGS........................... (496,366) (455,742) 5,048,219 6,127,641 WGR........................... (847,123) (899,185) 14,522,129 15,058,757 WTR........................... (286,944) (207,494) 5,354,633 4,676,853
+For the period May 6, 1997 (commencement of operations of Sub-Account) through December 31, 1998. -30- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F NOTES TO FINANCIAL STATEMENTS -- continued (5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS -- continued
Units Transferred Between Sub-Accounts and Fixed Units Outstanding Accumulation Beginning of Year Units Purchased Account ----------------- ---------------- ------------------ Year Ended Year Ended Year Ended December 31, December 31, December 31, 1998 1997 1998 1997 1998 1997 --------- ------ ------- ------- -------- -------- MFS REGATTA CLASSIC CONTRACTS: ------------------------------ BDS+.......................... -- -- 33,440 -- 1,859 -- CAS........................... 265,497 1,892 170,863 246,247 49,860 23,978 COS........................... 160,778 9,578 98,617 107,548 29,367 46,458 CGS........................... 554,216 3,545 449,788 446,522 267,481 122,228 EGS........................... 318,028 9,744 613,049 289,836 55,590 22,223 EIS+.......................... -- -- 9,590 -- 2,523 -- FCE........................... 40,698 140 16,413 44,896 (12,814) (3,278) FCI........................... 67,892 2,249 20,502 75,178 (3,210) (7,901) FCG*.......................... 51,038 -- 34,300 42,039 8,318 9,735 GSS........................... 113,243 6,514 139,510 89,817 51,253 21,240 HYS........................... 155,306 8,219 224,640 120,521 (2,332) 30,370 MSS**......................... 118,243 -- 59,666 92,458 (29,055) 28,860 MIS++......................... -- -- 78,233 -- 156,319 -- MMS........................... 77,105 13,813 733,426 366,163 (366,138) (259,749) NWD++......................... -- -- 13,601 -- 15,614 -- RES........................... 553,996 25,665 279,626 497,934 85,963 37,701 RGS#.......................... 6,085 -- 9,086 5,777 19,504 320 RSS........................... -- -- 942 -- 1,292 -- SIS+++........................ -- -- 1,726 -- 851 -- TRS........................... 951,205 40,575 681,412 859,444 155,997 66,034 UTS**......................... 77,009 -- 97,613 41,263 15,497 36,412 WAA........................... 50,531 6,448 16,112 44,701 (8,665) (150) WGS****....................... 19,394 -- 20,516 18,266 639 2,357 WGR........................... 85,526 71 47,642 77,864 (2,579) 7,879 WTR***........................ 45,122 -- 38,335 49,398 8,687 (3,919) Units Withdrawn, Surrendered, and Units Outstanding Annuitized End of Year ---------------- ------------------ Year Ended Year Ended December 31, December 31, 1998 1997 1998 1997 ------- ------- --------- ------- MFS REGATTA CLASSIC CONTRACTS: ------------------------------ BDS+.......................... (176) -- 35,123 -- CAS........................... (20,408) (6,620) 465,812 265,497 COS........................... (11,244) (2,806) 277,518 160,778 CGS........................... (58,292) (18,079) 1,213,193 554,216 EGS........................... (26,865) (3,775) 959,802 318,028 EIS+.......................... -- -- 12,113 -- FCE........................... (643) (1,060) 43,654 40,698 FCI........................... (1,364) (1,634) 83,820 67,892 FCG*.......................... (3,074) (736) 90,582 51,038 GSS........................... (6,696) (4,328) 297,310 113,243 HYS........................... (35,251) (3,804) 342,363 155,306 MSS**......................... (8,530) (3,075) 140,324 118,243 MIS++......................... (1,764) -- 232,788 -- MMS........................... (173,976) (43,122) 270,417 77,105 NWD++......................... (33) -- 29,182 -- RES........................... (47,296) (7,305) 872,289 553,996 RGS#.......................... (793) (12) 33,882 6,085 RSS........................... -- -- 2,234 -- SIS+++........................ -- -- 2,577 -- TRS........................... (57,322) (14,848) 1,731,292 951,205 UTS**......................... (11,983) (666) 178,136 77,009 WAA........................... (4,811) (468) 53,167 50,531 WGS****....................... (475) (1,229) 40,074 19,394 WGR........................... (9,292) (288) 121,297 85,526 WTR***........................ (891) (357) 91,253 45,122
*For the period January 7, 1997 (commencement of operations of Sub-Account) through December 31, 1997. **For the period January 22, 1997 (commencement of operations of Sub-Account) through December 31, 1997. ***For the period February 11, 1997 (commencement of operations of Sub-Account) through December 31, 1997. ****For the period February 21, 1997 (commencement of operations of Sub-Account) through December 31, 1997. #For the period July 7, 1997 (commencement of operations of Sub-Account) through December 31, 1997. +For the period June 22, 1998 (commencement of operations of Sub-Account) through December 31, 1998. ++For the period May 7, 1998 (commencement of operations of Sub-Account) through December 31, 1998. +++For the period June 26, 1998 (commencement of operations of Sub-Account) through December 31, 1998. -31- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F NOTES TO FINANCIAL STATEMENTS -- continued (5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS -- continued
Units Transferred Between Sub-Accounts Units Outstanding and Units Withdrawn, Beginning of Fixed Accumulation Surrendered, and Units Outstanding Period Units Purchased Account Annuitized End of Period ------------------ --------------- -------------------- ---------------- ----------------- Period Ended Period Ended Period Ended Period Ended Period Ended December 31, December 31, December 31, December 31, December 31, 1998 1998 1998 1998 1998 ------------------ --------------- -------------------- ---------------- ----------------- MFS REGATTA PLATINUM CONTRACTS: ------------------------------ BDS+.......................... -- 491,319 143,015 (6,334) 628,000 CAS++......................... -- 1,489,422 215,237 (21,495) 1,683,164 COS*.......................... -- 480,199 80,801 (4,045) 556,955 CGS++......................... -- 4,380,217 1,013,330 (62,529) 5,331,018 EGS++......................... -- 1,412,976 254,376 (15,948) 1,651,404 EIS+++........................ -- 237,608 35,740 (986) 272,362 FCE+++........................ -- 67,723 4,892 (29) 72,586 FCI+++........................ -- 305,695 37,500 (4,257) 338,938 FCG*.......................... -- 167,384 34,931 (2,969) 199,346 GSS*.......................... -- 686,599 142,121 (12,618) 816,102 HYS+++........................ -- 917,703 95,977 (12,975) 1,000,705 MSS**......................... -- 180,220 35,500 (4,676) 211,044 MIS++......................... -- 2,052,872 400,450 (25,188) 2,428,134 MMS+++........................ -- 1,436,884 (492,250) (58,155) 886,479 NWD+++........................ -- 366,459 75,832 (6,113) 436,178 RES**......................... -- 1,463,540 319,544 (31,371) 1,751,713 RGS+.......................... -- 306,364 82,311 (1,595) 387,080 RSS***........................ -- 162,752 19,544 (1,165) 181,131 SIS#.......................... -- 123,410 35,045 (821) 157,634 TRS+++........................ -- 1,926,233 434,196 (41,582) 2,318,847 UTS**......................... -- 647,482 178,704 (6,537) 819,649 WAA*.......................... -- 175,049 56,466 (2,676) 228,839 WGS+++........................ -- 78,588 (2,199) (119) 76,270 WGR*.......................... -- 125,715 37,960 (819) 162,856 WTR##......................... -- 116,666 37,792 (1,601) 152,857
+For the period June 30, 1998 (commencement of operations of Sub-Account) through December 31, 1998. ++For the period June 5, 1998 (commencement of operations of Sub-Account) through December 31, 1998. +++For the period June 18, 1998 (commencement of operations of Sub-Account) through December 31, 1998. *For the period June 23, 1998 (commencement of operations of Sub-Account) through December 31, 1998. **For the period June 16, 1998 (commencement of operations of Sub-Account) through December 31, 1998. ***For the period June 29, 1998 (commencement of operations of Sub-Account) through December 31, 1998. #For the period June 26, 1998 (commencement of operations of Sub-Account) through December 31, 1998. ##For the period July 7, 1998 (commencement of operations of Sub-Account) through December 31, 1998. -32- INDEPENDENT AUDITOR'S REPORT To the Participants in Regatta, Regatta Gold, Regatta Classic and Regatta Platinum Sub-Accounts and the Board of Directors of Sun Life Assurance Company of Canada (U.S.): We have audited the accompanying statement of condition of Sun Life of Canada (U.S.) Bond Sub-Account, Capital Appreciation Sub-Account, Capital Opportunities Sub-Account, Conservative Growth Sub-Account, Emerging Growth Sub-Account, Equity Income Sub-Account, MFS/Foreign & Colonial Emerging Markets Equity Sub-Account, International Growth Sub-Account, International Growth and Income Sub-Account, Government Securities Sub-Account, High Yield Sub-Account, Managed Sectors Sub-Account, Massachusetts Investors Growth Stock Sub-Account, Money Market Sub-Account, New Discovery Sub-Account, Research Sub-Account, Research Growth and Income Sub-Account, Research International Sub-Account, Strategic Income Sub-Account, Total Return Sub-Account, Utilities Sub-Account, World Asset Allocation Sub-Account, World Governments Sub-Account, World Growth Sub-Account, and World Total Return Sub-Account of Sun Life of Canada (U.S.) Variable Account F, (the "Sub-Accounts") as of December 31, 1998, the related statement of operations for the year then ended and the statements of changes in net assets for the years ended December 31, 1998 and 1997. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities held at December 31, 1998 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Sub-Accounts as of December 31, 1998, the results of their operations and the changes in their net assets for the respective stated periods in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Boston, Massachusetts February 4, 1999 -33- SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) ANNUITY SERVICE MAILING ADDRESS: C/O RETIREMENT PRODUCTS AND SERVICES P.O. BOX 1024 BOSTON, MASSACHUSETTS 02103 TELEPHONE: Toll Free (800) 752-7215 In Massachusetts (617) 348-9600 GENERAL DISTRIBUTOR Clarendon Insurance Agency, Inc. One Sun Life Executive Park Wellesley Hills, Massachusetts 02481 AUDITORS Deloitte Touche LLP 125 Summer Street Boston, Massachusetts 02110 May 1, 1999 MFS REGATTA GOLD VARIABLE AND FIXED ANNUITY STATEMENT OF ADDITIONAL INFORMATION SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F TABLE OF CONTENTS Calculation of Performance Data ................................................ Advertising and Sales Literature ............................................... Calculations ................................................................... Example of Variable Accumulation Unit Value Calculation.................... Example of Variable Annuity Unit Calculation .............................. Example of Variable Annuity Payment Calculation ........................... Calculation of Annuity Values ............................................. Distribution of the Contracts .................................................. Designation and Change of Beneficiary .......................................... Custodian ...................................................................... Financial Statements ........................................................... The Statement of Additional Information sets forth information which may be of interest to prospective purchasers of MFS Regatta Gold Variable and Fixed Annuity Contracts (the "Contracts") issued by Sun Life Assurance Company of Canada (U.S.) (the "Company") in connection with Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") which is not included in the Prospectus dated May 1, 1999. This Statement of Additional Information should be read in conjunction with the Prospectus, a copy of which may be obtained without charge from the Company at its Annuity Service Mailing Address, c/o Sun Life Assurance Company of Canada (U.S.), Retirement Products and Services, P.O. Box 1024, Boston, Massachusetts 02103, or by telephoning (617) 348-9600 or (800)-752-7215. The terms used in this Statement of Additional Information have the same meanings as in the Prospectus. - -------------------------------------------------------------------------------- THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE PURCHASERS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS. -2- CALCULATION OF PERFORMANCE DATA STANDARDIZED AVERAGE ANNUAL TOTAL RETURN: The table below shows, for various Sub-Accounts of the Variable Account, the Standardized Average Annual Total Return for the stated periods (or shorter period indicated in the note below), based upon a hypothetical initial Purchase Payment of $1,000, calculated in accordance with the formula set out below. For purposes of determining these investment results, the actual investment performance of each Series of MFS/Sun Life Series Trust is reflected from the date the Variable Account was established, or such later date that the Series commenced operations (the "Commencement Date"), although the Contracts have been offered only since __________________. No information is shown for the Bond Series, Equity Income Series, Massachusetts Investors Growth Stock Series, New Discovery Series, Research International Series or Strategic Income Series as such Series had not yet commenced operations as of December 31, 1997. STANDARDIZED AVERAGE ANNUAL TOTAL RETURN PERIOD ENDING DECEMBER 31, 1997
1 YEAR 5 YEAR 10 YEAR COMMENCEMENT PERIOD PERIOD PERIOD LIFE DATE ----------- ----------- --------- ---------------- ---------------------- Capital Appreciation Series............. 20.59% 17.64% -- 15.76% July 13, 1989 Capital Opportunities Series*........... 19.16% -- -- 22.00% June 3, 1996 Emerging Growth Series.................. 25.78% -- -- 24.65% May 1, 1995 Government Securities Series............ 1.28% 4.52% -- 6.39% July 13, 1989 High Yield Series....................... (6.23)% 5.75% -- 7.72% July 13, 1989 International Growth Series*............ (4.95)% -- -- (3.29)% June 3, 1996 International Growth and Income Series................................. 13.90% -- -- 7.59% October 2, 1995 Managed Sectors Series.................. 4.60% 14.36% -- 13.33% July 13, 1989 Massachusetts Investors Trust Series (5) 15.75% 20.46% -- 15.83% July 13, 1989 MFS/Foreign & Colonial Emerging Markets Equity Series*......................... (34.48)% -- -- (11.83)% June 5, 1996 Money Market Series..................... (2.18)% 2.70% -- 3.26% July 13, 1989 Research Series......................... 15.63% -- -- 22.48% November 7, 1994 Research Growth and Income Series....... 14.47% -- -- 14.92% May 12, 1997 Total Return Series..................... 3.84% 11.50% -- 10.60% July 13, 1989 Utilities Series........................ 9.89% 16.66% -- 16.21% November 16, 1993 Global Asset Allocation Series (1)...... (0.68)% -- -- 10.97% November 7, 1994 Global Governments Series (2)........... 7.81% 3.71% -- 7.10% July 13, 1989 Global Growth Series (3)................ 6.84% 10.04% -- 11.10% November 16, 1993 Global Total Return Series (4).......... 10.67% -- -- 13.25% November 7, 1994
- ------------------------ *Actual returns, not annualized. (1) Formerly, the World Asset Allocation Series. (2) Formerly, the World Governments Series. (3) Formerly, the World Growth Series. (4) Formerly, the World Total Return Series. (5) Formerly, the Conservative Growth Series. The length of the period and the last day of each period used in the above table are set out in the table heading and in the footnotes above. The Average Annual Total Return for each period was determined by finding the average annual compounded rate of return over each period that would equate the initial amount invested to the ending redeemable value for that period, in accordance with the following formula: n P(1 + T) = ERV Where: P = a hypothetical initial Purchase Payment of $1,000 T = average annual total return for the period n = number of years ERV = redeemable value (as of the end of the period) of a hypothetical $1,000 Purchase Payment made at the beginning of the 1-year, 5-year, or 10-year period (or fractional portion thereof) The formula assumes that: 1) all recurring fees have been deducted from the Participant's Account; 2) all applicable non-recurring Contract charges are deducted at the end of the period; and 3) there will be a full surrender at the end of the period. The $35 annual Account Fee will be allocated among the Sub-Accounts so that each Sub-Account's allocated portion of the Account Fee is proportional to the percentage of the number of Certificates that have amounts allocated to that Sub-Account. Because the impact of Account Fees on a particular Certificate may differ from those assumed in the computation due to differences between actual allocations and the assumed ones, the total return that would have been experienced by an actual Contract over these same time periods may have been different from that shown above. -3- NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN: The table below shows, for various Sub-Accounts of the Variable Account, the Non-Standardized Average Annual Total Return for the stated periods (or shorter period indicated in the note below), based upon a hypothetical initial Purchase Payment of $1,000, calculated in accordance with the formula set out under "Standardized Average Annual Total Return." For purposes of determining these investment results, the actual investment performance of each Series of MFS/Sun Life Series Trust is reflected from the date such Series commenced operations ("Inception"), although the Contracts have been offered only since _________________. No information is shown for the Bond Series, Equity Income Series, Massachusetts Investors Growth Stock Series, New Discovery Series, Research International Series or Strategic Income Series as such Series had been in operation less than one year as of December 31, 1997. NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN PERIOD ENDING DECEMBER 31, 1998
1 YEAR 5 YEAR 10 YEAR DATE OF PERIOD PERIOD PERIOD LIFE* INCEPTION ----------- ----------- ----------- ----------- ---------------------- Capital Appreciation Series............. 20.59% 17.64% 18.17% 15.86% August 13, 1985 Capital Opportunities Series**.......... 19.16% -- -- 22.00% June 3, 1996 Emerging Growth Series.................. 25.78% -- -- 24.65% May 1, 1995 Government Securities Series............ 1.28% 4.52% 6.86% 7.01% August 12, 1985 High Yield Series....................... (6.23)% 5.75% 7.90% 8.06% August 13, 1985 International Growth Series**........... (4.95)% -- -- (3.29)% June 3, 1996 International Growth and Income Series.. 13.90% -- -- 7.59% October 2, 1995 Managed Sectors Series.................. 4.60% 14.36% 15.77% 15.22% May 27, 1988 Massachusetts Investors Trust Series.... 15.75% 20.46% 17.26% 14.27% December 5, 1986 MFS/Foreign & Colonial Emerging Markets Equity Series**........................ (34.48)% -- -- (11.83)% June 5, 1996 Money Market Series..................... (2.18)% 2.70% 3.47% 3.68% August 29, 1985 Research Series......................... 15.63% -- -- 22.48% November 7, 1994 Research Growth and Income Series....... 14.47% -- -- 14.92% May 12, 1997 Total Return Series..................... 3.84% 11.50% 11.23% 11.01% May 16, 1988 Utilities Series........................ 9.89% 16.66% -- 16.21% November 16, 1993 Global Asset Allocation Series.......... (0.68)% -- -- 10.97% November 7, 1994 Global Governments Series............... (7.81)% 3.71% 6.87% 6.77% May 16, 1988 Global Growth Series.................... 6.84% 10.04% -- 11.10% November 16, 1993 Global Total Return Series.............. 10.67% -- -- 13.25% November 7, 1994
- ------------------------ *From commencement of investment operations **Actual returns, not annualized. -4- NON-STANDARDIZED COMPOUND GROWTH RATE: The table below shows, for various Sub-Accounts of the Variable Account, the Non-Standardized Compound Growth Rate for the stated periods (or shorter period indicated in the note below), based upon a hypothetical initial Purchase Payment of $1,000, calculated in accordance with the formula set out under "Standardized Average Annual Return," except that no withdrawal charges or annual Account Fees have been deducted. If withdrawal charges and Account Fees were reflected, returns would be lower (see "Standardized Average Annual Total Return" and "Non-Standardized Average Annual Total Return"). For purposes of determining these investment results, the actual investment performance of each Series of MFS/Sun Life Series Trust is reflected from the date such Series commenced operations ("Inception"), although the Contracts have been offered only since ________________. No information is shown for the Bond Series, Equity Income Series, Massachusetts Investors Growth Stock Series, New Discovery Series, Research International Series or Strategic Income Series as such Series had been in operation less than one year as of December 31, 1998. NON-STANDARDIZED COMPOUND GROWTH RATE PERIOD ENDING DECEMBER 31, 1998
1 YEAR 5 YEAR 10 YEAR DATE OF PERIOD PERIOD PERIOD LIFE* INCEPTION ----------- ----------- ----------- ----------- ---------------------- Capital Appreciation Series............. 26.93% 18.41% 18.45% 16.12% August 13, 1985 Capital Opportunities Series**.......... 25.20% -- -- 23.44% June 3, 1996 Emerging Growth Series.................. 32.01% -- -- 25.55% May 1, 1995 Government Securities Series............ 7.23% 5.23% 7.11% 7.27% August 12, 1985 High Yield Series....................... (0.78)% 6.39% 7.99% 8.13% August 13, 1985 International Growth Series**........... 0.51% -- -- 1.95% June 3, 1996 International Growth and Income Series.. 19.94% -- -- 8.81% October 2, 1995 Managed Sectors Series.................. 10.72% 14.95% 15.90% 15.35% May 27, 1988 Massachusetts Investors Trust Series.... 22.13% 21.04% 17.42% 14.45% December 5, 1986 MFS/Foreign & Colonial Emerging Markets Equity Series**........................ (30.92)% -- -- (10.76)% June 5, 1996 Money Market Series..................... 3.58% 3.39% 3.80% 4.05% August 29, 1985 Research Series......................... 21.92% -- -- 23.14% November 7, 1994 Research Growth and Income Series....... 20.48% -- -- 18.25% May 12, 1997 Total Return Series..................... 10.20% 12.44% 11.70% 11.47% May 16, 1988 Utilities Series........................ 15.96% 17.13% -- 16.69% November 16, 1993 Global Asset Allocation Series.......... 5.07% -- -- 11.69% November 7, 1994 Global Governments Series............... 13.87% 4.33% 7.02% 6.92% May 16, 1988 Global Growth Series.................... 12.97% 10.71% -- 11.75% November 16, 1993 Global Total Return Series.............. 16.71% -- -- 13.93% November 7, 1994
- ------------------------ *From commencement of investment operations **Actual returns, not annualized. ADDITIONAL NON-STANDARDIZED INVESTMENT PERFORMANCE: The Variable Account may illustrate its results over various periods and compare its results to indices and other variable annuities in sales materials including advertisements, brochures and sports. Such results may be computed on a "cumulative" and/or "annualized" basis. "Cumulative" quotations are arrived at by calculating the change in the Accumulation Unit value of a Sub-Account between the first and last day of the base period being measured, and expressing the difference as a percentage of the Accumulation Unit value at the beginning of the base period. "Annualized" quotations (described in the following table as "Compound Growth Rate") are calculated by applying a formula which determines the level rate of return which, if earned over the entire base period, would produce the cumulative return. -5- ADVERTISING AND SALES LITERATURE As set forth in the Prospectus, the Company may refer to the following organizations (and others) in its marketing materials: A.M. BEST'S RATING SYSTEM is designed to evaluate the various factors affecting the overall performance of an insurance company in order to provide an opinion as to an insurance company's relative financial strength and ability to meet its contractual obligations. The procedure includes both a quantitative and qualitative review of each company. DUFF & PHELPS CREDIT RATING Company's Insurance Company Claims Paying Ability Rating is an independent evaluation by a nationally accredited rating organization of an insurance company's ability to meet its future obligations under the contracts and products it sells. The rating takes into account both quantitative and qualitative factors. LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a publisher of statistical data covering the investment company industry in the United States and overseas. Lipper is recognized as the leading source of data on open-end and closed-end funds. Lipper currently tracks the performance of over 5,000 investment companies and publishes numerous specialized reports, including reports on performance and portfolio analysis, fee and expense analysis. STANDARD & POOR's insurance claims-paying ability rating is an opinion of an operating insurance company's financial capacity to meet obligations of its insurance policies in accordance with their terms. VARDS (Variable Annuity Research Data Service) provides a comprehensive guide to variable annuity contract features and historical fund performance. The service also provides a readily understandable analysis of the comparative characteristics and market performance of funds inclusive in variable contracts. MOODY'S Investors Services, Inc.'s insurance claims-paying rating is a system of rating an insurance company's financial strength, market leadership, and ability to meet financial obligations. The purpose of Moody's ratings is to provide investors with a simple system of gradation by which the relative quality of insurance companies may be noted. STANDARD & POOR'S INDEX - broad-based measurement of changes in stock-market conditions based on the average performance of 500 widely held common stocks; commonly known as the Standard & Poor's 500 (S&P 500). The selection of stocks, their relative weightings to reflect differences in the number of outstanding shares, and publication of the index itself are services of Standard & Poor's Corporation, a financial advisory, securities rating, and publishing firm. The index tracks 400 industrial company stocks, 20 transportation stocks, 40 financial company stocks, and 40 public utilities. -6- NASDAQ-OTC Price Index - this index is based on the National Association of Securities Dealers Automated Quotations (NASDAQ) and represents all domestic over-the-counter stocks except those traded on exchanges and those having only one market maker, a total of some 3,500 stocks. It is market valueweighted and was introduced with a base of 100.00 on February 5, 1971. DOW JONES INDUSTRIAL AVERAGE (DJIA) - price-weighted average of 30 actively traded blue chip stocks, primarily industrials, but including American Express Company and American Telephone and Telegraph Company. Prepared and Published by Dow Jones & Company, it is the oldest and most widely quoted of all the market indicators. The average is quoted in points, not dollars. MORNINGSTAR, Inc. is an independent financial publisher offering comprehensive statistical and analytical coverage of open-end and closed-end funds and variable annuities. This coverage for mutual funds includes, among other information, performance analysis rankings, risk rankings (e.g. aggressive, moderate or conservative), and "style box" matrices. Style box matrices display, for equity funds, the investment philosophy and size of the companies in which the fund invests and, for fixed-income funds, interest rate sensitivity and credit quality of the investment instruments. IBBOTSON ASSOCIATES, Inc. is a consulting firm that provides a variety of historical data, including total return, capital appreciation and income, on the stock market as well as other investment asset classes, and inflation. This information will be used primarily for comparative purposes and to illustrate general financial planning principles. In its advertisements and other sales literature for the Variable Account and the Series Fund, the Company intends to illustrate the advantages of the Contracts in a number of ways: DOLLAR COST AVERAGING ILLUSTRATIONS. These illustrations will generally discuss the price-leveling effect of making regular investments in the same Sub-Accounts over a period of time, to take advantage of the trends in market prices of the portfolio securities purchased by those Sub-Accounts. SYSTEMATIC WITHDRAWAL PROGRAM. A service provided by the Company, through which a Participant may take any distribution allowed by Internal Revenue Code Section 401 (a) (9) in the case of Qualified Contracts, or permitted under Internal Revenue Code Section 72 in the case of Non-Qualified Contracts, by way of a series of partial withdrawals. Withdrawals under this program may be fully or partially includible in income and may be subject to a 10% penalty tax. Consult your tax advisor. THE COMPANY'S OR MFS' CUSTOMERS. Sales literature for the Variable Account and the Funds may refer to the number of clients which they serve. THE COMPANY'S OR MFS' ASSETS, SIZE. The Company may discuss its general financial condition (see, for example, the references to Standard & Poor's, Duff & Phelps and A.M. Best Company above); it may refer to its assets; it may also discuss its -7- relative size and/or ranking among companies in the industry or among any sub-classification of those companies, based upon recognized evaluation criteria. For example, at December 31, 1997 the Company was the 37th largest U.S. life insurance company based upon overall assets and its ultimate parent company, Sun Life Assurance Company of Canada, was the 21st largest. COMPOUND INTEREST ILLUSTRATIONS. These will emphasize several advantages of the variable annuity contract. For example, but not by way of limitation, the literature may emphasize the potential savings through tax deferral; the potential advantage of the Variable Account over the Fixed Account; and the compounding effect when a participant makes regular deposits to his or her account. The Company may use hypothetical illustrations of the benefits of tax deferral, including but not limited to the following chart: The chart below assumes an initial investment of $10,000 which remains fully invested for the entire time period, an 8% annual return, and a 33% combined federal and state income tax rate. It compares how three different investments might fare over 10, 20, and 30 years. The first example illustrates an investment in a non-tax-deferred account and assumes that taxes are paid annually out of that account. The second example illustrates how the same investment would grow in a tax-deferred investment, such as an annuity. And the third example illustrates the net value of the tax-deferred investment after paying taxes on the full account value.
- -------------------------------------------------------------------------------- 10 YEARS 20 YEARS 30 YEARS - -------------------------------------------------------------------------------- Non-Tax-Deferred Account $16,856 $28,413 $ 47,893 - -------------------------------------------------------------------------------- Tax-Deferred Account $21,589 $46,610 $100,627 - -------------------------------------------------------------------------------- Tax-Deferred Account After $17,765 $34,528 $ 70,720 - -------------------------------------------------------------------------------- Paying Taxes - --------------------------------------------------------------------------------
THIS ILLUSTRATION IS HYPOTHETICAL AND DOES NOT REPRESENT THE PROJECTED PERFORMANCE OF THE MFS REGATTA GOLD VARIABLE ANNUITY OR ANY OF ITS INVESTMENT OPTIONS. THE ILLUSTRATION DOES NOT REFLECT THE DEDUCTION OF ANY CHARGES OR FEES RELATED TO PORTFOLIO MANAGEMENT, MORTALITY AND EXPENSE, OR ACCOUNT ADMINISTRATION. TAXES ON EARNINGS WITHIN AN ANNUITY ARE DUE UPON WITHDRAWAL. WITHDRAWALS MAY ALSO BE SUBJECT TO SURRENDER CHARGES AND, IF MADE PRIOR TO AGE 59 1/2, A 10% FEDERAL PENALTY TAX. -8- CALCULATIONS EXAMPLE OF VARIABLE ACCUMULATION UNIT VALUE CALCULATION Suppose the net asset value of a Series Fund share at the end of the current valuation period is $18.38; at the end of the immediately preceding valuation period was $18.32; the Valuation Period is one day; and no dividends or distributions caused Series Fund shares to go "ex-dividend" during the current Valuation Period. $18.38 divided by $18.32 is 1.00327511. Subtracting the one day risk factor for mortality and expense risks and the administrative expense charge of .00003809 (the daily equivalent of the current maximum charge of 1.40% on an annual basis) gives a net investment factor of 1.00323702. If the value of the variable accumulation unit for the immediately preceding valuation period had been 14.5645672, the value for the current valuation period would be 14.6117130 (14.5645672 X 1.00323702). EXAMPLE OF VARIABLE ANNUITY UNIT CALCULATION Suppose the circumstances of the first example exist, and the value of an annuity unit for the immediately preceding valuation period had been 12.3456789. If the first variable annuity payment is determined by using an annuity payment based on an assumed interest rate of 4% per year, the value of the annuity unit for the current valuation period would be 12.3843113 (12.3456789 X 1.00323702 (the Net Investment Factor) X 0.99989255). 0.99989255 is the factor, for a one day Valuation Period, that neutralizes the assumed interest rate of 3% per year used to establish the Annuity Payment Rates found in certain Contracts. (The factor that neutralizes the assumed interest rate of 3% per year used to establish the Annuity Payment Rates found in other contracts is 0.99991902). EXAMPLE OF VARIABLE ANNUITY PAYMENT CALCULATION Suppose that a Participant Account is credited with 8,765.4321 variable accumulation units of a particular Sub-Account but is not credited with any fixed accumulation units; that the variable accumulation unit value and the annuity unit value for the particular Sub-Account for the valuation period which ends immediately preceding the annuity commencement date are 14.5645672 and 12.3456789 respectively; that the annuity payment rate for the age and option elected is $6.78 per $1,000; and that the annuity unit value on the day prior to the second variable annuity payment date is 12.3843113. The first variable annuity payment would be $865.57 (8,765.4321 X 14.5645672 X 6.78 divided by 1,000). The number of annuity units credited would be 70.1112 ($865.57 divided by 12.3456789) and the second variable annuity payment would be $868.28 (70.1112 X 12.3843113). CALCULATION OF ANNUITY VALUES The Fixed Annuity Unit Value for each Sub-Account is $10.00 for the first Valuation Period of the Sub-Account. For subsequent Valuation periods, the Variable Annuity Unit Value for the Sub-Account is the previous Variable Annuity Unit Value times the Net Investment Factor for the Sub-Account. DISTRIBUTION OF THE CONTRACTS We offer the Contracts on a continuous basis. The Contracts are sold by licensed insurance agents in those states where the Contracts may be lawfully sold. Such agents will be registered representatives of broker-dealers registered under the Securities Exchange Act of 1934 who are members of the National Association of Securities Dealers, Inc. and who have entered into distribution agreements with the Company and the general distributor and principal underwriter of the Contracts, Clarendon Insurance Agency, Inc. ("Clarendon"), One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. Clarendon is a wholly-owned subsidiary of the Company. Clarendon is registered with the SEC under the Securities Exchange Act of 1934 as broker-dealer and is a member of the National Association of Securities Dealers, Inc. Clarendon also acts as the general distributor of certain other annuity contracts issued by the Company and its wholly-owned subsidiary, Sun Life Insurance and Annuity Company of New York, and variable life insurance contracts issued by the Company. Commissions and other distribution compensation will be paid by the Company to the selling agents and will not be more than 7.34% of Purchase Payments. In addition, after the first Account Year, broker-dealers who have entered into distribution agreements with the Company may receive an annual renewal commission of no more than 1.00% of the Participant's Account Value. In addition to commissions, the Company may, from time to time, pay or allow additional promotional incentives, in the form of cash or other compensation. The Company reserves the right to offer these additional incentives only to certain -9- broker-dealers that sell or are expected to sell during specified time periods certain minimum amounts of the Contracts or Certificates or other contracts offered by the Company. Promotional incentives may change at any time. Commissions will not be paid with respect to Participant Accounts established for the personal account of employees of the Company or any of its affiliates, or of persons engaged in the distribution of the Contracts, or of immediate family members of such employees or persons. In addition, commissions may be waived or reduced in connection with certain transactions described in the Prospectus under the heading "Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest Rates." DESIGNATION AND CHANGE OF BENEFICIARY The Beneficiary designation in the Application will remain in effect until changed. Subject to the rights of an irrevocably designated Beneficiary, you may change or revoke the designation of Beneficiary by filing the change or revocation with us in the form we require. The change or revocation will not be binding on us until we receive it. When we receive it, the change or revocation will be effective as of the date on which it was signed, but the change or revocation will be without prejudice to us on account of any payment we make or any action we take before receiving the change or revocation. Please refer to the terms of your particular retirement plan and any applicable legislation for any restrictions on the beneficiary designation. CUSTODIAN We are the Custodian of the assets of the Variable Account. We will purchase Series Fund shares at net asset value in connection with amounts allocated to the Sub-Accounts in accordance with your instructions, and we will redeem Series Fund shares at net asset value for the purpose of meeting the contractual obligations of the Variable Account, paying charges relative to the Variable Account or making adjustments for annuity reserves held in the Variable Account. FINANCIAL STATEMENTS The Financial Statements of Sun Life of Canada (U.S.) Variable Account F for the year ended December 31, 1998 included in this Statement of Additional Information have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. -10- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF CONDITION -- December 31, 1998
Assets: Investment in MFS/Sun Life Series Trust: Shares Cost Value ----------- -------------- -------------- Bond Series ("BDS").............................................................. 1,833,052 $ 19,308,754 $ 19,594,756 Capital Appreciation Series ("CAS").............................................. 32,535,812 1,207,116,273 1,494,454,468 Capital Opportunities Series ("COS")............................................. 11,033,845 154,891,892 187,374,642 Conservative Growth Series ("CGS")............................................... 45,143,592 1,273,801,516 1,726,636,223 Emerging Growth Series ("EGS")................................................... 30,106,934 505,953,776 700,846,932 Equity Income Series ("EIS")..................................................... 808,548 7,896,401 8,491,757 MFS/Foreign & Colonial Emerging Markets Equity Series ("FCE").................... 2,266,785 22,335,481 16,977,985 International Growth Series ("FCI").............................................. 3,626,435 35,824,144 35,304,699 International Growth and Income Series ("FCG")................................... 5,453,761 65,412,844 71,908,458 Government Securities Series ("GSS")............................................. 29,861,826 385,880,145 399,987,008 High Yield Series ("HYS")........................................................ 31,251,222 294,351,362 286,371,075 Managed Sectors Series ("MSS")................................................... 11,831,026 317,435,697 334,165,044 Massachusetts Investors Growth Stock Series ("MIS").............................. 6,724,723 69,779,820 81,191,995 Money Market Series ("MMS")...................................................... 417,135,145 417,135,145 417,135,145 New Discovery Series ("NWD")..................................................... 1,250,089 11,775,479 13,279,492 Research Series ("RES").......................................................... 41,174,957 725,772,331 947,967,793 Research Growth & Income Series ("RGS").......................................... 2,708,382 32,789,497 36,276,888 Research International Series ("RSS")............................................ 373,636 3,392,628 3,519,310 Strategic Income Series ("SIS").................................................. 774,644 7,563,923 7,781,098 Total Return Series ("TRS")...................................................... 85,415,374 1,568,357,466 1,816,228,173 Utilities Series ("UTS")......................................................... 12,363,259 176,926,102 211,219,612 World Asset Allocation Series ("WAA")............................................ 8,540,141 119,915,782 123,362,461 World Governments Series ("WGS")................................................. 7,341,822 83,199,514 89,769,321 World Growth Series ("WGR")...................................................... 16,637,922 227,100,556 260,469,628 World Total Return Series ("WTR")................................................ 5,736,216 80,641,108 95,255,576 -------------- -------------- $7,814,557,636 $9,385,569,539 -------------- -------------- Receivable from Sponsor......................................................................................... 124,848 -------------- Net Assets................................................................................................ $9,385,694,387 -------------- --------------
Applicable to Owners of Reserve Deferred Variable Annuity Contracts for ------------------------------------- Variable NET ASSETS APPLICABLE TO CONTRACT OWNERS: Units Unit Value Value Annuities Total ---------- ---------- ------------ ---------- -------------- MFS REGATTA CONTRACTS: CAS -- Level 1......................... 464,349 $38.0799 $ 17,690,821 $ 128,185 $ 17,819,006 CAS -- Level 2......................... 9,053,993 15.3711 139,037,017 502,016 139,539,033 GSS -- Level 1......................... 325,241 17.8992 5,834,948 85,153 5,920,101 GSS -- Level 2......................... 2,656,978 11.4928 30,519,539 186,149 30,705,688 HYS -- Level 1......................... 73,632 21.8836 1,617,626 4,912 1,622,538 HYS -- Level 2......................... 1,320,379 11.1015 14,660,653 65,418 14,726,071 MSS -- Level 1......................... 196,463 30.2227 5,814,583 64,763 5,879,346 MSS -- Level 2......................... 2,730,897 13.6177 37,269,491 76,615 37,346,106 MMS -- Level 1......................... 268,447 13.6495 3,851,232 27,783 3,879,015 MMS -- Level 2......................... 3,722,758 10.7906 39,934,531 3,596 39,938,127 TRS -- Level 1......................... 898,137 26.5642 23,875,313 222,411 24,097,724 TRS -- Level 2......................... 12,506,430 13.3189 166,507,969 1,042,925 167,550,894 WGS -- Level 1......................... 89,328 18.6916 1,681,850 39,205 1,721,055 WGS -- Level 2......................... 834,010 11.2037 9,329,126 36,551 9,365,677 ------------ ---------- -------------- $497,624,699 $2,485,682 $ 500,110,381 ------------ ---------- --------------
See notes to financial statements -11- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF CONDITION -- December 31, 1998 -- continued
Applicable to Owners of Reserve Deferred Variable Annuity Contracts for NET ASSETS APPLICABLE TO CONTRACT OWNERS --------------------------------------- Variable (CONTINUED): Units Unit Value Value Annuities Total ---------- ---------- -------------- ---------- -------------- MFS REGATTA GOLD CONTRACTS: BDS.................................... 1,182,239 $10.5921 $ 12,523,169 $ 148,957 $ 12,672,126 CAS.................................... 37,500,481 34.7871 1,304,369,755 6,496,774 1,310,866,529 COS.................................... 10,262,282 17.2085 176,609,581 303,057 176,912,638 CGS.................................... 51,880,765 31.7109 1,645,157,266 5,065,107 1,650,222,373 EGS.................................... 28,900,957 23.0408 665,946,545 1,249,399 667,195,944 EIS.................................... 528,238 10.4065 5,496,893 -- 5,496,893 FCE.................................... 2,147,348 7.4615 16,021,601 19,295 16,040,896 FCI.................................... 3,290,043 9.5047 31,272,468 50,802 31,323,270 FCG.................................... 5,214,558 13.1538 68,597,649 89,079 68,686,728 GSS.................................... 23,218,234 15.0941 350,499,319 1,093,255 351,592,574 HYS.................................... 14,190,817 18.0207 255,739,789 889,807 256,629,596 MSS.................................... 11,245,144 25.4406 285,790,341 972,779 286,763,120 MIS.................................... 4,121,518 11.9635 49,306,625 88,325 49,394,950 MMS.................................... 29,387,086 12.2282 359,428,914 1,587,715 361,016,629 NWD.................................... 794,859 10.5258 8,366,403 37,385 8,403,788 RES.................................... 38,553,986 23.7119 913,668,029 2,442,962 916,110,991 RGS.................................... 2,408,676 13.1605 31,700,558 131,422 31,831,980 RSS.................................... 190,267 9.3330 1,776,592 -- 1,776,592 SIS.................................... 622,914 9.9530 6,199,328 -- 6,199,328 TRS.................................... 71,102,020 22.1273 1,573,134,778 4,410,143 1,577,544,921 UTS.................................... 9,023,102 22.0489 198,939,550 710,512 199,650,062 WAA.................................... 7,576,691 15.8203 119,890,942 617,113 120,508,055 WGS.................................... 5,048,219 15.2422 76,964,930 444,193 77,409,123 WGR.................................... 14,522,129 17.6676 256,577,775 663,609 257,241,384 WTR.................................... 5,354,633 17.1741 91,961,363 521,228 92,482,591 -------------- ---------- -------------- $8,505,940,163 $28,032,918 $8,533,973,081 -------------- ---------- --------------
See notes to financial statements -12- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF CONDITION -- December 31, 1998 -- continued
Applicable to Owners of Reserve Deferred Variable Annuity Contracts for NET ASSETS APPLICABLE TO CONTRACT OWNERS --------------------------------------- Variable (CONTINUED): Units Unit Value Value Annuities Total ---------- ---------- -------------- ---------- -------------- MFS REGATTA CLASSIC CONTRACTS: BDS.................................... 35,123 $10.4200 $ 365,971 $ -- $ 365,971 CAS.................................... 465,812 15.2806 7,116,057 -- 7,116,057 COS.................................... 277,518 15.9773 4,429,393 -- 4,429,393 CGS.................................... 1,213,193 15.7220 19,066,338 701 19,067,039 EGS.................................... 959,802 15.2416 14,625,520 -- 14,625,520 EIS.................................... 12,113 10.6318 128,778 -- 128,778 FCE.................................... 43,654 7.8620 343,375 -- 343,375 FCI.................................... 83,820 9.8139 822,725 -- 822,725 FCG.................................... 90,582 12.7274 1,152,339 -- 1,152,339 GSS.................................... 297,310 11.5012 3,424,501 -- 3,424,501 HYS.................................... 342,363 11.2212 3,840,819 -- 3,840,819 MSS.................................... 140,324 13.2363 1,856,704 -- 1,856,704 MIS.................................... 232,788 11.9830 2,790,662 -- 2,790,662 MMS.................................... 270,417 10.7995 2,919,832 -- 2,919,832 NWD.................................... 29,182 10.5430 307,881 -- 307,881 RES.................................... 872,289 14.3354 12,502,110 -- 12,502,110 RGS.................................... 33,882 12.9744 439,317 -- 439,317 RSS.................................... 2,234 11.0101 24,596 -- 24,596 SIS.................................... 2,577 9.8850 25,477 -- 25,477 TRS.................................... 1,731,292 13.1773 22,813,315 1,386 22,814,701 UTS.................................... 178,136 14.8587 2,640,990 -- 2,640,990 WAA.................................... 53,167 11.5822 616,156 -- 616,156 WGS.................................... 40,074 11.4588 459,164 -- 459,164 WGR.................................... 121,297 12.8959 1,563,449 -- 1,563,449 WTR.................................... 91,253 13.0681 1,192,112 723 1,192,835 -------------- ---------- -------------- $ 105,467,581 $ 2,810 $ 105,470,391 -------------- ---------- --------------
See notes to financial statements -13- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF CONDITION -- December 31, 1998 -- continued
Applicable to Owners of Deferred Variable Annuity Contracts Reserve for NET ASSETS APPLICABLE TO CONTRACT OWNERS ------------------------------------- Variable (CONTINUED): Units Unit Value Value Annuities Total -------- ---------- -------------- ----------- -------------- MFS REGATTA PLATINUM CONTRACTS: BDS.................................... 628,000 $10.4201 $ 6,543,991 $ -- $ 6,543,991 CAS.................................... 1,683,164 11.3405 19,087,857 21,268 19,109,125 COS.................................... 556,955 10.8048 6,017,955 -- 6,017,955 CGS.................................... 5,331,018 10.7939 57,543,942 58,386 57,602,328 EGS.................................... 1,651,404 11.5819 19,126,029 -- 19,126,029 EIS.................................... 272,362 10.5234 2,866,086 -- 2,866,086 FCE.................................... 72,586 8.1616 592,467 -- 592,467 FCI.................................... 338,938 9.3254 3,160,703 -- 3,160,703 FCG.................................... 199,346 10.3378 2,060,785 -- 2,060,785 GSS.................................... 816,102 10.4116 8,497,341 -- 8,497,341 HYS.................................... 1,000,705 9.5030 9,509,687 9,324 9,519,011 MSS.................................... 211,044 10.5861 2,234,121 21,614 2,255,735 MIS.................................... 2,428,134 11.9094 28,917,948 87,345 29,005,293 MMS.................................... 886,479 10.1878 9,031,808 119,936 9,151,744 NWD.................................... 436,178 10.4124 4,541,543 23,912 4,565,455 RES.................................... 1,751,713 11.0189 19,301,999 96,452 19,398,451 RGS.................................... 387,080 10.3415 4,002,882 -- 4,002,882 RSS.................................... 181,131 9.4845 1,718,122 -- 1,718,122 SIS.................................... 157,634 9.8713 1,556,293 -- 1,556,293 TRS.................................... 2,318,847 10.2907 23,862,327 210,689 24,073,016 UTS.................................... 819,649 10.9233 8,953,383 10,545 8,963,928 WAA.................................... 228,839 9.7081 2,221,401 -- 2,221,401 WGS.................................... 76,270 11.2639 858,944 -- 858,944 WGR.................................... 162,856 10.2820 1,674,403 -- 1,674,403 WTR.................................... 152,857 10.4567 1,598,349 697 1,599,046 -------------- ----------- -------------- $ 245,480,366 $ 660,168 $ 246,140,534 -------------- ----------- -------------- Net Assets............................. $9,354,512,809 $31,181,578 $9,385,694,387 -------------- ----------- -------------- -------------- ----------- --------------
See notes to financial statements -14- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF OPERATIONS -- Year Ended December 31, 1998
BDS CAS COS CGS Sub-Account* Sub-Account Sub-Account Sub-Account --------------- ------------ ------------ ------------- INCOME AND EXPENSES: Dividend income and capital gain distributions received.......... $ -- $145,840,372 $ 5,578,765 $ 93,714,906 Mortality and expense risk charges......................... (73,456) (15,736,721) (1,733,280) (17,202,966) Distribution expense charges..... -- (84,682) -- -- Administrative expense charges... (8,815) (1,803,725) (207,994) (2,064,356) --------------- ------------ ------------ ------------- Net investment income (loss)... $ (82,271) $128,215,244 $ 3,637,491 $ 74,447,584 --------------- ------------ ------------ ------------- REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains (losses) on investment transactions Proceeds from sales............ $5,147,887 $333,053,338 $ 18,663,825 $ 67,989,586 Cost of investments sold....... (4,931,477) (266,350,843) (13,493,338) (34,336,835) --------------- ------------ ------------ ------------- Net realized gains (losses).................... $ 216,410 $ 66,702,495 $ 5,170,487 $ 33,652,751 --------------- ------------ ------------ ------------- Net unrealized appreciation (depreciation) on investments End of year.................... $ 286,002 $287,338,195 $ 32,482,750 $ 452,834,707 Beginning of year.............. -- 165,968,995 11,851,082 285,383,733 --------------- ------------ ------------ ------------- Change in unrealized appreciation (depreciation).............. $ 286,002 $121,369,200 $ 20,631,668 $ 167,450,974 --------------- ------------ ------------ ------------- Realized and unrealized gains (losses)...................... $ 502,412 $188,071,695 $ 25,802,155 $ 201,103,725 --------------- ------------ ------------ ------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS................... $ 420,141 $316,286,939 $ 29,439,646 $ 275,551,309 --------------- ------------ ------------ ------------- --------------- ------------ ------------ ------------- EGS EIS FCE Sub-Account Sub-Account* Sub-Account ------------- ------------ ------------ INCOME AND EXPENSES: Dividend income and capital gain distributions received.......... $ 18,895,299 $-- $ 747,426 Mortality and expense risk charges......................... (6,840,338) (28,468) (249,740) Distribution expense charges..... -- -- -- Administrative expense charges... (820,840) (3,416) (29,969) ------------- ------------ ------------ Net investment income (loss)... $ 11,234,121 $(31,884) $ 467,717 ------------- ------------ ------------ REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains (losses) on investment transactions Proceeds from sales............ $ 67,761,609 3,$017,698 $ 16,258,903 Cost of investments sold....... (45,241,707) (3,135,184) (20,682,560) ------------- ------------ ------------ Net realized gains (losses).................... $ 22,519,902 ($117,486) $ (4,423,657) ------------- ------------ ------------ Net unrealized appreciation (depreciation) on investments End of year.................... $ 194,893,156 $595,356 $ (5,357,496) Beginning of year.............. 69,992,703 -- (1,673,420) ------------- ------------ ------------ Change in unrealized appreciation (depreciation).............. $ 124,900,453 $595,356 $ (3,684,076) ------------- ------------ ------------ Realized and unrealized gains (losses)...................... $ 147,420,355 $477,870 $ (8,107,733) ------------- ------------ ------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS................... $ 158,654,476 $445,986 $ (7,640,016) ------------- ------------ ------------ ------------- ------------ ------------
*For the period May 6, 1998 (commencement of operations of Sub-Account) through December 31, 1998. See notes to financial statements -15- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF OPERATIONS -- Year Ended December 31, 1998 -- continued
FCI FCG GSS HYS MSS MIS Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account* ----------- -------------- ----------- ------------ ------------ -------------- INCOME AND EXPENSES: Dividend income and capital gain distributions received............... $ 317,696 1$,908,465 $20,116,757 $ 17,576,410 $ 49,435,052 $ -- Mortality and expense risk charges.... (374,634) (770,139) (4,519,127) (3,406,720) (3,954,559) (248,138) Distribution expense charges.......... -- -- (23,267) (11,390) (25,353) -- Administrative expense charges........ (44,956) (92,417) (519,028) (397,417) (449,194) (29,777) ----------- -------------- ----------- ------------ ------------ -------------- Net investment income (loss)...... $ (101,894) 1$,045,909 $15,055,335 $ 13,760,883 $ 45,005,946 $(277,915) ----------- -------------- ----------- ------------ ------------ -------------- REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains (losses) on investment transactions Proceeds from sales................. $6,476,662 39$,966,952 $141,956,429 $127,769,004 $ 83,847,621 5$,759,463 Cost of investments sold............ (6,610,768) (34,355,430) (134,011,602) (123,024,988) (72,366,519) (5,468,843) ----------- -------------- ----------- ------------ ------------ -------------- Net realized gains (losses)....... $ (134,106) 5$,611,522 $ 7,944,827 $ 4,744,016 $ 11,481,102 $290,620 ----------- -------------- ----------- ------------ ------------ -------------- Net unrealized appreciation (depreciation) on investments End of year......................... $ (519,445) 6$,495,614 $14,106,863 $ (7,980,287) $ 16,729,347 11$,412,175 Beginning of year................... (418,012) 2,425,793 11,293,081 12,659,920 40,525,807 -- ----------- -------------- ----------- ------------ ------------ -------------- Change in unrealized appreciation (depreciation)................... $ (101,433) 4$,069,821 $ 2,813,782 $(20,640,207) $(23,796,460) 11$,412,175 ----------- -------------- ----------- ------------ ------------ -------------- Realized and unrealized gains (losses)........................... $ (235,539) 9$,681,343 $10,758,609 $(15,896,191) $(12,315,358) 11$,702,795 ----------- -------------- ----------- ------------ ------------ -------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS............................. $ (337,433) 10$,727,252 $25,813,944 $ (2,135,308) $ 32,690,588 11$,424,880 ----------- -------------- ----------- ------------ ------------ -------------- ----------- -------------- ----------- ------------ ------------ -------------- MMS Sub-Account ------------ INCOME AND EXPENSES: Dividend income and capital gain distributions received............... $ 17,312,637 Mortality and expense risk charges.... (4,328,735) Distribution expense charges.......... (17,272) Administrative expense charges........ (502,176) ------------ Net investment income (loss)...... $ 12,464,454 ------------ REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains (losses) on investment transactions Proceeds from sales................. $648,695,089 Cost of investments sold............ (648,695,089) ------------ Net realized gains (losses)....... $ -- ------------ Net unrealized appreciation (depreciation) on investments End of year......................... $ -- Beginning of year................... -- ------------ Change in unrealized appreciation (depreciation)................... $ -- ------------ Realized and unrealized gains (losses)........................... $ -- ------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS............................. $ 12,464,454 ------------ ------------
*For the period May 6, 1998 (commencement of operations of Sub-Account) through December 31, 1998. See notes to financial statements -16- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF OPERATIONS -- Year Ended December 31, 1998 -- continued
NWD RES RGS RSS SIS Sub-Account* Sub-Account Sub-Account Sub-Account* Sub-Account* ------------ ------------- ------------ ----------- ------------ INCOME AND EXPENSES: Dividend income and capital gain distributions received.......... $-- $ 34,036,093 $76,267 $-- $-- Mortality and expense risk charges......................... (49,668) (9,949,193) (243,948) (13,748) (33,096) Distribution expense charges..... -- -- -- -- -- Administrative expense charges... (5,960) (1,193,903) (29,274) (1,650) (3,971) ------------ ------------- ------------ ----------- ------------ Net investment income (loss)...................... $(55,628) $ 22,892,997 ($196,955) ($15,398) $(37,067) ------------ ------------- ------------ ----------- ------------ REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains(losses) on investment transactions Proceeds from sales............ 1,$614,329 $ 55,466,811 6,$084,512 5$50,369 3,$456,275 Cost of investments sold....... (1,692,255) (33,492,897) (5,571,502) (645,339) (3,545,101) ------------ ------------- ------------ ----------- ------------ Net realized gains (losses).... $(77,926) $ 21,973,914 $513,010 ($94,970) $(88,826) ------------ ------------- ------------ ----------- ------------ Net unrealized appreciation on investments End of year.................... 1,$504,013 $ 222,195,462 3,$487,391 1$26,682 $217,175 Beginning of year.............. -- 111,290,775 263,416 -- -- ------------ ------------- ------------ ----------- ------------ Change in unrealized appreciation................ 1,$504,013 $ 110,904,687 3,$223,975 1$26,682 $217,175 ------------ ------------- ------------ ----------- ------------ Realized and unrealized gains......................... 1,$426,087 $ 132,878,601 3,$736,985 $31,712 $128,349 ------------ ------------- ------------ ----------- ------------ INCREASE IN NET ASSETS FROM OPERATIONS........................ 1,$370,459 $ 155,771,598 3,$540,030 $16,314 $91,282 ------------ ------------- ------------ ----------- ------------ ------------ ------------- ------------ ----------- ------------ TRS UTS Sub-Account Sub-Account ------------- -------------- INCOME AND EXPENSES: Dividend income and capital gain distributions received.......... $ 187,021,256 $ 17,526,264 Mortality and expense risk charges......................... (21,072,561) (1,979,657) Distribution expense charges..... (122,533) -- Administrative expense charges... (2,406,174) (237,559) ------------- -------------- Net investment income (loss)...................... $ 163,419,988 $ 15,309,048 ------------- -------------- REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains(losses) on investment transactions Proceeds from sales............ $ 285,917,310 $ 9,858,290 Cost of investments sold....... (234,220,673) (6,719,351) ------------- -------------- Net realized gains (losses).... $ 51,696,637 $ 3,138,939 ------------- -------------- Net unrealized appreciation on investments End of year.................... $ 247,870,707 $ 34,293,510 Beginning of year.............. 297,846,753 28,380,652 ------------- -------------- Change in unrealized appreciation................ $ (49,976,046) $ 5,912,858 ------------- -------------- Realized and unrealized gains......................... $ 1,720,591 $ 9,051,797 ------------- -------------- INCREASE IN NET ASSETS FROM OPERATIONS........................ $ 165,140,579 $ 24,360,845 ------------- -------------- ------------- --------------
*For the period May 6, 1998 (commencement of operations of Sub-Account) through December 31, 1998. See notes to financial statements -17- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF OPERATIONS -- Year Ended December 31, 1998 -- continued
WAA WGS WGR WTR Sub-Account Sub-Account Sub-Account Sub-Account Total ------------ ------------ ------------ ------------ ------------- INCOME AND EXPENSES: Dividend income and capital gain distributions received............... $ 9,239,610 $ 1,161,945 $ 18,963,375 $ 3,790,536 $ 643,259,131 Mortality and expense risk charges.... (1,568,686) (1,115,945) (3,101,995) (1,031,335) (99,626,853) Distribution expense charges.......... -- (8,707) -- -- (293,204) Administrative expense charges........ (188,242) (125,206) (372,239) (123,760) (11,662,018) ------------ ------------ ------------ ------------ ------------- Net investment income (loss)...... $ 7,482,682 $ (87,913) $ 15,489,141 $ 2,635,441 $ 531,677,056 ------------ ------------ ------------ ------------ ------------- REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains (losses) on investment transactions Proceeds from sales................. $ 28,323,513 $ 36,276,075 $ 47,578,064 $ 15,451,732 $2,056,941,346 Cost of investments sold............ (24,630,654) (36,774,597) (35,986,240) (11,648,715) (1,807,632,507) ------------ ------------ ------------ ------------ ------------- Net realized gains (losses)....... $ 3,692,859 $ (498,522) $ 11,591,824 $ 3,803,017 $ 249,308,839 ------------ ------------ ------------ ------------ ------------- Net unrealized appreciation (depreciation) on investments End of year......................... $ 3,446,679 $ 6,569,807 $ 33,369,072 $ 14,614,468 $1,571,011,903 Beginning of year................... 9,486,253 (5,701,264) 31,911,034 8,223,467 1,079,710,768 ------------ ------------ ------------ ------------ ------------- Change in unrealized appreciation (depreciation)................... $ (6,039,574) $ 12,271,071 $ 1,458,038 $ 6,391,001 $ 491,301,135 ------------ ------------ ------------ ------------ ------------- Realized and unrealized gains (losses)........................... $ (2,346,715) $ 11,772,549 $ 13,049,862 $ 10,194,018 $ 740,609,974 ------------ ------------ ------------ ------------ ------------- INCREASE IN NET ASSETS FROM OPERATIONS............................. $ 5,135,967 $ 11,684,636 $ 28,539,003 $ 12,829,459 $1,272,287,030 ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------ -------------
See notes to financial statements -18- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS
BDS CAS COS Sub-Account Sub-Account Sub-Account ------------ -------------------------------- --------------------------- Year Ended Year Ended Year Ended Year Ended Year Ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1998* 1998 1997 1998 1997 ------------ --------------- --------------- ------------- ------------ OPERATIONS: Net investment income (loss)..... $ (82,271) $ 128,215,244 $ 74,369,495 $ 3,637,491 $ (375,236) Net realized gains............... 216,410 66,702,495 86,668,781 5,170,487 337,679 Net unrealized gains............. 286,002 121,369,200 32,342,322 20,631,668 11,106,441 ------------ --------------- --------------- ------------- ------------ Increase in net assets from operations.................. $ 420,141 $ 316,286,939 $ 193,380,598 $ 29,439,646 $ 11,068,884 ------------ --------------- --------------- ------------- ------------ CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received..... $ 9,875,456 $ 107,933,141 $ 191,209,464 $ 38,230,487 $ 29,587,412 Net transfers between Sub-Accounts and Fixed Account....................... 9,534,568 47,848,492 28,967,751 40,051,430 31,786,583 Withdrawals, surrenders, annuitizations and contract charges....................... (395,676) (114,794,853) (177,738,789) (7,541,790) (2,199,052) ------------ --------------- --------------- ------------- ------------ Net accumulation activity.... $ 19,014,348 $ 40,986,780 $ 42,438,426 $ 70,740,127 $ 59,174,943 ------------ --------------- --------------- ------------- ------------ Annuitization Activity: Annuitizations................. $ 164,170 $ 1,220,067 $ 1,367,156 $ 142,386 $ 136,454 Annuity payments and contract charges....................... (3,903) (1,025,009) (736,487) (46,545) (15,580) Net Transfers between Sub-Accounts.................. -- (41,318) 40,842 25,440 -- Adjustments to annuity reserves...................... (12,668) (88,123) (64,938) (10,400) (4,256) ------------ --------------- --------------- ------------- ------------ Net annuitization activity..... $ 147,599 $ 65,617 $ 606,573 $ 110,881 $ 116,618 ------------ --------------- --------------- ------------- ------------ Increase in net assets from contract owner transactions..... $ 19,161,947 $ 41,052,397 $ 43,044,999 $ 70,851,008 $ 59,291,561 ------------ --------------- --------------- ------------- ------------ Increase in net assets......... $ 19,582,088 $ 357,339,336 $ 236,425,597 $ 100,290,654 $ 70,360,445 ------------ --------------- --------------- ------------- ------------ NET ASSETS: Beginning of year................ -- 1,137,110,414 900,684,817 87,069,332 16,708,887 ------------ --------------- --------------- ------------- ------------ End of year...................... $ 19,582,088 $ 1,494,449,750 $ 1,137,110,414 $ 187,359,986 $ 87,069,332 ------------ --------------- --------------- ------------- ------------ ------------ --------------- --------------- ------------- ------------ CGS Sub-Account -------------------------------- Year Ended Year Ended Dec. 31, Dec. 31, 1998 1997 --------------- --------------- OPERATIONS: Net investment income (loss)..... $ 74,447,584 $ 24,679,106 Net realized gains............... 33,652,751 9,412,903 Net unrealized gains............. 167,450,974 162,512,568 --------------- --------------- Increase in net assets from operations.................. $ 275,551,309 $ 196,604,577 --------------- --------------- CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received..... $ 265,107,890 $ 211,472,643 Net transfers between Sub-Accounts and Fixed Account....................... 206,082,223 176,163,947 Withdrawals, surrenders, annuitizations and contract charges....................... (88,307,981) (42,133,444) --------------- --------------- Net accumulation activity.... $ 382,882,132 $ 345,503,146 --------------- --------------- Annuitization Activity: Annuitizations................. $ 2,012,633 $ 947,612 Annuity payments and contract charges....................... (713,563) (271,967) Net Transfers between Sub-Accounts.................. (116,539) 354,557 Adjustments to annuity reserves...................... 265,082 52,749 --------------- --------------- Net annuitization activity..... $ 1,447,613 $ 1,082,951 --------------- --------------- Increase in net assets from contract owner transactions..... $ 384,329,745 $ 346,586,097 --------------- --------------- Increase in net assets......... $ 659,881,054 $ 543,190,674 --------------- --------------- NET ASSETS: Beginning of year................ 1,067,010,686 523,820,012 --------------- --------------- End of year...................... $ 1,726,891,740 $ 1,067,010,686 --------------- --------------- --------------- ---------------
*For the period May 6, 1998 (commencement of operations of Sub-Account) through December 31, 1998. See notes to financial statements -19- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
EGS EIS FCE Sub-Account Sub-Account Sub-Account ---------------------------- ------------ -------------------------- Year Ended Year Ended Year Ended Year Ended Year Ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1998 1997 1998* 1998 1997 ------------- ------------- ------------ ------------ ------------ OPERATIONS: Net investment income (loss)..... $ 11,234,121 $ (3,455,859) $ (31,884) $ 467,717 $ (230,489) Net realized gains (losses)...... 22,519,902 8,307,222 (117,486) (4,423,657) 974,141 Net unrealized gains (losses).... 124,900,453 53,637,553 595,356 (3,684,076) (1,720,809) ------------- ------------- ------------ ------------ ------------ Increase (decrease) in net assets from operations...... $ 158,654,476 $ 58,488,916 $ 445,986 $ (7,640,016) $ (977,157) ------------- ------------- ------------ ------------ ------------ CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received..... $ 90,838,283 $ 95,095,489 $ 4,758,335 $ 2,734,886 $ 9,918,873 Net transfers between Sub-Accounts and Fixed Account....................... 40,488,353 57,336,795 3,493,264 (1,032,098) 12,522,767 Withdrawals, surrenders, annuitizations and contract charges....................... (30,769,813) (16,909,470) (205,828) (897,534) (953,005) ------------- ------------- ------------ ------------ ------------ Net accumulation activity.... $ 100,556,823 $ 135,522,814 $ 8,045,771 $ 805,254 $ 21,488,635 ------------- ------------- ------------ ------------ ------------ Annuitization Activity: Annuitizations................. $ 453,478 $ 158,875 $ -- $ 3,586 $ 39,195 Annuity payments and contract charges....................... (113,219) (58,246) -- (7,084) (5,864) Net transfers between Sub-Accounts.................. (5,495) 21,015 -- -- -- Adjustments to annuity reserves...................... 128,245 7,823 -- 218 (1,465) ------------- ------------- ------------ ------------ ------------ Net annuitization activity... $ 463,009 $ 129,467 $ -- $ (3,280) $ 31,866 ------------- ------------- ------------ ------------ ------------ Increase in net assets from contract owner transactions..... $ 101,019,832 $ 135,652,281 $ 8,045,771 $ 801,974 $ 21,520,501 ------------- ------------- ------------ ------------ ------------ Increase (decrease) in net assets........................ $ 259,674,308 $ 194,141,197 $ 8,491,757 $ (6,838,042) $ 20,543,344 ------------- ------------- ------------ ------------ ------------ NET ASSETS: Beginning of year................ 441,273,185 247,131,988 -- 23,814,780 3,271,436 ------------- ------------- ------------ ------------ ------------ End of year...................... $ 700,947,493 $ 441,273,185 $ 8,491,757 $ 16,976,738 $ 23,814,780 ------------- ------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------ FCI Sub-Account -------------------------- Year Ended Year Ended Dec. 31, Dec. 31, 1998 1997 ------------ ------------ OPERATIONS: Net investment income (loss)..... $ (101,894) $ (193,476) Net realized gains (losses)...... (134,106) (156,246) Net unrealized gains (losses).... (101,433) (353,885) ------------ ------------ Increase (decrease) in net assets from operations...... $ (337,433) $ (703,607) ------------ ------------ CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received..... $ 8,231,578 $ 10,356,882 Net transfers between Sub-Accounts and Fixed Account....................... 5,579,377 8,764,120 Withdrawals, surrenders, annuitizations and contract charges....................... (1,479,723) (683,649) ------------ ------------ Net accumulation activity.... $ 12,331,232 $ 18,437,353 ------------ ------------ Annuitization Activity: Annuitizations................. $ 1,716 $ 55,177 Annuity payments and contract charges....................... (5,621) (2,405) Net transfers between Sub-Accounts.................. -- -- Adjustments to annuity reserves...................... 2,415 (416) ------------ ------------ Net annuitization activity... $ (1,490) $ 52,356 ------------ ------------ Increase in net assets from contract owner transactions..... $ 12,329,742 $ 18,489,709 ------------ ------------ Increase (decrease) in net assets........................ $ 11,992,309 $ 17,786,102 ------------ ------------ NET ASSETS: Beginning of year................ 23,314,389 5,528,287 ------------ ------------ End of year...................... $ 35,306,698 $ 23,314,389 ------------ ------------ ------------ ------------
*For the period May 6, 1998 (commencement of operations of Sub-Account) through December 31, 1998. See notes to financial statements -20- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
FCG GSS Sub-Account Sub-Account -------------------------- ---------------------------- Year Ended Year Ended Year Ended Year Ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1998 1998 1997 1998 ------------ ------------ ------------- ------------- OPERATIONS: Net investment income (loss)..... $ 1,045,909 $ (87,178) $ 15,055,335 $ 16,257,472 Net realized gains (losses)...... 5,611,522 575,848 7,944,827 (320,218) Net unrealized gains (losses).... 4,069,821 1,624,106 2,813,782 5,893,925 ------------ ------------ ------------- ------------- Increase (decrease) in net assets from operations...... $ 10,727,252 $ 2,112,776 $ 25,813,944 $ 21,831,179 ------------ ------------ ------------- ------------- CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received..... $ 7,721,923 $ 8,465,356 $ 33,941,912 $ 45,924,248 Net transfers between Sub-Accounts and Fixed Account....................... 8,246,837 5,802,185 49,410,266 9,720,766 Withdrawals, surrenders, annuitizations and contract charges....................... (4,121,150) (2,204,864) (40,854,521) (58,612,247) ------------ ------------ ------------- ------------- Net accumulation activity.... $ 11,847,610 $ 12,062,677 $ 42,497,657 $ (2,967,233) ------------ ------------ ------------- ------------- Annuitization Activity: Annuitizations................. $ 34,551 $ 45,941 $ 1,080,791 $ 142,666 Annuity payments and contract charges....................... (28,601) (6,247) (563,274) (181,979) Net transfers between Sub-Accounts.................. (17,030) -- (10,317) (55,523) Adjustments to annuity reserves...................... (10,148) 62 17,162 111,855 ------------ ------------ ------------- ------------- Net annuitization activity... $ (21,228) $ 39,756 $ 524,362 $ 17,019 ------------ ------------ ------------- ------------- Increase (decrease) in net assets from contract owner transactions.................... $ 11,826,382 $ 12,102,433 $ 43,022,019 $ (2,950,214) ------------ ------------ ------------- ------------- Increase in net assets......... $ 22,553,634 $ 14,215,209 $ 68,835,963 $ 18,880,965 ------------ ------------ ------------- ------------- NET ASSETS: Beginning of year................ 49,346,218 35,131,009 331,304,242 312,423,277 ------------ ------------ ------------- ------------- End of year...................... $ 71,899,852 $ 49,346,218 $ 400,140,205 $ 331,304,242 ------------ ------------ ------------- ------------- ------------ ------------ ------------- ------------- HYS Sub-Account ---------------------------- Year Ended Year Ended Dec. 31, Dec. 31, 1998 1997 ------------- ------------- OPERATIONS: Net investment income (loss)..... $ 13,760,883 $ 9,894,976 Net realized gains (losses)...... 4,744,016 6,191,967 Net unrealized gains (losses).... (20,640,207) 5,472,328 ------------- ------------- Increase (decrease) in net assets from operations...... $ (2,135,308) $ 21,559,271 ------------- ------------- CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received..... $ 54,795,963 $ 56,445,474 Net transfers between Sub-Accounts and Fixed Account....................... 20,587,340 35,346,824 Withdrawals, surrenders, annuitizations and contract charges....................... (24,841,987) (37,189,764) ------------- ------------- Net accumulation activity.... $ 50,541,316 $ 54,602,534 ------------- ------------- Annuitization Activity: Annuitizations................. $ 514,021 $ 403,156 Annuity payments and contract charges....................... (301,855) (164,426) Net transfers between Sub-Accounts.................. -- -- Adjustments to annuity reserves...................... 44,449 2,369 ------------- ------------- Net annuitization activity... $ 256,615 $ 241,099 ------------- ------------- Increase (decrease) in net assets from contract owner transactions.................... $ 50,797,931 $ 54,843,633 ------------- ------------- Increase in net assets......... $ 48,662,623 $ 76,402,904 ------------- ------------- NET ASSETS: Beginning of year................ 237,675,412 161,272,508 ------------- ------------- End of year...................... $ 286,338,035 $ 237,675,412 ------------- ------------- ------------- -------------
See notes to financial statements -21- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
MSS MIS Sub-Account Sub-Account ---------------------------- ------------ Year Ended Year Ended Year Ended Dec. 31, Dec. 31, Dec. 31, 1998 1997 1998* ------------- ------------- ------------ OPERATIONS: Net investment income (loss)..... $ 45,005,946 $ 25,345,850 $ (277,915) Net realized gains (losses)...... 11,481,102 19,553,090 290,620 Net unrealized gains (losses).... (23,796,460) 11,613,272 11,412,175 ------------- ------------- ------------ Increase in net assets from operations.................. $ 32,690,588 $ 56,512,212 $ 11,424,880 ------------- ------------- ------------ CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received..... $ 22,720,393 $ 56,177,555 $ 42,898,409 Net transfers between Sub-Accounts and Fixed Account....................... (5,210,223) 12,554,894 27,944,745 Withdrawals, surrenders, annuitizations and contract charges....................... (28,997,564) (57,321,938) (1,223,987) ------------- ------------- ------------ Net accumulation activity.... $ (11,487,394) $ 11,410,511 $ 69,619,167 ------------- ------------- ------------ Annuitization Activity: Annuitizations................. $ 360,666 $ 558,077 $ 158,201 Annuity payments and contract charges....................... (278,169) (166,248) (10,253) Net transfers between Sub-Accounts.................. (6,870) -- -- Adjustments to annuity reserves...................... (3,336) (43,539) (1,090) ------------- ------------- ------------ Net annuitization activity... $ 72,291 $ 348,290 $ 146,858 ------------- ------------- ------------ Increase (decrease) in net assets from contract owner transactions.................... $ (11,415,103) $ 11,758,801 $ 69,766,025 ------------- ------------- ------------ Increase (decrease) in net assets........................ $ 21,275,485 $ 68,271,013 $ 81,190,905 ------------- ------------- ------------ NET ASSETS: Beginning of year................ 312,825,526 244,554,513 -- ------------- ------------- ------------ End of year...................... $ 334,101,011 $ 312,825,526 $ 81,190,905 ------------- ------------- ------------ ------------- ------------- ------------ MMS NWD Sub-Account Sub-Account ---------------------------- ------------ Year Ended Year Ended Year Ended Dec. 31, Dec. 31, Dec. 31, 1998 1997 1998* ------------- ------------- ------------ OPERATIONS: Net investment income (loss)..... $ 12,464,454 $ 12,238,449 $ (55,628) Net realized gains (losses)...... -- -- (77,926) Net unrealized gains (losses).... -- -- 1,504,013 ------------- ------------- ------------ Increase in net assets from operations.................. $ 12,464,454 $ 12,238,449 $ 1,370,459 ------------- ------------- ------------ CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received..... $ 84,539,955 $ 151,523,026 $ 5,928,260 Net transfers between Sub-Accounts and Fixed Account....................... 205,348,459 (1,240,893) 6,269,724 Withdrawals, surrenders, annuitizations and contract charges....................... (180,586,976) (229,658,956) (345,722) ------------- ------------- ------------ Net accumulation activity.... $ 109,301,438 $ (79,376,823) $ 11,852,262 ------------- ------------- ------------ Annuitization Activity: Annuitizations................. $ 1,223,366 $ 79,534 $ 59,889 Annuity payments and contract charges....................... (267,886) (200,563) (3,118) Net transfers between Sub-Accounts.................. (4,847) (312,207) -- Adjustments to annuity reserves...................... (38,667) (31,750) (2,368) ------------- ------------- ------------ Net annuitization activity... $ 911,966 $ (464,986) $ 54,403 ------------- ------------- ------------ Increase (decrease) in net assets from contract owner transactions.................... $ 110,213,404 $ (79,841,809) $ 11,906,665 ------------- ------------- ------------ Increase (decrease) in net assets........................ $ 122,677,858 $ (67,603,360) $ 13,277,124 ------------- ------------- ------------ NET ASSETS: Beginning of year................ 294,227,489 361,830,849 -- ------------- ------------- ------------ End of year...................... $ 416,905,347 $ 294,227,489 $ 13,277,124 ------------- ------------- ------------ ------------- ------------- ------------
*For the period May 6, 1998 (commencement of operations of Sub-Account) through December 31, 1998. See notes to financial statements -22- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
RES RGS Sub-Account Sub-Account ---------------------------- ------------------------- Year Ended Year Ended Year Ended Year Ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1998 1997 1998 1997** ------------- ------------- ------------ ----------- OPERATIONS: Net investment income (loss).................... $ 22,892,997 $ 5,840,008 $ (196,955) $ (21,782) Net realized gains (losses)..................... 21,973,914 5,057,991 513,010 8,741 Net unrealized gains............................ 110,904,687 68,490,719 3,223,975 263,416 ------------- ------------- ------------ ----------- Increase in net assets from operations...... $ 155,771,598 $ 79,388,718 $ 3,540,030 $ 250,375 ------------- ------------- ------------ ----------- CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received.................... $ 103,921,694 $ 153,316,348 $ 13,378,132 $ 2,950,897 Net transfers between Sub-Accounts and Fixed Account...................................... 82,986,033 119,233,197 14,755,314 2,726,224 Withdrawals, surrenders, annuitizations and contract charges............................. (44,188,615) (24,008,616) (1,413,449) (29,969) ------------- ------------- ------------ ----------- Net accumulation activity................... $ 142,719,112 $ 248,540,929 $ 26,719,997 $ 5,647,152 ------------- ------------- ------------ ----------- Annuitization Activity: Annuitizations................................ $ 452,588 $ 415,748 $ 73,112 $ -- Annuity payments and contract charges......... (211,454) (139,282) (12,398) -- Net transfers between Sub-Accounts............ 34,374 12,992 58,620 -- Adjustments to annuity reserves............... (35,852) (40,528) (2,709) -- ------------- ------------- ------------ ----------- Net annuitization activity.................. $ 239,656 $ 248,930 $ 116,625 $ -- ------------- ------------- ------------ ----------- Increase in net assets from contract owner transactions................................... $ 142,958,768 $ 248,789,859 $ 26,836,622 $ 5,647,152 ------------- ------------- ------------ ----------- Increase in net assets........................ $ 298,730,366 $ 328,178,577 $ 30,376,652 $ 5,897,527 ------------- ------------- ------------ ----------- NET ASSETS: Beginning of year............................... 649,281,186 321,102,609 5,897,527 -- ------------- ------------- ------------ ----------- End of year..................................... $ 948,011,552 $ 649,281,186 $ 36,274,179 $ 5,897,527 ------------- ------------- ------------ ----------- ------------- ------------- ------------ ----------- RSS SIS Sub-Account Sub-Account ------------ ----------- Year Ended Year Ended Dec. 31, Dec. 31, 1998* 1998* ------------ ----------- OPERATIONS: Net investment income (loss).................... $ (15,398) $ (37,067) Net realized gains (losses)..................... (94,970) (88,826) Net unrealized gains............................ 126,682 217,175 ------------ ----------- Increase in net assets from operations...... $ 16,314 $ 91,282 ------------ ----------- CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received.................... $2,275,775 $3,255,808 Net transfers between Sub-Accounts and Fixed Account...................................... 1,268,571 4,501,699 Withdrawals, surrenders, annuitizations and contract charges............................. (41,350) (67,691) ------------ ----------- Net accumulation activity................... $3,502,996 $7,689,816 ------------ ----------- Annuitization Activity: Annuitizations................................ $ -- $ -- Annuity payments and contract charges......... -- -- Net transfers between Sub-Accounts............ -- -- Adjustments to annuity reserves............... -- -- ------------ ----------- Net annuitization activity.................. $ -- $ -- ------------ ----------- Increase in net assets from contract owner transactions................................... $3,502,996 $7,689,816 ------------ ----------- Increase in net assets........................ $3,519,310 $7,781,098 ------------ ----------- NET ASSETS: Beginning of year............................... -- -- ------------ ----------- End of year..................................... $3,519,310 $7,781,098 ------------ ----------- ------------ -----------
* For the period May 6, 1998 (commencement of operations of Sub-Account) through December 31, 1998. ** For the period July 7, 1997 (commencement of operations of Sub-Account) through December 31, 1997. See notes to financial statements -23- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
TRS UTS Sub-Account Sub-Account -------------------------------- ---------------------------- Year Ended Year Ended Year Ended Year Ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1998 1997 1998 1997 --------------- --------------- ------------- ------------- OPERATIONS: Net investment income........................... $ 163,419,988 $ 116,769,728 $ 15,309,048 $ 7,729,340 Net realized gains.............................. 51,696,637 66,640,057 3,138,939 2,083,741 Net unrealized gains (losses)................... (49,976,046) 74,650,982 5,912,858 14,781,219 --------------- --------------- ------------- ------------- Increase in net assets from operations...... $ 165,140,579 $ 258,060,767 $ 24,360,845 $ 24,594,300 --------------- --------------- ------------- ------------- CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received.................... $ 144,694,740 $ 260,379,742 $ 39,799,198 $ 16,090,619 Net transfers between Sub-Accounts and Fixed Account...................................... 99,107,901 90,568,461 40,165,423 13,552,388 Withdrawals, surrenders, annuitizations and contract charges............................. (174,048,588) (276,158,725) (10,679,491) (5,005,318) --------------- --------------- ------------- ------------- Net accumulation activity................... $ 69,754,053 $ 74,789,478 $ 69,285,130 $ 24,637,689 --------------- --------------- ------------- ------------- Annuitization Activity: Annuitizations................................ $ 2,556,048 $ 1,271,371 $ 357,771 $ 165,628 Annuity payments and contract charges......... (1,415,164) (935,550) (266,331) (60,528) Net transfers between Sub-Accounts............ 104,077 87,811 93,575 28,886 Adjustments to annuity reserves............... 157,679 (136,590) 117,915 2,804 --------------- --------------- ------------- ------------- Net annuitization activity.................. $ 1,402,640 $ 287,042 $ 302,930 $ 136,790 --------------- --------------- ------------- ------------- Increase (decrease) in net assets from contract owner transactions............................. $ 71,156,693 $ 75,076,520 $ 69,588,060 $ 24,774,479 --------------- --------------- ------------- ------------- Increase in net assets........................ $ 236,297,272 $ 333,137,287 $ 93,948,905 $ 49,368,779 --------------- --------------- ------------- ------------- NET ASSETS: Beginning of year............................... 1,579,783,984 1,246,646,697 117,306,075 67,937,296 --------------- --------------- ------------- ------------- End of year..................................... $ 1,816,081,256 $ 1,579,783,984 $ 211,254,980 $ 117,306,075 --------------- --------------- ------------- ------------- --------------- --------------- ------------- ------------- WAA Sub-Account ---------------------------- Year Ended Year Ended Dec. 31, Dec. 31, 1998 1997 ------------- ------------- OPERATIONS: Net investment income........................... $ 7,482,682 $ 3,255,293 Net realized gains.............................. 3,692,859 2,612,317 Net unrealized gains (losses)................... (6,039,574) 2,483,575 ------------- ------------- Increase in net assets from operations...... $ 5,135,967 $ 8,351,185 ------------- ------------- CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received.................... $ 8,860,816 $ 23,232,543 Net transfers between Sub-Accounts and Fixed Account...................................... (4,974,353) 17,783,698 Withdrawals, surrenders, annuitizations and contract charges............................. (6,184,345) (5,742,891) ------------- ------------- Net accumulation activity................... $ (2,297,882) $ 35,273,350 ------------- ------------- Annuitization Activity: Annuitizations................................ $ 196,381 $ 167,170 Annuity payments and contract charges......... (88,583) (51,214) Net transfers between Sub-Accounts............ 1,087 79,307 Adjustments to annuity reserves............... (39,140) 487 ------------- ------------- Net annuitization activity.................. $ 69,745 $ 195,750 ------------- ------------- Increase (decrease) in net assets from contract owner transactions............................. $ (2,228,137) $ 35,469,100 ------------- ------------- Increase in net assets........................ $ 2,907,830 $ 43,820,285 ------------- ------------- NET ASSETS: Beginning of year............................... 120,437,782 76,617,497 ------------- ------------- End of year..................................... $ 123,345,612 $ 120,437,782 ------------- ------------- ------------- -------------
See notes to financial statements -24- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
WGS WGR WTR Sub-Account Sub-Account Sub-Account ---------------------------- ---------------------------- -------------------------- Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1998 1997 1998 1997 1998 1997 ------------- ------------- ------------- ------------- ------------ ------------ OPERATIONS: Net investment income (loss).......... $ (87,913) $ 2,978,724 $ 15,489,141 $ 1,724,285 $ 2,635,441 $ 518,499 Net realized gains (losses)........... (498,522) (5,597,019) 11,591,824 8,571,645 3,803,017 1,518,827 Net unrealized gains (losses)......... 12,271,071 (269,307) 1,458,038 16,669,581 6,391,001 4,352,747 ------------- ------------- ------------- ------------- ------------ ------------ Increase (decrease) in net assets from operations.................. $ 11,684,636 $ (2,887,602) $ 28,539,003 $ 26,965,511 $ 12,829,459 $ 6,390,073 ------------- ------------- ------------- ------------- ------------ ------------ CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received.......... $ 3,786,224 $ 11,552,959 $ 15,688,080 $ 26,811,741 $ 8,845,349 $ 15,459,554 Net transfers between Sub-Accounts and Fixed Account.................. (12,675,687) (19,473,409) (6,628,067) 3,906,046 8,428,546 13,106,711 Withdrawals, surrenders, annuitizations and contract charges............................ (11,908,423) (17,997,612) (14,148,887) (13,503,627) (4,603,063) (2,840,427) ------------- ------------- ------------- ------------- ------------ ------------ Net accumulation activity......... $ (20,797,886) $ (25,918,062) $ (5,088,874) $ 17,214,160 $ 12,670,832 $ 25,725,838 ------------- ------------- ------------- ------------- ------------ ------------ Annuitization Activity: Annuitizations...................... $ 158,700 $ 101,934 $ 107,920 $ 112,909 $ 134,223 $ 215,870 Annuity payments and contract charges............................ (130,085) (132,080) (104,706) (92,720) (61,120) (28,925) Net transfers between Sub-Accounts....................... -- (8,188) (114,522) (249,492) -- -- Adjustments to annuity reserves..... 3,766 (5,055) (5,286) (31,480) 16,790 (3,240) ------------- ------------- ------------- ------------- ------------ ------------ Net annuitization activity........ $ 32,381 $ (43,389) $ (116,594) $ (260,783) $ 89,893 $ 183,705 ------------- ------------- ------------- ------------- ------------ ------------ Increase (decrease) in net assets from contract owner transactions.......... $ (20,765,505) $ (25,961,451) $ (5,205,468) $ 16,953,377 $ 12,760,725 $ 25,909,543 ------------- ------------- ------------- ------------- ------------ ------------ Increase (decrease) in net assets... $ (9,080,869) $ (28,849,053) $ 23,333,535 $ 43,918,888 $ 25,590,184 $ 32,299,616 ------------- ------------- ------------- ------------- ------------ ------------ NET ASSETS: Beginning of year..................... 98,894,832 127,743,885 237,145,701 193,226,813 69,684,288 37,384,672 ------------- ------------- ------------- ------------- ------------ ------------ End of year........................... $ 89,813,963 $ 98,894,832 $ 260,479,236 $ 237,145,701 $ 95,274,472 $ 69,684,288 ------------- ------------- ------------- ------------- ------------ ------------ ------------- ------------- ------------- ------------- ------------ ------------
See notes to financial statements -25- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
Total --------------------------------- Year Ended Year Ended Dec. 31, Dec. 31, 1998 1997 --------------- --------------- OPERATIONS: Net investment income.................................................................. $ 531,677,056 $ 297,237,205 Net realized gains..................................................................... 249,308,839 212,441,467 Net unrealized gains................................................................... 491,301,135 463,550,753 --------------- --------------- Increase in net assets from operations............................................. 1,272,287,030 $ 973,229,425 --------------- --------------- CONTRACT OWNER TRANSACTIONS: Accumulation Activity: Purchase payments received........................................................... 1,124,762,687 $ 1,375,970,825 Net transfers between Sub-Accounts and Fixed Account................................. 891,578,137 619,129,055 Withdrawals, surrenders, annuitizations and contract charges......................... (792,649,007) (970,892,363) --------------- --------------- Net accumulation activity.......................................................... $ 1,223,691,817 $ 1,024,207,517 --------------- --------------- Annuitization Activity: Annuitizations....................................................................... 11,466,264 $ 6,384,473 Annuity payments and contract charges................................................ (5,657,941) (3,250,311) Net transfers between Sub-Accounts................................................... 235 -- Adjustments to annuity reserves...................................................... 503,934 (185,108) --------------- --------------- Net annuitization activity......................................................... $ 6,312,492 $ 2,949,054 --------------- --------------- Increase in net assets from contract owner transactions................................ $ 1,230,004,309 $ 1,027,156,571 --------------- --------------- Increase in net assets............................................................... $ 2,502,291,339 $ 2,000,385,996 --------------- --------------- NET ASSETS: Beginning of year...................................................................... 6,883,403,048 4,883,017,052 --------------- --------------- End of year............................................................................ $ 9,385,694,387 $ 6,883,403,048 --------------- --------------- --------------- ---------------
See notes to financial statements -26- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F NOTES TO FINANCIAL STATEMENTS (1) ORGANIZATION Sun Life of Canada (U.S.) Variable Account F (the "Variable Account"), a separate account of Sun Life Assurance Company of Canada (U.S.), (the "Sponsor"), was established on July 13, 1989 as a funding vehicle for the variable portion of Regatta contracts, Regatta Gold contracts, Regatta Classic contracts, Regatta Platinum contracts (collectively, the "Contracts") and certain other fixed and variable annuity contracts issued by the Sponsor. The Variable Account is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 as a unit investment trust. The assets of the Variable Account are divided into Sub-Accounts. Each Sub-Account attributable to the Contracts is invested in shares of a specific corresponding series of MFS/Sun Life Series Trust (the "Series Trust"), an open-end management investment company registered under the Investment Company Act of 1940. Massachusetts Financial Services Company ("MFS"), an affiliate of the Sponsor, is the investment adviser to the Series Trust. (2) SIGNIFICANT ACCOUNTING POLICIES GENERAL The preparation of financial statements in conformity with generally accepted accounting principles requires the Sponsor's 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 amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENT VALUATIONS Investments in shares of the Series Trust are recorded at their net asset value. Realized gains and losses on sales of shares of the Series Trust are determined on the identified cost basis. Dividend income and capital gain distributions received by the Sub-Accounts are reinvested in additional Series Trust shares and are recognized on the ex-dividend date. Exchanges between Sub-Accounts requested by participants under the Contracts are recorded in the new Sub-Account upon receipt of the redemption proceeds. FEDERAL INCOME TAX STATUS The operations of the Variable Account are part of the operations of the Sponsor and are not taxed separately. The Variable Account is not taxed as a regulated investment company. The Sponsor qualifies for the federal income tax treatment granted to life insurance companies under Subchapter L of the Internal Revenue Code. Under existing federal income tax law, investment income and capital gains earned by the Variable Account on contract owner reserves are not taxable and, therefore, no provision has been made for federal income taxes. -27- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F NOTES TO FINANCIAL STATEMENTS -- continued (3) CONTRACT CHARGES A mortality and expense risk charge based on the value of the Variable Account is deducted from the Variable Account at the end of each valuation period for the mortality and expense risks assumed by the Sponsor. The deductions are transferred periodically to the Sponsor. Currently, the deduction is at an effective annual rate of 1.25% for Regatta, Regatta Gold and Regatta Platinum contracts and 1.00% for Regatta Classic contracts. Each year on the account anniversary, an account administration fee ("Account Fee") equal to the lesser of $30 or 2% of the participant's account value in the case of Regatta and Regatta Gold contracts, $35 in the case of Regatta Platinum contracts and $50 in the case of Regatta Classic contracts is deducted from the participant's account to reimburse the Sponsor for certain administrative expenses. After the annuity commencement date, the Account Fee will be deducted pro rata from each variable annuity payment made during the year. The Sponsor does not deduct a sales charge from purchase payments. However, in the case of Regatta, Regatta Gold and Regatta Platinum, a withdrawal charge (contingent deferred sales charge) of up to 6% of certain amounts withdrawn, when applicable, may be deducted to cover certain expenses relating to the sale of the contracts and certificates. In the case of Regatta Classic, a withdrawal charge of 1% is applied to purchase payments withdrawn which have been credited to a participant's account for less than one year. For assuming the risk that withdrawal charges may be insufficient to compensate it for the costs of distributing the Regatta contracts, the Sponsor makes a deduction from the Variable Account at the end of each valuation period for the first seven account years at an effective annual rate of 0.15% of the net assets attributable to such contracts. No deduction for the distribution expense charge is made after the seventh account anniversary. As reimbursement for administrative expenses attributable to Regatta Gold, Regatta Classic and Regatta Platinum contracts, which exceed the revenues received from the Account Fees described above derived from such contracts, the Sponsor makes a deduction from the Variable Account at the end of each valuation period at an effective annual rate of 0.15% of the net assets attributable to such contracts. (4) ANNUITY RESERVES Annuity reserves are calculated using the 1983 Individual Annuitant Mortality Table and an assumed interest rate of 4% or 3%, as stated in each participant's contract or certificate, as applicable. Required adjustments to the reserves are accomplished by transfers to or from the Sponsor. -28- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F NOTES TO FINANCIAL STATEMENTS -- continued (5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS
Units Transferred Between Sub-Accounts and Units Outstanding Units Fixed Accumulation Beginning of Year Purchased Account --------------------- -------------- ---------------------- Year Ended Year Ended Year Ended December 31, December 31, December 31, 1998 1997 1998 1997 1998 1997 --------- ---------- ----- ------- ---------- ---------- MFS REGATTA CONTRACTS: ------------------------------ CAS -- Level 1................ 2,993,020 6,316,305 -- 860 (2,286,027) (2,421,311) CAS -- Level 2................ 5,390,680 58,968 -- 624,374 5,658,421 6,542,104 GSS -- Level 1................ 1,462,222 3,362,650 -- -- (932,035) (1,340,875) GSS -- Level 2................ 1,514,633 55,891 -- 265,628 1,951,275 2,012,610 HYS -- Level 1................ 537,033 1,204,380 -- -- (384,324) (510,706) HYS -- Level 2*............... 975,126 -- -- 64,893 742,028 1,416,411 MSS -- Level 1................ 941,686 2,202,213 -- 881 (678,909) (924,959) MSS -- Level 2................ 2,022,757 14,270 -- 240,391 1,359,567 2,378,532 MMS -- Level 1................ 1,518,722 3,859,738 12,315 1,948 1,824,176 3,301,197 MMS -- Level 2................ 1,845,809 59,562 8,252 310,378 6,810,959 6,074,695 TRS -- Level 1................ 5,756,653 12,461,003 4,933 1,598 (4,180,220) (4,580,966) TRS -- Level 2................ 7,838,741 32,548 2,056 815,196 8,389,482 10,202,663 WGS -- Level 1................ 700,338 1,460,289 -- -- (536,114) (584,950) WGS -- Level 2................ 483,253 3,325 -- 34,073 702,569 686,256 Units Withdrawn, Surrendered, and Units Outstanding Annuitized End of Year ---------------------- -------------------- Year Ended Year Ended December 31, December 31, 1998 1997 1998 1997 ---------- ---------- --------- --------- MFS REGATTA CONTRACTS: ------------------------------ CAS -- Level 1................ (242,644) (902,834) 464,349 2,993,020 CAS -- Level 2................ (1,995,108) (1,834,766) 9,053,993 5,390,680 GSS -- Level 1................ (204,946) (559,553) 325,241 1,462,222 GSS -- Level 2................ (808,930) (819,496) 2,656,978 1,514,633 HYS -- Level 1................ (79,077) (156,641) 73,632 537,033 HYS -- Level 2*............... (396,775) (506,178) 1,320,379 975,126 MSS -- Level 1................ (66,314) (336,449) 196,463 941,686 MSS -- Level 2................ (651,427) (610,436) 2,730,897 2,022,757 MMS -- Level 1................ (3,086,766) (5,644,161) 268,447 1,518,722 MMS -- Level 2................ (4,942,262) (4,598,826) 3,722,758 1,845,809 TRS -- Level 1................ (683,229) (2,124,982) 898,137 5,756,653 TRS -- Level 2................ (3,723,849) (3,211,666) 12,506,430 7,838,741 WGS -- Level 1................ (74,896) (175,001) 89,328 700,338 WGS -- Level 2................ (351,812) (240,401) 834,010 483,253
*For the period January 6, 1997 (commencement of operations of Sub-Account) through December 31, 1997. -29- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F NOTES TO FINANCIAL STATEMENTS -- continued (5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS -- continued
Units Transferred Between Sub-Accounts and Units Outstanding Fixed Accumulation Beginning of Year Units Purchased Account ---------------------- ---------------------- ---------------------- Year Ended Year Ended Year Ended December 31, December 31, December 31, 1998 1997 1998 1997 1998 1997 ---------- ---------- ---------- -------------------- ---------- MFS REGATTA GOLD CONTRACTS: ------------ BDS+.......................... -- -- 437,383 -- 776,227 -- CAS........................... 35,528,897 32,796,793 2,963,417 4,171,857 1,606,290 753,855 COS........................... 6,175,224 1,520,787 2,085,178 2,333,873 2,487,753 2,499,269 CGS........................... 40,709,531 26,199,975 7,531,155 8,951,992 6,682,559 7,405,405 EGS........................... 25,039,986 16,998,044 3,519,560 5,826,649 1,929,406 3,279,517 EIS+.......................... -- -- 235,337 -- 312,512 -- FCE........................... 2,159,228 329,630 203,168 815,491 (114,376) 1,097,883 FCI........................... 2,390,056 564,742 532,412 997,740 520,640 902,857 FCG........................... 4,441,911 3,360,596 449,506 760,057 655,503 531,069 GSS........................... 20,508,844 19,714,114 1,760,124 1,627,923 2,891,419 723,328 HYS........................... 11,699,195 8,424,289 2,333,919 2,340,052 1,143,802 1,768,446 MSS........................... 11,326,719 10,541,726 838,284 1,191,194 (135,303) 289,858 MIS+.......................... -- -- 2,049,150 -- 2,166,812 -- MMS........................... 21,463,139 27,275,583 5,295,611 7,818,118 9,723,034 (8,894,337) NWD+.......................... -- -- 252,432 -- 573,525 -- RES........................... 35,654,917 19,577,745 1,299,737 10,988,440 3,631,861 6,437,281 RGS........................... 533,928 -- 857,568 276,177 1,134,366 260,605 RSS+.......................... -- -- 83,591 -- 110,312 -- SIS+.......................... -- -- 207,182 -- 423,614 -- TRS........................... 66,303,467 59,508,016 5,585,984 7,069,596 4,374,616 4,111,016 UTS........................... 6,101,638 4,671,192 1,559,584 966,544 1,878,542 773,360 WAA........................... 7,928,833 5,539,010 440,970 1,565,894 (400,015) 1,218,708 WGS........................... 6,127,641 7,510,766 199,740 324,862 (782,796) (1,252,245) WGR........................... 15,058,757 13,989,946 815,222 1,725,746 (504,727) 242,250 WTR........................... 4,676,853 2,836,079 458,384 1,085,978 506,340 962,291 Units Withdrawn, Surrendered, and Units Outstanding Annuitized End of Year ---------------------- ---------------------- Year Ended Year Ended December 31, December 31, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- MFS REGATTA GOLD CONTRACTS: ------------ BDS+.......................... (31,371) -- 1,182,239 -- CAS........................... (2,598,123) (2,193,608) 37,500,481 35,528,897 COS........................... (485,873) (178,705) 10,262,282 6,175,224 CGS........................... (3,042,480) (1,847,841) 51,880,765 40,709,531 EGS........................... (1,587,995) (1,064,224) 28,900,957 25,039,986 EIS+.......................... (19,611) -- 528,238 -- FCE........................... (100,672) (83,776) 2,147,348 2,159,228 FCI........................... (153,065) (75,283) 3,290,043 2,390,056 FCG........................... (332,362) (209,811) 5,214,558 4,441,911 GSS........................... (1,942,153) (1,556,521) 23,218,234 20,508,844 HYS........................... (986,099) (833,592) 14,190,817 11,699,195 MSS........................... (784,556) (696,059) 11,245,144 11,326,719 MIS+.......................... (94,444) -- 4,121,518 -- MMS........................... (7,094,698) (4,736,225) 29,387,086 21,463,139 NWD+.......................... (31,098) -- 794,859 -- RES........................... (2,032,529) (1,348,549) 38,553,986 35,654,917 RGS........................... (117,186) (2,854) 2,408,676 533,928 RSS+.......................... (3,636) -- 190,267 -- SIS+.......................... (7,882) -- 622,914 -- TRS........................... (5,162,047) (4,385,161) 71,102,020 66,303,467 UTS........................... (516,662) (309,458) 9,023,102 6,101,638 WAA........................... (393,097) (394,779) 7,576,691 7,928,833 WGS........................... (496,366) (455,742) 5,048,219 6,127,641 WGR........................... (847,123) (899,185) 14,522,129 15,058,757 WTR........................... (286,944) (207,494) 5,354,633 4,676,853
+For the period May 6, 1997 (commencement of operations of Sub-Account) through December 31, 1998. -30- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F NOTES TO FINANCIAL STATEMENTS -- continued (5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS -- continued
Units Transferred Between Sub-Accounts and Fixed Units Outstanding Accumulation Beginning of Year Units Purchased Account ----------------- ---------------- ------------------ Year Ended Year Ended Year Ended December 31, December 31, December 31, 1998 1997 1998 1997 1998 1997 --------- ------ ------- ------- -------- -------- MFS REGATTA CLASSIC CONTRACTS: ------------------------------ BDS+.......................... -- -- 33,440 -- 1,859 -- CAS........................... 265,497 1,892 170,863 246,247 49,860 23,978 COS........................... 160,778 9,578 98,617 107,548 29,367 46,458 CGS........................... 554,216 3,545 449,788 446,522 267,481 122,228 EGS........................... 318,028 9,744 613,049 289,836 55,590 22,223 EIS+.......................... -- -- 9,590 -- 2,523 -- FCE........................... 40,698 140 16,413 44,896 (12,814) (3,278) FCI........................... 67,892 2,249 20,502 75,178 (3,210) (7,901) FCG*.......................... 51,038 -- 34,300 42,039 8,318 9,735 GSS........................... 113,243 6,514 139,510 89,817 51,253 21,240 HYS........................... 155,306 8,219 224,640 120,521 (2,332) 30,370 MSS**......................... 118,243 -- 59,666 92,458 (29,055) 28,860 MIS++......................... -- -- 78,233 -- 156,319 -- MMS........................... 77,105 13,813 733,426 366,163 (366,138) (259,749) NWD++......................... -- -- 13,601 -- 15,614 -- RES........................... 553,996 25,665 279,626 497,934 85,963 37,701 RGS#.......................... 6,085 -- 9,086 5,777 19,504 320 RSS........................... -- -- 942 -- 1,292 -- SIS+++........................ -- -- 1,726 -- 851 -- TRS........................... 951,205 40,575 681,412 859,444 155,997 66,034 UTS**......................... 77,009 -- 97,613 41,263 15,497 36,412 WAA........................... 50,531 6,448 16,112 44,701 (8,665) (150) WGS****....................... 19,394 -- 20,516 18,266 639 2,357 WGR........................... 85,526 71 47,642 77,864 (2,579) 7,879 WTR***........................ 45,122 -- 38,335 49,398 8,687 (3,919) Units Withdrawn, Surrendered, and Units Outstanding Annuitized End of Year ---------------- ------------------ Year Ended Year Ended December 31, December 31, 1998 1997 1998 1997 ------- ------- --------- ------- MFS REGATTA CLASSIC CONTRACTS: ------------------------------ BDS+.......................... (176) -- 35,123 -- CAS........................... (20,408) (6,620) 465,812 265,497 COS........................... (11,244) (2,806) 277,518 160,778 CGS........................... (58,292) (18,079) 1,213,193 554,216 EGS........................... (26,865) (3,775) 959,802 318,028 EIS+.......................... -- -- 12,113 -- FCE........................... (643) (1,060) 43,654 40,698 FCI........................... (1,364) (1,634) 83,820 67,892 FCG*.......................... (3,074) (736) 90,582 51,038 GSS........................... (6,696) (4,328) 297,310 113,243 HYS........................... (35,251) (3,804) 342,363 155,306 MSS**......................... (8,530) (3,075) 140,324 118,243 MIS++......................... (1,764) -- 232,788 -- MMS........................... (173,976) (43,122) 270,417 77,105 NWD++......................... (33) -- 29,182 -- RES........................... (47,296) (7,305) 872,289 553,996 RGS#.......................... (793) (12) 33,882 6,085 RSS........................... -- -- 2,234 -- SIS+++........................ -- -- 2,577 -- TRS........................... (57,322) (14,848) 1,731,292 951,205 UTS**......................... (11,983) (666) 178,136 77,009 WAA........................... (4,811) (468) 53,167 50,531 WGS****....................... (475) (1,229) 40,074 19,394 WGR........................... (9,292) (288) 121,297 85,526 WTR***........................ (891) (357) 91,253 45,122
*For the period January 7, 1997 (commencement of operations of Sub-Account) through December 31, 1997. **For the period January 22, 1997 (commencement of operations of Sub-Account) through December 31, 1997. ***For the period February 11, 1997 (commencement of operations of Sub-Account) through December 31, 1997. ****For the period February 21, 1997 (commencement of operations of Sub-Account) through December 31, 1997. #For the period July 7, 1997 (commencement of operations of Sub-Account) through December 31, 1997. +For the period June 22, 1998 (commencement of operations of Sub-Account) through December 31, 1998. ++For the period May 7, 1998 (commencement of operations of Sub-Account) through December 31, 1998. +++For the period June 26, 1998 (commencement of operations of Sub-Account) through December 31, 1998. -31- REGATTA, REGATTA GOLD, REGATTA CLASSIC AND REGATTA PLATINUM SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F NOTES TO FINANCIAL STATEMENTS -- continued (5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS -- continued
Units Transferred Between Sub-Accounts Units Outstanding and Units Withdrawn, Beginning of Fixed Accumulation Surrendered, and Units Outstanding Period Units Purchased Account Annuitized End of Period ------------------ --------------- -------------------- ---------------- ----------------- Period Ended Period Ended Period Ended Period Ended Period Ended December 31, December 31, December 31, December 31, December 31, 1998 1998 1998 1998 1998 ------------------ --------------- -------------------- ---------------- ----------------- MFS REGATTA PLATINUM CONTRACTS: ------------------------------ BDS+.......................... -- 491,319 143,015 (6,334) 628,000 CAS++......................... -- 1,489,422 215,237 (21,495) 1,683,164 COS*.......................... -- 480,199 80,801 (4,045) 556,955 CGS++......................... -- 4,380,217 1,013,330 (62,529) 5,331,018 EGS++......................... -- 1,412,976 254,376 (15,948) 1,651,404 EIS+++........................ -- 237,608 35,740 (986) 272,362 FCE+++........................ -- 67,723 4,892 (29) 72,586 FCI+++........................ -- 305,695 37,500 (4,257) 338,938 FCG*.......................... -- 167,384 34,931 (2,969) 199,346 GSS*.......................... -- 686,599 142,121 (12,618) 816,102 HYS+++........................ -- 917,703 95,977 (12,975) 1,000,705 MSS**......................... -- 180,220 35,500 (4,676) 211,044 MIS++......................... -- 2,052,872 400,450 (25,188) 2,428,134 MMS+++........................ -- 1,436,884 (492,250) (58,155) 886,479 NWD+++........................ -- 366,459 75,832 (6,113) 436,178 RES**......................... -- 1,463,540 319,544 (31,371) 1,751,713 RGS+.......................... -- 306,364 82,311 (1,595) 387,080 RSS***........................ -- 162,752 19,544 (1,165) 181,131 SIS#.......................... -- 123,410 35,045 (821) 157,634 TRS+++........................ -- 1,926,233 434,196 (41,582) 2,318,847 UTS**......................... -- 647,482 178,704 (6,537) 819,649 WAA*.......................... -- 175,049 56,466 (2,676) 228,839 WGS+++........................ -- 78,588 (2,199) (119) 76,270 WGR*.......................... -- 125,715 37,960 (819) 162,856 WTR##......................... -- 116,666 37,792 (1,601) 152,857
+For the period June 30, 1998 (commencement of operations of Sub-Account) through December 31, 1998. ++For the period June 5, 1998 (commencement of operations of Sub-Account) through December 31, 1998. +++For the period June 18, 1998 (commencement of operations of Sub-Account) through December 31, 1998. *For the period June 23, 1998 (commencement of operations of Sub-Account) through December 31, 1998. **For the period June 16, 1998 (commencement of operations of Sub-Account) through December 31, 1998. ***For the period June 29, 1998 (commencement of operations of Sub-Account) through December 31, 1998. #For the period June 26, 1998 (commencement of operations of Sub-Account) through December 31, 1998. ##For the period July 7, 1998 (commencement of operations of Sub-Account) through December 31, 1998. -32- INDEPENDENT AUDITOR'S REPORT To the Participants in Regatta, Regatta Gold, Regatta Classic and Regatta Platinum Sub-Accounts and the Board of Directors of Sun Life Assurance Company of Canada (U.S.): We have audited the accompanying statement of condition of Sun Life of Canada (U.S.) Bond Sub-Account, Capital Appreciation Sub-Account, Capital Opportunities Sub-Account, Conservative Growth Sub-Account, Emerging Growth Sub-Account, Equity Income Sub-Account, MFS/Foreign & Colonial Emerging Markets Equity Sub-Account, International Growth Sub-Account, International Growth and Income Sub-Account, Government Securities Sub-Account, High Yield Sub-Account, Managed Sectors Sub-Account, Massachusetts Investors Growth Stock Sub-Account, Money Market Sub-Account, New Discovery Sub-Account, Research Sub-Account, Research Growth and Income Sub-Account, Research International Sub-Account, Strategic Income Sub-Account, Total Return Sub-Account, Utilities Sub-Account, World Asset Allocation Sub-Account, World Governments Sub-Account, World Growth Sub-Account, and World Total Return Sub-Account of Sun Life of Canada (U.S.) Variable Account F, (the "Sub-Accounts") as of December 31, 1998, the related statement of operations for the year then ended and the statements of changes in net assets for the years ended December 31, 1998 and 1997. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities held at December 31, 1998 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Sub-Accounts as of December 31, 1998, the results of their operations and the changes in their net assets for the respective stated periods in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Boston, Massachusetts February 4, 1999 -33- SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) ANNUITY SERVICE MAILING ADDRESS: C/O RETIREMENT PRODUCTS AND SERVICES P.O. BOX 1024 BOSTON, MASSACHUSETTS 02103 TELEPHONE: Toll Free (800) 752-7215 In Massachusetts (617) 348-9600 GENERAL DISTRIBUTOR Clarendon Insurance Agency, Inc. One Sun Life Executive Park Wellesley Hills, Massachusetts 02481 AUDITORS Deloitte Touche LLP 125 Summer Street Boston, Massachusetts 02110 May 1, 1999 FUTURITY II VARIABLE AND FIXED ANNUITY STATEMENT OF ADDITIONAL INFORMATION SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F TABLE OF CONTENTS Calculation of Performance Data - Average Annual Total Return................... Non-Standardized Investment Performance ........................................ Advertising and Sales Literature ............................................... Calculations ................................................................... Example of Variable Accumulation Unit Value Calculation.................... Example of Variable Annuity Unit Calculation .............................. Example of Variable Annuity Payment Calculation ........................... Calculation of Annuity Values ............................................. Distribution of the Contracts .................................................. Designation and Change of Beneficiary .......................................... Custodian ...................................................................... Financial Statements ........................................................... The Statement of Additional Information sets forth information which may be of interest to prospective purchasers of Futurity II Variable and Fixed Annuity Contracts (the "Contracts") issued by Sun Life Assurance Company of Canada (U.S.) (the "Company") in connection with Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") which is not included in the Prospectus dated May 1, 1999. This Statement of Additional Information should be read in conjunction with the Prospectus, a copy of which may be obtained without charge from the Company at its Annuity Service Mailing Address, c/o Sun Life Assurance Company of Canada (U.S.), Retirement Products and Services, P.O. Box 9133, Boston, Massachusetts 02117, or by telephoning (617) 348-9600 or (888) 786-2435. The terms used in this Statement of Additional Information have the same meanings as in the Prospectus. - -------------------------------------------------------------------------------- THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE PURCHASERS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS. -2- CALCULATION OF PERFORMANCE DATA AVERAGE ANNUAL TOTAL RETURN: The table below shows, for various Sub-Accounts of the Variable Account, the Average Annual Total Return for the stated periods (or shorter period indicated in the note below), based upon a hypothetical initial Purchase Payment of $1,000, calculated in accordance with the formula set out after the table. For purposes of determining the investment results in this table, the actual investment performance of each Fund is reflected from the date the Fund commenced operations ("Inception"), although the Contracts have been offered only since December 9, 1998. No information is shown for the Funds that have not commenced operations or that have been in operation for less than one year. The Securities and Exchange Commission defines "standardized" total return information to mean Average Annual Total Return, based on a hypothetical initial purchase payment of $1,000 and calculated in accordance with the formula set forth after the table, but presented only for periods subsequent to the commencement of the offering of the Futurity annuities. Since as of the date of this Prospectus the Company has been offering the Futurity annuities for less than a year, no standardized total return information is currently provided. Standardized total return information will be provided after the Sub-Accounts have been in operation for one year. AVERAGE ANNUAL TOTAL RETURN PERIOD ENDING DECEMBER 31, 1998
10 YEAR FUND 1 YEAR 3 YEAR 5 YEAR OR INCEPTION PERIOD PERIOD PERIOD LIFE(1) DATE ------ ------ ------ ------- ------------------- AIM V.I. Capital Appreciation Fund 11.48% 13.20% 14.68% 16.34% May 5, 1993 AIM V.I. Growth Fund 26.08% 19.91% 17.29% 17.04% May 5, 1993 AIM V.I. Growth and Income Fund 19.72% 21.26% -- 19.27% May 2, 1994 AIM V.I. International Equity Fund 7.68% 10.30% 8.68% 10.86% May 5, 1993 Alger American Growth Portfolio 39.85% 25.29% 21.67% 20.23% January 9, 1989 Alger American Income and Growth Portfolio 24.38% 26.28% 19.53% 13.87% November 15, 1988 Alger American Small Capitalization Portfolio 7.72% 7.14% 10.83% 18.10% September 21, 1988 Goldman Sachs CORE Large Cap Fund -- -- -- 9.25% February 13, 1998 Goldman Sachs CORE Small Cap Fund -- -- -- (15.45)% February 13, 1998 Goldman Sachs CORE U.S. Equity Fund -- -- -- 7.01% February 13, 1998 Goldman Sachs Growth and Income Fund -- -- -- (1.09)% January 12, 1998 Goldman Sachs International Equity Fund -- -- -- 12.56% January 12, 1998 J.P. Morgan Equity Portfolio (2) 15.39% 20.97% -- 23.86% January 3, 1995 J.P. Morgan International Opportunities Portfolio (2) (2.51)% 4.68% -- 6.23% January 3, 1995 J.P. Morgan Small Company Portfolio (2) (12.01)% 8.99% -- 14.42% January 3, 1995 Lord Abbett Growth and Income Portfolio 5.12% 15.82% 15.27% 14.40% December 1, 1989 MFS/Sun Life Capital Appreciation Series 20.50% 21.19% 17.64% 18.23% June 12, 1985 MFS/Sun Life Emerging Growth Series 25.80% 21.07% -- 24.59% May 1, 1995 MFS/Sun Life Government Securities Series 1.21% 3.35% 4.52% 6.96% June 12, 1985 MFS/Sun Life High Yield Series (6.21)% 5.53% 5.74% 7.87% June 12, 1985 MFS/Sun Life Utilities Series 9.83% 20.43% 16.51% 16.17% November 16, 1993 OCC Equity Portfolio (3) 4.08% 17.41% 18.99% 16.26% August 1, 1988 OCC Managed Portfolio (3) (0.28)% 14.10% 16.94% 17.60% August 1, 1988 OCC Mid Cap Portfolio -- -- -- (8.26)% February 9, 1998 OCC Small Cap Portfolio (3) (15.28)% 6.60% 6.31% 11.52% August 1, 1988 SunCap Money Market -- -- -- (5.39)% December 7, 1998 SunCap Bond -- -- -- (5.69)% December 7, 1998 SunCap Real Estate -- -- -- (6.43)% December 7, 1998 Warburg Pincus Emerging Markets Portfolio (22.96)% -- -- (23.42)% December 31, 1997 Warburg Pincus International Equity Portfolio (1.90)% 1.34% -- 3.07% June 30, 1995 Warburg Pincus Post-Venture Capital Portfolio (0.86)% -- -- 4.06% September 30, 1996 Warburg Pincus Small Company Growth Portfolio (9.57)% 5.51% -- 11.53% June 30, 1995
(1) From commencement of investment operations. (2) From January 3, 1995 (commencement of operations) to December 31, 1996, Chubb Investment Advisory Corporation ("Chubb Investment Advisory"), a wholly owned subsidiary of Chubb Life Insurance Company of America, served as each of these Fund's investment manager, and Morgan Guaranty Trust Comapny of New York, an affiliate of J.P. Morgan Investment Management Inc. ("J.P. Morgan") served as such Fund's sub-investment adviser. Effective January 1, 1997, J.P. Morgan began serving as each Fund's investment adviser. (3) On September 16, 1994, an investment company then called Quest for Value Accumulation Trust (the "Old Trust") was effectively divided into two investment funds, the Old Trust and the OCC Accumulation Trust, at which time the OCC Accumulation Trust commenced operations. The total net assets for each of the Equity, Managed and Small Cap Portfolios immediately after the transaction were $86,789,755, $682,601,380, and $139,812,573, respectively, with respect to the Old Trust, and for each of the Equity, Managed and Small Cap Portfolios, $3,764,598, $51,345,102, and $8,129,274, respectively, with respect to the OCC Accumulation Trust. The Equity, Managed and Small Cap Portfolios commenced operations on August 1, 1998. For the period prior to September 16, 1994, the performance figures above for each of the Equity, Managed, and Small Cap Portfolios reflect the performance of the corresponding Portfolios of the Old Trust. The length of the period and the last day of each period used in the above table are set out in the table heading and in the footnotes above. The Average Annual Total Return for each period was determined by finding the average annual compounded rate of return over each period that would equate the initial amount invested to the ending redeemable value for that period, in accordance with the following formula: -3- n P(l + T) = ERV Where: P = a hypothetical initial Purchase Payment of $1,000 T = average annual total return for the period n = number of years ERV = redeemable value (as of the end of the period) of a hypothetical $1,000 Purchase Payment made at the beginning of the 1-year, 5-year, or 10-year period (or fractional portion thereof) The formula assumes that: 1) all recurring fees have been deducted from the Participant's Account; 2) all applicable non-recurring Contract charges are deducted at the end of the period, and 3) there will be a full surrender at the end of the period. The $35 annual Account Fee will be allocated among the Sub-Accounts so that each Sub-Account's allocated portion of the Account Fee is proportional to the percentage of the number of Individual Contracts and Certificates that have amounts allocated to that Sub-Account. Because the impact of Account Fees on a particular Contract may differ from those assumed in the computation due to differences between actual allocations and the assumed ones, the total return that would have been experienced by an actual Contract over these same time periods may have been different from that shown above. ADDITIONAL NON-STANDARDIZED INVESTMENT PERFORMANCE: The Variable Account may illustrate its results over various periods and compare its results to indices and other variable annuities in sales materials including advertisements, brochures and sports. Such results may be computed on a "cumulative" and/or "annualized" basis. "Cumulative" quotations are arrived at by calculating the change in the Accumulation Unit value of a Sub-Account between the first and last day of the base period being measured, and expressing the difference as a percentage of the Accumulation Unit value at the beginning of the base period. "Annualized" quotations (described in the following table as "Compound Growth Rate") are calculated by applying a formula which determines the level rate of return which, if earned over the entire base period, would produce the cumulative return. -4-
NON-STANDARDIZED INVESTMENT PERFORMANCE* $10,000 invested in this Fund under a ...would have grown to this amount Futurity II Contract, this many years ago... on December 31, 1998
AIM V.I. CAPITAL APPRECIATION FUND AIM V.I. GROWTH FUND Number Cumulative Compound Number Cumulative Compound of Growth Growth of Growth Growth Years Periods Amount Rate Rate Years Periods Amount Rate Rate 1 12/31/97-12/31/98 $11,766.00 17.66% 17.66% 1 12/31/97-12/31/98 $13,226.00 32.26% 32.26% 2 12/31/96-12/31/98 $12,996.00 29.96% 14.00% 2 12/31/96-12/31/98 $15,982.02 59.82% 26.42% 3 12/31/95-12/31/98 $15,070.31 50.70% 14.65% 3 12/31/95-12/31/98 $17,812.42 78.12% 21.22% 4 12/31/94-12/31/98 $20,154.69 101.55% 19.15% 4 12/31/94-12/31/98 $23,665.03 136.65% 24.03% 5 12/31/93-12/31/98 $20,368.46 103.68% 15.29% 5 12/31/93-12/31/98 $22,751.83 127.52% 17.87% Life 05/05/93-12/31/98 $24,131.63 141.32% 16.84% Life 05/05/93-12/31/98 $24,961.47 149.61% 17.54% AIM V.I. GROWTH AND INCOME FUND AIM V.I. INTERNATIONAL EQUITY FUND Number Cumulative Compound Number Cumulative Compound of Growth Growth of Growth Growth Years Periods Amount Rate Rate Years Periods Amount Rate Rate 1 12/31/97-12/31/98 $12,591.00 25.91% 25.91% 1 12/31/97-12/31/98 $11,387.00 13.87% 13.87% 2 12/31/96-12/31/98 $15,590.02 55.90% 24.86% 2 12/31/96-12/31/98 $11,811.34 18.11% 8.68% 3 12/31/95-12/31/98 $18,400.67 84.01% 22.54% 3 12/31/95-12/31/98 $13,981.65 39.82% 11.82% 4 12/31/94-12/31/98 $23,527.95 135.28% 23.85% 4 12/31/94-12/31/98 $16,160,92 61.61% 12.75% 5 12/31/93-12/31/98 $15,677.80 56.78% 9.41% Life 05/02/94-12/31/98 $23,323.71 133.24% 19.89% Life 05/05/93-12/31/98 $18,470.82 84.71% 11.45% ALGER GROWTH PORTFOLIO ALGER INCOME AND GROWTH PORTFOLIO Number Cumulative Compound Number Cumulative Compound of Growth Growth of Growth Growth Years Periods Amount Rate Rate Years Periods Amount Rate Rate 1 12/31/97-12/31/98 $14,604.00 46.04% 46.04% 1 12/31/97-12/31/98 $13,056.00 30.56% 30.56% 2 12/31/96-12/31/98 $18,111.78 81.12% 34.58% 2 12/31/96-12/31/98 $17,550.95 75.51% 32.48% 3 12/31/95-12/31/98 $20,242.85 102.43% 26.50% 3 12/31/95-12/31/98 $20,712.09 107.12% 27.47% 4 12/31/94-12/31/98 $27,223.03 172.23% 28.45% 4 12/31/94-12/31/98 $27,606.52 176.07% 28.90% 5 12/31/93-12/31/98 $27,238.19 172.38% 22.19% 5 12/31/93-12/31/98 $24,966.25 149.66% 20.08% 10 12/31/88-12/31/98 $37,104.75 271.05% 14.01% Life 01/09/89-12/31/98 $63,521.12 535.21% 20.35% Life 11/15/88-12/31/98 $37,415.95 274.16% 13.91%
* For periods of less than one year, the growth rates listed are not annualized. -5-
NON-STANDARDIZED INVESTMENT PERFORMANCE* $10,000 invested in this Fund under a ...would have grown to this amount Futurity II Contract, this many years ago... on December 31, 1998
ALGER SMALL CAPITALIZATION PORTFOLIO GOLDMAN SACHS CORE LARGE CAP GROWTH FUND Number Cumulative Compound Number Cumulative Compound of Growth Growth of Growth Growth Years Periods Amount Rate Rate Years Periods Amount Rate Rate* 1 12/31/97-12/31/98 $11,391.00 13.91% 13.91% 2 12/31/96-12/31/98 $12,512.66 25.13% 11.86% 3 12/31/95-12/31/98 $12,850.75 28.51% 8.72% 4 12/31/94-12/31/98 $18,294.43 82.94% 16.30% 5 12/31/93-12/31/98 $17,249.00 72.49% 11.52% 10 12/31/88-12/31/98 $53,187.22 431.87% 18.19% Life 09/21/88-12/31/98 $51,225.82 412.26% 17.22% Life 02/13/98-12/31/98 $11,543.00 15.43% 15.43% GOLDMAN SACHS CORE SMALL CAP EQUITY FUND GOLDMAN SACHS CORE U.S. EQUITY FUND Number Cumulative Compound Number Cumulative Compound of Growth Growth of Growth Growth Years Periods Amount Rate Rate* Years Periods Amount Rate Rate* Life 02/13/98-12/31/98 $8,949.00 -10.51% -10.51% Life 02/13/98-12/31/98 $11,320.00 13.20% 13.20% GOLDMAN SACHS CORE GROWTH AND INCOME FUND GOLDMAN SACHS INTERNATIONAL EQUITY FUND Number Cumulative Compound Number Cumulative Compound of Growth Growth of Growth Growth Years Periods Amount Rate Rate* Years Periods Amount Rate Rate* Life 01/12/98-12/31/98 $10,404.00 4.04% 4.04% Life 01/12/98-12/31/98 $11,844.00 18.44% 18.44% J.P. MORGAN EQUITY PORTFOLIO J.P. INTERNATIONAL OPPORTUNITIES PORTFOLIO Number Cumulative Compound Number Cumulative Compound of Growth Growth of Growth Growth Years Periods Amount Rate Rate Years Periods Amount Rate Rate 1 12/31/97-12/31/98 $12,157.00 21.57% 21.57% 1 12/31/97-12/31/98 $10,327.00 3.27% 3.27% 2 12/31/96-12/31/98 $15,284.38 52.84% 23.63% 2 12/31/96-12/31/98 $10,735.03 7.35% 3.61% 3 12/31/95-12/31/98 $18,274.82 82.75% 22.26% 3 12/31/95-12/31/98 $11,977.70 19.78% 6.20% Life 01/03/95-12/31/98 $24,120.37 141.20% 24.66% Life 01/03/95-12/31/98 $13,275.15 32.75% 7.35%
* For periods of less than one year, the growth rates listed are not annualized. -6-
NON-STANDARDIZED INVESTMENT PERFORMANCE* $10,000 invested in this Fund under a ...would have grown to this amount Futurity II Contract, this many years ago... on December 31, 1998
J.P. MORGAN SMALL COMPANY PORTFOLIO LORD ABBETT GROWTH AND INCOME PORTFOLIO Number Cumulative Compound Number Cumulative Compound of Growth Growth of Growth Growth Years Periods Amount Rate Rate Years Periods Amount Rate Rate 1 12/31/97-12/31/98 $9,316.00 -6.84% -6.84% 1 12/31/97-12/31/98 $11,130.00 11.30% 11.30% 2 12/31/96-12/31/98 $11,252.97 12.53% 6.08% 2 12/31/96-12/31/98 $13,679.64 36.80% 16.96% 3 12/31/95-12/31/98 $13,510.65 35.11% 10.55% 3 12/31/95-12/31/98 $16,102.53 61.03% 17.21% 4 12/31/94-12/31/98 $20,611.86 106.12% 19.82% 5 12/31/93-12/31/98 $20,885.99 108.86% 15.87% Life 01/03/95-12/31/98 $17,714.63 77.15% 15.39% Life 12/11/89-12/31/98 $34,238.26 242.38% 14.55% MFS/SUN LIFE CAPITAL APPRECIATION SERIES MFS/SUN LIFE EMERGING GROWTH SERIES Number Cumulative Compound Number Cumulative Compound of Growth Growth of Growth Growth Years Periods Amount Rate Rate Years Periods Amount Rate Rate 1 12/31/97-12/31/98 $12,690.00 26.90% 26.90% 1 12/31/97-12/31/98 $13,202.00 32.02% 32.02% 2 12/31/96-12/31/98 $15,405.77 54.06% 24.12% 2 12/31/96-12/31/98 $15,870.96 58.71% 25.98% 3 12/31/95-12/31/98 $18,450.27 84.50% 22.65% 3 12/31/95-12/31/98 $18,328.69 83.29% 22.38% 4 12/31/94-12/31/98 $24,460.97 144.61% 25.06% 5 12/31/93-12/31/98 $23,258.15 132.58% 18.39% 10 12/31/88-12/31/98 $54,368.91 443.69% 18.45% Life 06/12/85-12/31/98 $73,887.09 638.87% 15.89% Life 05/01/95-12/31/98 $23,042.27 130.42% 25.53% MFS/SUN LIFE GOVERNMENT SECURITIES SERIES MFS/SUN LIFE HIGH YIELD SERIES Number Cumulative Compound Number Cumulative Compound of Growth Growth of Growth Growth Years Periods Amount Rate Rate Years Periods Amount Rate Rate 1 12/31/97-12/31/98 $10,721.00 7.21% 7.21% 1 12/31/97-12/31/98 $9,926.00 -0.74% -0.74% 2 12/31/96-12/31/98 $11,493.98 14.94% 7.21% 2 12/31/96-12/31/98 $11,081.77 10.82% 5.27% 3 12/31/95-12/31/98 $11,516.82 15.17% 4.82% 3 12/31/95-12/31/98 $12,250.43 22.50% 7.00% 4 12/31/94-12/31/98 $13,359.66 33.60% 7.51% 4 12/31/94-12/31/98 $14,126.18 41.26% 9.02% 5 12/31/93-12/31/98 $12,884.83 28.85% 5.20% 5 12/31/93-12/31/98 $13,630.26 36.30% 6.39% 10 12/31/88-12/31/98 $19,837.60 98.38% 7.09% 10 12/31/88-12/31/98 $21,509.42 115.09% 7.96% Life 06/12/85-12/31/98 $25,479.65 154.80% 7.14% Life 06/12/85-12/31/98 $28,326.33 183.26% 7.98%
* For periods of less than one year, the growth rates listed are not annualized. -7-
NON-STANDARDIZED INVESTMENT PERFORMANCE* $10,000 invested in this Fund under a ...would have grown to this amount Futurity II Contract, this many years ago... on December 31, 1998
MFS/SUN LIFE UTILITIES SERIES OCC EQUITY PORTFOLIO Number Cumulative Compound Number Cumulative Compound of Growth Growth of Growth Growth Years Periods Amount Rate Rate Years Periods Amount Rate Rate 1 12/31/97-12/31/98 $11,591.00 15.91% 15.91% 1 12/31/97-12/31/98 $11,027.00 10.27% 10.27% 2 12/31/96-12/31/98 $15,168.39 51.68% 23.16% 2 12/31/96-12/31/98 $13,771.02 37.71% 17.35% 3 12/31/95-12/31/98 $17,998.21 79.98% 21.64% 3 12/31/95-12/31/98 $16,754.07 67.54% 18.77% 4 12/31/94-12/31/98 $23,489.98 134.90% 23.80% 4 12/31/94-12/31/98 $23,848.73 138.49% 24.27% 5 12/31/93-12/31/98 $22,018.34 120.18% 17.10% 5 12/31/93-12/31/98 $24,409.91 144.10% 19.54% 10 12/31/88-12/31/98 $45,580.97 355.81% 16.38% Life 11/16/93-12/31/98 $22,031.49 120.31% 16.66% Life 08/01/88-12/31/98 $46,211.18 362.11% 15.82% OCC MANAGED PORTFOLIO OCC MID CAP PORTFOLIO Number Cumulative Compound Number Cumulative Compound of Growth Growth of Growth Growth Years Periods Amount Rate Rate Years Periods Amount Rate Rate* 1 12/31/97-12/31/98 $10,564.00 5.64% 5.64% 2 12/31/96-12/31/98 $12,739.64 27.40% 12.87% 3 12/31/95-12/31/98 $15,424.00 54.24% 15.54% 4 12/31/94-12/31/98 $22,146.08 121.46% 21.99% 5 12/31/93-12/31/98 $22,406.51 124.07% 17.51% 10 12/31/88-12/31/98 $51,022.84 410.23% 17.70% Life 08/01/88-12/31/98 $52,984.29 429.84% 17.35% Life 02/09/98-12/31/98 $9,714.00 -2.86% -2.86% OCC SMALL CAP PORTFOLIO SUN CAPITAL INVESTMENT GRADE BOND FUND Number Cumulative Compound Number Cumulative Compound of Growth Growth of Growth Growth Years Periods Amount Rate Rate Years Periods Amount Rate Rate* 1 12/31/97-12/31/98 $8,968.00 -10.32% -10.32% 2 12/31/96-12/31/98 $10,811.84 8.12% 3.98% 3 12/31/95-12/31/98 $12,656.70 26.57% 8.17% 4 12/31/94-12/31/98 $14,381.86 43.82% 9.51% 5 12/31/93-12/31/98 $14,038.63 40.39% 7.02% 10 12/31/88-12/31/98 $30,074.49 200.74% 11.64% Life 08/01/88-12/31/98 $30,490.33 204.90% 11.29% Life 12/07/98-12/31/98 $9,988.00 -0.12% -0.12%
* For periods of less than one year, the growth rates listed are not annualized. -8-
NON-STANDARDIZED INVESTMENT PERFORMANCE* $10,000 invested in this Fund under a ...would have grown to this amount Futurity II Contract, this many years ago... on December 31, 1998
SUN CAPITAL MONEY MARKET FUND SUN CAPITAL REAL ESTATE FUND Number Cumulative Compound Number Cumulative Compound of Growth Growth of Growth Growth Years Periods Amount Rate Rate* Years Periods Amount Rate Rate* Life 12/07/98-12/31/98 $10,020.00 0.20% 0.20% Life 12/07/98-12/31/98 $9,920.00 -0.80% -0.80% WARBURG PINCUS EMERGING MARKETS PORTFOLIO WARBURG PINCUS INTERNATIONAL EQUITY PORTFOLIO Number Cumulative Compound Number Cumulative Compound of Growth Growth of Growth Growth Years Periods Amount Rate Rate Years Periods Amount Rate Rate 1 12/31/97-12/31/98 $8,151.00 -18.49% -18.49% 1 12/31/97-12/31/98 $10,387.00 3.87% 3.87% 2 12/31/96-12/31/98 $10,010.00 0.10% 0.05% 3 12/31/95-12/31/98 $10,854.23 8.54% 2.77% Life 12/31/97-12/31/98 $8,151.00 -18.49% -18.49% Life 06/30/95-12/31/98 $11,567.72 15.68% 4.24% WARBURG PINCUS POST-VENTURE CAPITAL PORTFOLIO WARBURG PINCUS SMALL COMPANY GROWTH PORTFOLIO Number Cumulative Compound Number Cumulative Compound of Growth Growth of Growth Growth Years Periods Amount Rate Rate Years Periods Amount Rate Rate 1 12/31/97-12/31/98 $10,501.00 5.01% 5.01% 1 12/31/97-12/31/98 $9,577.00 -4.23% -4.23% 2 12/31/96-12/31/98 $11,735.39 17.35% 8.33% 2 12/31/96-12/31/98 $10,930.70 9.31% 4.55% 3 12/31/95-12/31/98 $12,267.61 22.68% 7.05% Life 09/30/96-12/31/98 $11,411.93 14.12% 6.04% Life 06/30/95-12/31/98 $15,246.50 52.46% 12.78%
* For periods of less than one year, the growth rates listed are not annualized. -9- ADVERTISING AND SALES LITERATURE As set forth in the Prospectus, the Company may refer to the following organizations (and others) in its marketing materials: A.M. BEST'S RATING SYSTEM is designed to evaluate the various factors affecting the overall performance of an insurance company in order to provide an opinion as to an insurance company's relative financial strength and ability to meet its contractual obligations. The procedure includes both a quantitative and qualitative review of each company. DUFF & PHELPS CREDIT RATING Company's Insurance Company Claims Paying Ability Rating is an independent evaluation by a nationally accredited rating organization of an insurance company's ability to meet its future obligations under the contracts and products it sells. The rating takes into account both quantitative and qualitative factors. LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a publisher of statistical data covering the investment company industry in the United States and overseas. Lipper is recognized as the leading source of data on open-end and closed-end funds. Lipper currently tracks the performance of over 5,000 investment companies and publishes numerous specialized reports, including reports on performance and portfolio analysis, fee and expense analysis. STANDARD & POOR's insurance claims-paying ability rating is an opinion of an operating insurance company's financial capacity to meet obligations of its insurance policies in accordance with their terms. VARDS (Variable Annuity Research Data Service) provides a comprehensive guide to variable annuity contract features and historical fund performance. The service also provides a readily understandable analysis of the comparative characteristics and market performance of funds inclusive in variable contracts. MOODY'S Investors Services, Inc.'s insurance claims-paying rating is a system of rating an insurance company's financial strength, market leadership, and ability to meet financial obligations. The purpose of Moody's ratings is to provide investors with a simple system of gradation by which the relative quality of insurance companies may be noted. STANDARD & POOR'S INDEX - broad-based measurement of changes in stock-market conditions based on the average performance of 500 widely held common stocks; commonly known as the Standard & Poor's 500 (S&P 500). The selection of stocks, their relative weightings to reflect differences in the number of outstanding shares, and publication of the index itself are services of Standard & Poor's Corporation, a financial advisory, securities rating, and publishing firm. The index tracks 400 industrial company stocks, 20 transportation stocks, 40 financial company stocks, and 40 public utilities. -10- NASDAQ-OTC Price Index - this index is based on the National Association of Securities Dealers Automated Quotations (NASDAQ) and represents all domestic over-the-counter stocks except those traded on exchanges and those having only one market maker, a total of some 3,500 stocks. It is market valueweighted and was introduced with a base of 100.00 on February 5, 1971. DOW JONES INDUSTRIAL AVERAGE (DJIA) - price-weighted average of 30 actively traded blue chip stocks, primarily industrials, but including American Express Company and American Telephone and Telegraph Company. Prepared and Published by Dow Jones & Company, it is the oldest and most widely quoted of all the market indicators. The average is quoted in points, not dollars. MORNINGSTAR, Inc. is an independent financial publisher offering comprehensive statistical and analytical coverage of open-end and closed-end funds and variable annuities. This coverage for mutual funds includes, among other information, performance analysis rankings, risk rankings (e.g. aggressive, moderate or conservative), and "style box" matrices. Style box matrices display, for equity funds, the investment philosophy and size of the companies in which the fund invests and, for fixed-income funds, interest rate sensitivity and credit quality of the investment instruments. IBBOTSON ASSOCIATES, Inc. is a consulting firm that provides a variety of historical data, including total return, capital appreciation and income, on the stock market as well as other investment asset classes, and inflation. This information will be used primarily for comparative purposes and to illustrate general financial planning principles. In its advertisements and other sales literature for the Variable Account and the Series Fund, the Company intends to illustrate the advantages of the Contracts in a number of ways: DOLLAR COST AVERAGING ILLUSTRATIONS. These illustrations will generally discuss the price-leveling effect of making regular investments in the same Sub-Accounts over a period of time, to take advantage of the trends in market prices of the portfolio securities purchased by those Sub-Accounts. SYSTEMATIC WITHDRAWAL PROGRAM. A service provided by the Company, through which a Participant may take any distribution allowed by Internal Revenue Code Section 401 (a) (9) in the case of Qualified Contracts, or permitted under Internal Revenue Code Section 72 in the case of Non-Qualified Contracts, by way of a series of partial withdrawals. Withdrawals under this program may be fully or partially includible in income and may be subject to a 10% penalty tax. Consult your tax advisor. THE COMPANY'S AND THE FUNDS CUSTOMERS. Sales literature for the Variable Account and the Funds may refer to the number of clients which they serve. THE COMPANY'S ASSETS, SIZE. The Company may discuss its general financial condition (see, for example, the references to Standard & Poor's, Duff & Phelps and A.M. Best Company above); it may refer to its assets; it may also discuss its -11- relative size and/or ranking among companies in the industry or among any sub-classification of those companies, based upon recognized evaluation criteria. For example, at December 31, 1997, the Company was the 37th largest U.S. life insurance company based upon overall assets and its ultimate parent company, Sun Life Assurance Company of Canada, was the 21st largest. COMPOUND INTEREST ILLUSTRATIONS. These will emphasize several advantages of the variable annuity contract. For example, but not by way of limitation, the literature may emphasize the potential savings through tax deferral; the potential advantage of the Variable Account over the Fixed Account; and the compounding effect when a participant makes regular deposits to his or her account. The Company may use hypothetical illustrations of the benefits of tax deferral, including but not limited to the following chart: The chart below assumes an initial investment of $10,000 which remains fully invested for the entire time period, an 8% annual return, and a 33% combined federal and state income tax rate. It compares how three different investments might fare over 10, 20, and 30 years. The first example illustrates an investment in a non-tax-deferred account and assumes that taxes are paid annually out of that account. The second example illustrates how the same investment would grow in a tax-deferred investment, such as an annuity. And the third example illustrates the net value of the tax-deferred investment after paying taxes on the full account value.
- -------------------------------------------------------------------------------- 10 YEARS 20 YEARS 30 YEARS - -------------------------------------------------------------------------------- Non-Tax-Deferred Account $16,856 $28,413 $ 47,893 - -------------------------------------------------------------------------------- Tax-Deferred Account $21,589 $46,610 $100,627 - -------------------------------------------------------------------------------- Tax-Deferred Account After $17,765 $34,528 $ 70,720 - -------------------------------------------------------------------------------- Paying Taxes - --------------------------------------------------------------------------------
THIS ILLUSTRATION IS HYPOTHETICAL AND DOES NOT REPRESENT THE PROJECTED PERFORMANCE OF THE FUTURRITY II VARIABLE ANNUITY OR ANY OF ITS INVESTMENT OPTIONS. THE ILLUSTRATION DOES NOT REFLECT THE DEDUCTION OF ANY CHARGES OR FEES RELATED TO PORTFOLIO MANAGEMENT, MORTALITY AND EXPENSE, OR ACCOUNT ADMINISTRATION. TAXES ON EARNINGS WITHIN AN ANNUITY ARE DUE UPON WITHDRAWAL. WITHDRAWALS MAY ALSO BE SUBJECT TO SURRENDER CHARGES AND, IF MADE PRIOR TO AGE 59 1/2, A 10% FEDERAL PENALTY TAX. -12- CALCULATIONS EXAMPLE OF VARIABLE ACCUMULATION UNIT VALUE CALCULATION Suppose the net asset value of a Fund share at the end of the current valuation period is $18.38; at the end of the immediately preceding valuation period was $18.32; the Valuation Period is one day; and no dividends or distributions caused Fund shares to go "ex-dividend" during the current Valuation Period. $18.38 divided by $18.32 is 1.00327511. Subtracting the one day risk factor for mortality and expense risks and the administrative expense charge of .00003863 (the daily equivalent of the current maximum charge of 1.40% on an annual basis) gives a net investment factor of 1.00323648. If the value of the variable accumulation unit for the immediately preceding valuation period had been 14.5645672, the value for the current valuation period would be 14.6117051 (14.5645672 X 1.00323648). EXAMPLE OF VARIABLE ANNUITY UNIT CALCULATION Suppose the circumstances of the first example exist, and the value of an annuity unit for the immediately preceding valuation period had been 12.3456789. If the first variable annuity payment is determined by using an annuity payment based on an assumed interest rate of 3% per year, the value of the annuity unit for the current valuation period would be 12.3846325 (12.3456789 X 1.00323648 (the Net Investment Factor) X 0.99991902). 0.99991902 is the factor, for a one day Valuation Period, that neutralizes the assumed interest rate of 3% per year used to establish the Annuity Payment Rates found in certain Contracts. (The factor that neutralizes the assumed interest rate of 3% per year used to establish the Annuity Payment Rates found in other Contracts is 0.99991902). EXAMPLE OF VARIABLE ANNUITY PAYMENT CALCULATION Suppose that a Participant Account is credited with 8,765.4321 variable accumulation units of a particular Sub-Account but is not credited with any fixed accumulation units; that the variable accumulation unit value and the annuity unit value for the particular Sub-Account for the valuation period which ends immediately preceding the annuity commencement date are 14.5645672 and 12.3456789 respectively; that the annuity payment rate for the age and option elected is $6.78 per $1,000; and that the annuity unit value on the day prior to the second variable annuity payment date is 12.3846325. The first variable annuity payment would be $865.57 (8,765.4321 X 14.5845672 X 6.78 divided by 1,000). The number of annuity units credited would be 70.1112 ($865.57 divided by 12.3456789) and the second variable annuity payment would be $868.28 (70.1112 X 12.3846325). CALCULATION OF ANNUITY VALUES The Fixed Annuity Unit Value for each Sub-Account is $10.00 for the first Valuation Period of the Sub-Account. For subsequent Valuation periods, the Variable Annuity Unit Value for the Sub-Account is the previous Variable Annuity Unit Value times the Net Investment Factor for the Sub-Account. DISTRIBUTION OF THE CONTRACTS We offer the Contracts on a continuous basis. The Contracts are sold by licensed insurance agents in those states where the Contracts may be lawfully sold. Such agents will be registered representatives of broker-dealers registered under the Securities Exchange Act of 1934 who are members of the National Association of Securities Dealers, Inc. and who have entered into distribution agreements with the Company and the general distributor and principal underwriter of the Contracts, Clarendon Insurance Agency, Inc. ("Clarendon"), One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. Clarendon is a wholly-owned subsidiary of the Company. Clarendon is registered with the SEC under the Securities Exchange Act of 1934 as broker-dealer and is a member of the National Association of Securities Dealers, Inc. Clarendon also acts as the general distributor of certain other annuity contracts issued by the Company and its wholly-owned subsidiary, Sun Life Insurance and Annuity Company of New York, and variable life insurance contracts issued by the Company. Commissions and other distribution compensation will be paid by the Company to the selling agents and will not be more than 7.46% of Purchase Payments. In addition, after the first Account Year, broker-dealers who have entered into distribution agreements with the Company may receive an annual renewal commission of no more than 1.00% of the Participant's Account Value. In addition to commissions, the Company may, from time to time, pay or allow additional promotional incentives, in the form of cash or other compensation. The Company reserves the right to offer these additional incentives only to certain -13- broker-dealers that sell or are expected to sell during specified time periods certain minimum amounts of the Contracts or Certificates or other contracts offered by the Company. Promotional incentives may change at any time. Commissions will not be paid with respect to Participant Accounts established for the personal account of employees of the Company or any of its affiliates, or of persons engaged in the distribution of the Contracts, or of immediate family members of such employees or persons. In addition, commissions may be waived or reduced in connection with certain transactions described in the Prospectus under the heading "Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest Rates." DESIGNATION AND CHANGE OF BENEFICIARY The Beneficiary designation in the Application will remain in effect until changed. Subject to the rights of an irrevocably designated Beneficiary, you may change or revoke the designation of Beneficiary by filing the change or revocation with us in the form we require. The change or revocation will not be binding on us until we receive it. When we receive it, the change or revocation will be effective as of the date on which it was signed, but the change or revocation will be without prejudice to us on account of any payment we make or any action we take before receiving the change or revocation. Please refer to the terms of your particular retirement plan and any applicable legislation for any restrictions on the beneficiary designation. CUSTODIAN We are the Custodian of the assets of the Variable Account. We will purchase Fund shares at net asset value in connection with amounts allocated to the Sub-Accounts in accordance with your instructions, and we will redeem Fund shares at net asset value for the purpose of meeting the contractual obligations of the Variable Account, paying charges relative to the Variable Account or making adjustments for annuity reserves held in the Variable Account. FINANCIAL STATEMENTS The Financial Statements of Sun Life of Canada (U.S.) Variable Account F for the year ended December 31, 1998 included in this Statement of Additional Information have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. -14- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF CONDITION -- December 31, 1998
ASSETS: Investments in: Shares Cost Value ---------- ------------ ------------ AIM Variable Insurance Funds, Inc. V.I. Capital Appreciation Fund ("AIM1")........................... 61,653 $ 1,425,203 $ 1,553,666 V.I. Growth Fund ("AIM2")........... 103,597 2,338,409 2,569,205 V.I. Growth and Income Fund ("AIM3")........................... 159,010 3,374,591 3,776,476 V.I. International Equity Fund ("AIM4")........................... 122,897 2,275,430 2,411,238 The Alger American Fund Growth Portfolio ("AL1")............ 68,386 3,143,210 3,639,502 Income and Growth Portfolio ("AL2")............................ 177,491 2,056,754 2,328,678 Small Capitalization Portfolio ("AL3")............................ 18,330 709,561 805,956 Goldman Sachs Variable Insurance Trust CORE Large Cap Growth Fund ("GS1")............................ 199,410 2,099,757 2,329,110 CORE Small Cap Equity Fund ("GS2")............................ 31,269 272,617 282,676 CORE US Equity Fund ("GS3")......... 281,905 2,922,399 3,219,352 Growth and Income Fund ("GS4")...... 176,926 1,920,797 1,848,880 International Equity Fund ("GS5")... 27,320 308,722 325,384 J.P. Morgan Series Trust II Equity Portfolio ("JP1")............ 201,127 3,112,186 3,185,847 International Equity Portfolio ("JP2")............................ 46,142 478,044 485,416 Small Cap Stock Portfolio ("JP3")... 16,051 191,610 190,370 Lord Abbett Series Fund, Inc. Growth and Income Portfolio ("LA1")............................ 163,870 3,361,117 3,382,278 MFS/Sun Life Series Trust Capital Appreciation Series ("CAS")............................ 100,566 3,989,435 4,619,240 Emerging Growth Series ("EGS")...... 209,516 4,099,958 4,877,239 Government Securities Series ("GSS")............................ 122,595 1,629,018 1,642,109 High Yield Series ("HYS")........... 230,697 2,116,785 2,113,993 Money Market Series ("MMS")......... 3,829,919 3,829,919 3,829,919 Utilities Series ("UTS")............ 169,613 2,694,298 2,897,748 OCC Accumulation Trust Equity Portfolio ("OP1")............ 99,730 3,657,753 3,859,556 Mid Cap Portfolio ("OP2")........... 92,501 863,619 905,583 Small Cap Portfolio ("OP3")......... 30,984 686,779 715,731 Managed Portfolio ("OP4")........... 24 999 1,053 Salomon Brothers Variable Series Funds, Inc. Variable Capital Fund ("SB1")....... 19,989 207,998 231,269 Variable Investors Fund ("SB2")..... 29,980 310,630 330,084 Variable Strategic Bond Fund ("SB3")............................ 287,433 2,978,552 2,911,700 Variable Total Return Fund ("SB4")............................ 286,820 2,918,463 2,982,932 Sun Capital Advisers Trust Sun Capital Money Market Fund ("SCA1")........................... 2,003 2,003 2,003 Sun Capital Investment Grade Bond Fund ("SCA2")...................... 1,808 18,012 18,033 Sun Capital Real Estate Fund ("SCA3")........................... 721 6,999 7,096 Warburg Pincus Trust Emerging Markets Portolio ("WP1")... 20,125 168,179 164,827 International Equity Portfolio ("WP2")............................ 15,073 167,510 165,652 Post-Venture Capital Portfolio ("WP3")............................ 11,625 129,509 136,947 Small Company Growth Portfolio ("WP4")............................ 23,191 341,750 371,281 ------------ ------------ $ 60,808,575 $ 65,118,029 ------------ ------------ LIABILITY: Payable to sponsor................................................ (475) ------------ Net assets.................................................. $ 65,117,554 ------------ ------------
See notes to financial statements -15- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF CONDITION -- December 31, 1998 -- continued
Applicable to Owners of Deferred Variable Annuity Contracts Reserve for ----------------------------------- Variable Units Unit Value Value Annuities Total --------- ---------- ------------ ----------- ------------ NET ASSETS APPLICABLE TO CONTRACT OWNERS: FUTURITY CONTRACTS: AIM Variable Insurance Funds, Inc. V.I. Capital Appreciation Fund........... 141,292 $11.2634 $ 1,552,536 $ -- $ 1,552,536 V.I. Growth Fund......................... 204,502 12.5052 2,557,319 -- 2,557,319 V.I. Growth and Income Fund.............. 332,662 11.2957 3,757,624 -- 3,757,624 V.I. International Equity Fund........... 216,812 10.9969 2,384,292 -- 2,384,292 The Alger American Fund Growth Portfolio......................... 285,990 12.6460 3,616,606 -- 3,616,606 Income and Growth Portfolio.............. 194,995 11.8414 2,308,987 -- 2,308,987 Small Capitalization Portfolio........... 77,472 10.3887 804,820 -- 804,820 Goldman Sachs Variable Insurance Trust CORE Large Cap Growth Fund............... 210,952 11.0000 2,320,458 -- 2,320,458 CORE Small Cap Equity Fund............... 31,476 8.9463 281,589 -- 281,589 CORE US Equity Fund...................... 282,488 11.3062 3,193,980 -- 3,193,980 Growth and Income Fund................... 199,770 9.2498 1,847,844 -- 1,847,844 International Equity Fund................ 30,394 10.5032 319,257 -- 319,257 J.P. Morgan Series Trust II Equity Portfolio......................... 293,787 10.8269 3,180,766 -- 3,180,766 International Opportunities Portfolio.... 52,419 9.2403 484,365 -- 484,365 Small Company Portfolio.................. 22,655 8.3553 189,285 -- 189,285 Lord Abbett Series Fund, Inc. Growth and Income Portfolio.............. 333,805 10.0766 3,363,604 -- 3,363,604 MFS/Sun Life Series Trust Capital Appreciation Series.............. 403,733 11.3759 4,592,910 -- 4,592,910 Emerging Growth Series................... 397,132 12.1772 4,835,955 -- 4,835,955 Government Securities Series............. 150,350 10.5829 1,591,131 40,272 1,631,403 High Yield Series........................ 217,924 9.6667 2,106,712 -- 2,106,712 Money Market Series...................... 371,404 10.3120 3,829,919 -- 3,829,919 Utilities Series......................... 278,221 10.3843 2,889,100 -- 2,889,100 OCC Accumulation Trust Equity Portfolio......................... 363,748 10.5664 3,843,506 -- 3,843,506 Mid Cap Portfolio........................ 93,160 9.7036 903,990 -- 903,990 Small Cap Portfolio...................... 86,567 8.2560 714,696 -- 714,696 Salomon Brothers Variable Series Funds, Inc. Variable Capital Fund.................... 21,329 10.8433 231,269 -- 231,269 Variable Investors Fund.................. 32,282 10.2249 330,084 -- 330,084 Variable Strategic Bond Fund............. 277,473 10.4937 2,911,700 -- 2,911,700 Variable Total Return Fund............... 293,921 10.1488 2,982,932 -- 2,982,932 Warburg Pincus Trust Emerging Markets Portfolio............... 22,480 7.2856 163,778 -- 163,778 International Equity Portfolio........... 18,253 9.0185 164,615 -- 164,615 Post-Venture Capital Portfolio........... 14,715 9.2305 135,822 -- 135,822 Small Company Growth Portfolio........... 41,843 8.8466 370,171 -- 370,171 ------------ ----------- ------------ $ 64,761,622 $ 40,272 $ 64,801,894 ------------ ----------- ------------ ------------ ----------- ------------
See notes to financial statements -16- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF CONDITION -- December 31, 1998 -- continued
Applicable to Owners of Deferred Variable Annuity Contracts Reserve for ----------------------------------- Variable Units Unit Value Value Annuities Total --------- ---------- ------------ ----------- ------------ FUTURITY II CONTRACTS: AIM Variable Insurance Funds, Inc. V.I. Capital Appreciation Fund........... 100 $11.2991 $ 1,130 $ -- $ 1,130 V.I. Growth Fund......................... 1,049 11.3293 11,886 -- 11,886 V.I. Growth & Income Fund................ 1,704 11.0655 18,852 -- 18,852 V.I. International Equity Fund........... 2,553 10.5553 26,946 -- 26,946 The Alger American Fund Growth Portfolio......................... 2,044 11.1993 22,896 -- 22,896 Income and Growth Portfolio.............. 1,785 11.0273 19,691 -- 19,691 Small Capitalization Portfolio........... 100 11.3603 1,136 -- 1,136 Goldman Sachs Variable Insurance Trust..... CORE Large-Cap Growth Fund............... 786 11.0085 8,652 -- 8,652 CORE Small Cap Equity Fund............... 100 10.8679 1,087 -- 1,087 CORE US Equity Fund...................... 2,341 10.8370 25,372 25,372 Growth and Income Fund................... 100 10.3642 1,036 -- 1,036 International Equity Fund................ 578 10.5999 6,127 -- 6,127 J.P. Morgan Series Trust II................ Equity Portfolio......................... 474 10.7114 5,081 -- 5,081 International Opportunities Portfolio.... 100 10.5058 1,051 -- 1,051 Small Company Portfolio.................. 100 10.8537 1,085 -- 1,085 Lord Abbett Series Fund, Inc. Growth and Income Portfolio.............. 1,763 10.5917 18,674 -- 18,674 MFS/Sun Life Series Trust Capital Appreciation Series.............. 2,367 11.1244 26,330 -- 26,330 Emerging Growth Series................... 3,662 11.2723 41,284 -- 41,284 Government Securities Series............. 1,027 9.9595 10,231 -- 10,231 High Yield Series........................ 729 9.9916 7,281 -- 7,281 Utilities Series......................... 821 10.5369 8,648 -- 8,648 OCC Accumulation Trust Equity Portfolio......................... 1,517 10.5784 16,050 -- 16,050 Mid Cap Portfolio........................ 150 10.6171 1,593 -- 1,593 Small Cap Portfolio...................... 100 10.3520 1,035 -- 1,035 Managed Portfolio........................ 100 10.5329 1,053 -- 1,053 Sun Capital Advisers Trust Sun Capital Money Market Fund............ 200 10.0143 2,003 -- 2,003 Sun Capital Investment Grade Bond Fund... 1,806 9.9809 18,033 -- 18,033 Sun Capital Real Estate Fund............. 705 10.0837 7,096 -- 7,096 Warburg Pincus Trust Emerging Markets Portfolio............... 100 10.4931 1,049 -- 1,049 International Equity Portfolio........... 100 10.3709 1,037 -- 1,037 Post-Venture Capital Portfolio........... 100 11.2546 1,125 -- 1,125 Small Company Growth Portfolio........... 100 11.0954 1,110 -- 1,110 ------------ ----------- ------------ $ 315,660 $ -- $ 315,660 ------------ ----------- ------------ $ 65,077,282 $ 40,272 $ 65,117,554 ------------ ----------- ------------ ------------ ----------- ------------
See notes to financial statements -17- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF OPERATIONS -- Period Ended December 31, 1998
AIM1 AIM2 AIM3 AIM4 AL1 Sub-Account* Sub-Account* Sub-Account** Sub-Account* Sub-Account** ------------- -------------- ------------- ------------- ------------- INCOME AND EXPENSES: Dividend income and capital gain distributions received............... $ 6,285 $ 156,348 $ 44,556 $ 18,795 $ 15,307 Mortality and expense risk charges.... (5,754) (10,256) (10,435) (9,450) (8,129) Distribution expense charges.......... (690) (1,231) (1,252) (1,134) (975) ------------- -------------- ------------- ------------- ------------- Net investment income (loss)...... $ (159) $ 144,861 $ 32,869 $ 8,211 $ 6,203 ------------- -------------- ------------- ------------- ------------- REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains (losses) on investment transactions: Proceeds from sales................. $ 51,118 $ 262,798 $ 194,277 $ 606,332 $ 134,431 Cost of investments sold............ (57,244) (260,107) (194,824) (658,114) (152,992) ------------- -------------- ------------- ------------- ------------- Net realized gain (losses)........ $ (6,126) $ 2,691 $ (547) $ (51,782) $ (18,561) ------------- -------------- ------------- ------------- ------------- Net unrealized appreciation on investments: End of period....................... $128,463 $ 230,796 $ 401,885 $ 135,808 $ 496,292 Beginning of period................. -- -- -- -- -- ------------- -------------- ------------- ------------- ------------- Change in unrealized appreciation..................... $128,463 $ 230,796 $ 401,885 $ 135,808 $ 496,292 ------------- -------------- ------------- ------------- ------------- Realized and unrealized gains....... $122,337 $ 233,487 $ 401,338 $ 84,026 $ 477,731 ------------- -------------- ------------- ------------- ------------- INCREASE IN NET ASSETS FROM OPERATIONS............................. $122,178 $ 378,348 $ 434,207 $ 92,237 $ 483,934 ------------- -------------- ------------- ------------- ------------- ------------- -------------- ------------- ------------- ------------- AL3 GS1 GS2 GS3 GS4 Sub-Account** Sub-Account*** Sub-Account* Sub-Account* Sub-Account* ------------- -------------- ------------- ------------- ------------- INCOME AND EXPENSES: Dividend income and capital gain distributions received............... $ 833 $ 3,540 $ 874 $ 14,485 $ 16,477 Mortality and expense risk charges.... (2,460) (8,520) (1,123) (13,699) (9,031) Distribution expense charges.......... (296) (1,022) (134) (1,644) (1,084) ------------- -------------- ------------- ------------- ------------- Net investment income (loss)...... $ (1,923) $ (6,002) $ (383) $ (858) $ 6,362 ------------- -------------- ------------- ------------- ------------- REALIZED AND UNREALIZED LOSSES: Realized losses on investment transactions: Proceeds from sales................. $ 28,682 $ 145,615 $ 31,350 $ 420,752 $ 53,455 Cost of investments sold............ (31,697) (152,360) (36,619) (430,572) (62,276) ------------- -------------- ------------- ------------- ------------- Net realized losses............... $ (3,015) $ (6,745) $ (5,269) $ (9,820) $ (8,821) ------------- -------------- ------------- ------------- ------------- Net unrealized appreciation (depreciation) on investments: End of period....................... $ 96,395 $ 229,353 $ 10,059 $ 296,953 $ (71,917) Beginning of period................. -- -- -- -- -- ------------- -------------- ------------- ------------- ------------- Change in unrealized appreciation (depreciation)................... $ 96,395 $ 229,353 $ 10,059 $ 296,953 $ (71,917) ------------- -------------- ------------- ------------- ------------- Realized and unrealized gains (losses)........................... $ 93,380 $ 222,608 $ 4,790 $ 287,133 $ (80,738) ------------- -------------- ------------- ------------- ------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS.................... $ 91,457 $ 216,606 $ 4,407 $ 286,275 $ (74,376) ------------- -------------- ------------- ------------- ------------- ------------- -------------- ------------- ------------- ------------- AL2 Sub-Account** ------------- INCOME AND EXPENSES: Dividend income and capital gain distributions received............... $ 14,144 Mortality and expense risk charges.... (6,477) Distribution expense charges.......... (777) ------------- Net investment income (loss)...... $ 6,890 ------------- REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains (losses) on investment transactions: Proceeds from sales................. $ 70,034 Cost of investments sold............ (75,270) ------------- Net realized gain (losses)........ $ (5,236) ------------- Net unrealized appreciation on investments: End of period....................... $271,924 Beginning of period................. -- ------------- Change in unrealized appreciation..................... $271,924 ------------- Realized and unrealized gains....... $266,688 ------------- INCREASE IN NET ASSETS FROM OPERATIONS............................. $273,578 ------------- ------------- GS5 Sub-Account+ ------------- INCOME AND EXPENSES: Dividend income and capital gain distributions received............... $ 2,340 Mortality and expense risk charges.... (1,316) Distribution expense charges.......... (158) ------------- Net investment income (loss)...... $ 866 ------------- REALIZED AND UNREALIZED LOSSES: Realized losses on investment transactions: Proceeds from sales................. $ 40,264 Cost of investments sold............ (43,080) ------------- Net realized losses............... $ (2,816) ------------- Net unrealized appreciation (depreciation) on investments: End of period....................... $ 16,662 Beginning of period................. -- ------------- Change in unrealized appreciation (depreciation)................... $ 16,662 ------------- Realized and unrealized gains (losses)........................... $ 13,846 ------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS.................... $ 14,712 ------------- -------------
*For the period February 20, 1998 (commencement of operations) through December 31, 1998. **For the period March 27, 1998 (commencement of operations) through December 31, 1998. ***For the period March 12, 1998 (commencement of operations) through December 31, 1998. +For the period March 17, 1998 (commencement of operations) through December 31, 1998. See notes to financial statements -18- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF OPERATIONS -- Period Ended December 31, 1998 -- continued
JP1 JP2 JP3 LA1 CAS Sub-Account** Sub-Account** Sub-Account** Sub-Account** Sub-Account* -------------- ------------ -------------- ------------- ------------- INCOME AND EXPENSES: Dividend income and capital gain distributions received............... $ 241,743 $ 4,493 $ 4,121 $ 205,897 $ 9,457 Mortality and expense risk charges.... (8,628) (1,808) (717) (11,202) (16,870) Distribution expense charges.......... (1,035) (217) (86) (1,344) (2,024) -------------- ------------ -------------- ------------- ------------- Net investment income (loss)...... $ 232,080 $ 2,468 $ 3,318 $ 193,351 $ (9,437) -------------- ------------ -------------- ------------- ------------- REALIZED AND UNREALIZED LOSSES: Realized losses on investment transactions: Proceeds from sales................. $ 576,853 $ 10,067 $ 55,312 $ 315,782 $ 1,184,955 Cost of investments sold............ (618,907) (11,959) (58,372) (319,246) (1,219,402) -------------- ------------ -------------- ------------- ------------- Net realized losses............... $ (42,054) $ (1,892) $ (3,060) $ (3,464) $ (34,447) -------------- ------------ -------------- ------------- ------------- Net unrealized appreciation (depreciation) on investments: End of period....................... $ 73,661 $ 7,372 $ (1,240) $ 21,161 $ 629,805 Beginning of period................. -- -- -- -- -- -------------- ------------ -------------- ------------- ------------- Change in unrealized appreciation (depreciation)................... $ 73,661 $ 7,372 $ (1,240) $ 21,161 $ 629,805 -------------- ------------ -------------- ------------- ------------- Realized and unrealized gains (losses)........................... $ 31,607 $ 5,480 $ (4,300) $ 17,697 $ 595,358 -------------- ------------ -------------- ------------- ------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS............................. $ 263,687 $ 7,948 $ (982) $ 211,048 $ 585,921 -------------- ------------ -------------- ------------- ------------- -------------- ------------ -------------- ------------- ------------- GSS HYS MMS UTS OP1 Sub-Account*** Sub-Account* Sub-Account*** Sub-Account** Sub-Account*** -------------- ------------ -------------- ------------- ------------- INCOME AND EXPENSES: Dividend income and capital gain distributions received............... $ 1,514 $ 9,226 $ 69,015 $ 2,328 $ 296 Mortality and expense risk charges.... (5,898) (8,450) (17,964) (9,095) (12,274) Distribution expense charges.......... (708) (1,015) (2,156) (1,092) (1,473) -------------- ------------ -------------- ------------- ------------- Net investment income (loss)...... $ (5,092) $ (239) $ 48,895 $ (7,859) $ (13,451) -------------- ------------ -------------- ------------- ------------- REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains (losses) on investment transactions: Proceeds from sales................. $ 658,482 $ 201,108 $ 6,791,349 $ 61,276 $ 121,931 Cost of investments sold............ (635,156) (218,864) (6,791,349) (62,407) (137,860) -------------- ------------ -------------- ------------- ------------- Net realized gains (losses)....... $ 23,326 $ (17,756) $ -- $ (1,131) $ (15,929) -------------- ------------ -------------- ------------- ------------- Net unrealized appreciation (depreciation) on investments: End of period....................... $ 13,091 $ (2,792) $ -- $ 203,450 $ 201,803 Beginning of period................. -- -- -- -- -- -------------- ------------ -------------- ------------- ------------- Change in unrealized appreciation (depreciation)....................... $ 13,091 $ (2,792) $ -- $ 203,450 $ 201,803 -------------- ------------ -------------- ------------- ------------- Realized and unrealized gains (losses)........................... $ 36,417 $ (20,548) $ -- $ 202,319 $ 185,874 -------------- ------------ -------------- ------------- ------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS............................. $ 31,325 $ (20,787) $ 48,895 $ 194,460 $ 172,423 -------------- ------------ -------------- ------------- ------------- -------------- ------------ -------------- ------------- ------------- EGS Sub-Account*** -------------- INCOME AND EXPENSES: Dividend income and capital gain distributions received............... $ 9,770 Mortality and expense risk charges.... (17,496) Distribution expense charges.......... (2,099) -------------- Net investment income (loss)...... $ (9,825) -------------- REALIZED AND UNREALIZED LOSSES: Realized losses on investment transactions: Proceeds from sales................. $ 1,285,214 Cost of investments sold............ (1,329,156) -------------- Net realized losses............... $ (43,942) -------------- Net unrealized appreciation (depreciation) on investments: End of period....................... $ 777,281 Beginning of period................. -- -------------- Change in unrealized appreciation (depreciation)................... $ 777,281 -------------- Realized and unrealized gains (losses)........................... $ 733,339 -------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS............................. $ 723,514 -------------- -------------- OP2 Sub-Account*** -------------- INCOME AND EXPENSES: Dividend income and capital gain distributions received............... $ 4,411 Mortality and expense risk charges.... (3,729) Distribution expense charges.......... (447) -------------- Net investment income (loss)...... $ 235 -------------- REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains (losses) on investment transactions: Proceeds from sales................. $ 185,099 Cost of investments sold............ (204,397) -------------- Net realized gains (losses)....... $ (19,298) -------------- Net unrealized appreciation (depreciation) on investments: End of period....................... $ 41,964 Beginning of period................. -- -------------- Change in unrealized appreciation (depreciation)....................... $ 41,964 -------------- Realized and unrealized gains (losses)........................... $ 22,666 -------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS............................. $ 22,901 -------------- --------------
*For the period February 26, 1998 (commencement of operations) through December 31, 1998. **For the period March 27, 1998 (commencement of operations) through December 31, 1998. ***For the period February 20, 1998 (commencement of operations) through December 31, 1998. See notes to financial statements -19- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF OPERATIONS -- Period Ended December 31, 1998 -- continued
OP3 OP4 SB1 SB2 SB3 SB4 Sub-Account** Sub-Account+ Sub-Account** Sub-Account** Sub-Account* Sub-Account** ------------- ------------- ------------- ------------- ------------- ------------ INCOME AND EXPENSES: Dividend income and capital gain distributions received.......... $ -- $ -- $ 4,723 $ 1,344 $ 133,766 $51,585 Mortality and expense risk charges......................... (1,648) (1) (1,045) (1,425) (11,087) (10,981) Distribution expense charges..... (198) -- (125) (171) (1,331) (1,318) ------------- ------------- ------------- ------------- ------------- ------------ Net investment income (loss)...................... $ (1,846) $ (1) $ 3,553 $ (252) $ 121,348 $39,286 ------------- ------------- ------------- ------------- ------------- ------------ REALIZED AND UNREALIZED GAINS (LOSSES): Realized gains (losses) on investment transactions: Proceeds from sales............ $ 41,674 $ -- $ 14,423 $ 17,667 $ 287,467 $76,303 Cost of investments sold....... (48,893) -- (16,180) (18,524) (277,837) (77,449) ------------- ------------- ------------- ------------- ------------- ------------ Net realized gains (losses).................... $ (7,219) $ -- $ (1,757) $ (857) $ 9,630 $(1,146) ------------- ------------- ------------- ------------- ------------- ------------ Net unrealized appreciation (depreciation) on investments: End of period.................. $ 28,952 $ 54 $ 23,271 $ 19,454 $ (66,852) $64,469 Beginning of period............ -- -- -- -- -- -- ------------- ------------- ------------- ------------- ------------- ------------ Change in unrealized appreciation (depreciation).............. $ 28,952 $ 54 $ 23,271 $ 19,454 $ (66,852) $64,469 ------------- ------------- ------------- ------------- ------------- ------------ Realized and unrealized gains (losses)...................... $ 21,733 $ 54 $ 21,514 $ 18,597 $ (57,222) $63,323 ------------- ------------- ------------- ------------- ------------- ------------ INCREASE IN NET ASSETS FROM OPERATIONS........................ $ 19,887 $ 53 $ 25,067 $ 18,345 $ 64,126 $102,609 ------------- ------------- ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------- ------------- ------------ SCA1 SCA2 SCA3 WP1 WP2 WP3 Sub-Account+ Sub-Account+ Sub-Account+ Sub-Account* Sub-Account** Sub-Account** ------------- ------------- ------------- ------------- ------------- ------------ INCOME AND EXPENSES: Dividend income and capital gain distributions received.......... $ 4 $ 18 $-- $-- $ -- $-- Mortality and expense risk charges......................... (1) (4) (1) (606) (1,215) (478) Distribution expense charges..... -- (1) -- (73) (146) (57) ------------- ------------- ------------- ------------- ------------- ------------ Net investment income (loss)...................... $ 3 $ 13 $ (1) $ (679) $ (1,361) $ (535) ------------- ------------- ------------- ------------- ------------- ------------ REALIZED AND UNREALIZED LOSSES: Realized losses on investment transactions: Proceeds from sales............ $ 1 $ 5 $ 1 $ 10,430 $ 969,366 $ 1,327 Cost of investments sold....... (1) (6) (1) (15,247) (1,002,396) (1,566) ------------- ------------- ------------- ------------- ------------- ------------ Net realized losses.......... $-- $ (1) $-- $ (4,817) $ (33,030) $ (239) ------------- ------------- ------------- ------------- ------------- ------------ Net unrealized appreciation (depreciation) on investments: End of period.................. $-- $ 21 $ 97 $ (3,352) $ (1,858) $ 7,438 Beginning of period............ -- -- -- -- -- -- ------------- ------------- ------------- ------------- ------------- ------------ Change in unrealized appreciation (depreciation).............. $-- $ 21 $ 97 $ (3,352) $ (1,858) $ 7,438 ------------- ------------- ------------- ------------- ------------- ------------ Realized and unrealized gains (losses)...................... $-- $ 20 $ 97 $ (8,169) $ (34,888) $ 7,199 ------------- ------------- ------------- ------------- ------------- ------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS................... $ 3 $ 33 $ 96 $ (8,848) $ (36,249) $ 6,664 ------------- ------------- ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------- ------------- ------------
*For the period February 20, 1998 (commencement of operations) through December 31, 1998. **For the period March 27, 1998 (commencement of operations) through December 31, 1998. +For the period December 15, 1998 (commencement of operations) through December 31, 1998. See notes to financial statements -20- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENT OF OPERATIONS -- Period Ended December 31, 1998 -- continued
WP4 Sub-Account** Total ------------- ------------- INCOME AND EXPENSES: Dividend income and capital gain distributions received............... $ -- $ 1,047,695 Mortality and expense risk charges.... (2,028) (231,301) Distribution expense charges.......... (243) (27,756) ------------- ------------- Net investment income (loss)...... $ (2,271) $ 788,638 ------------- ------------- REALIZED AND UNREALIZED LOSSES: Realized losses on investment transactions: Proceeds from sales................. $ 130,688 15,035,888 Cost of investments sold............ (156,790) (15,377,120) ------------- ------------- Net realized losses............... $ (26,102) $ (341,232) ------------- ------------- Net unrealized appreciation on investments: End of period....................... $ 29,531 4,309,454 Beginning of period................. -- -- ------------- ------------- Change in unrealized appreciation...................... $ 29,531 $ 4,309,454 ------------- ------------- Realized and unrealized gains....... $ 3,429 $ 3,968,222 ------------- ------------- INCREASE IN NET ASSETS FROM OPERATIONS............................. $ 1,158 $ 4,756,860 ------------- ------------- ------------- -------------
**For the period March 27, 1998 (commencement of operations) through December 31, 1998. See notes to financial statements -21- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS
AIM1 AIM2 AIM3 AIM4 AL1 AL2 Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account ------------ ------------ ------------ ------------ ------------ ------------ Period Ended Period Ended Period Ended Period Ended Period Ended Period Ended December 31, December 31, December 31, December 31, December 31, December 31, 1998* 1998* 1998** 1998* 1998** 1998** ------------ ------------ ------------ ------------ ------------ ------------ OPERATIONS: Net investment income (loss).......... $ (159) $ 144,861 $ 32,869 $ 8,211 $ 6,203 $ 6,890 Net realized gains (losses)........... (6,126) 2,691 (547) (51,782) (18,561) (5,236) Net unrealized gains.................. 128,463 230,796 401,885 135,808 496,292 271,924 ------------ ------------ ------------ ------------ ------------ ------------ Increase in net assets from operations....................... $ 122,178 $ 378,348 $ 434,207 $ 92,237 $ 483,934 $ 273,578 ------------ ------------ ------------ ------------ ------------ ------------ PARTICIPANT TRANSACTIONS: Accumulation activity: Purchase payments received.......... $1,229,109 $2,015,774 $2,099,297 $1,910,796 $2,399,047 $1,751,908 Net transfers between Sub-Accounts and Fixed Account.................. 212,774 193,750 1,293,608 416,832 768,779 350,911 Withdrawals, surrenders, annuitizations and contract charges............................ (10,395) (18,667) (50,636) (8,627) (12,258) (47,719) ------------ ------------ ------------ ------------ ------------ ------------ Net accumulation activity......... $1,431,488 $2,190,857 $3,342,269 $2,319,001 $3,155,568 $2,055,100 ------------ ------------ ------------ ------------ ------------ ------------ Increase in net assets from participant transactions............. $1,431,488 $2,190,857 $3,342,269 $2,319,001 $3,155,568 $2,055,100 ------------ ------------ ------------ ------------ ------------ ------------ Increase in net assets.............. $1,553,666 $2,569,205 $3,776,476 $2,411,238 $3,639,502 $2,328,678 NET ASSETS: Beginning of period................... -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ End of period......................... $1,553,666 $2,569,205 $3,776,476 $2,411,238 $3,639,502 $2,328,678 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
*For the period February 20, 1998 (commencement of operations) through December 31, 1998. **For the period March 27, 1998 (commencement of operations) through December 31, 1998. See notes to financial statements -22- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
AL3 GS1 GS2 GS3 GS4 GS5 Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account ------------ ------------ ------------ ------------ ------------ ------------ Period Ended Period Ended Period Ended Period Ended Period Ended Period Ended December 31, December 31, December 31, December 31, December 31, December 31, 1998** 1998*** 1998* 1998* 1998* 1998+ ------------ ------------ ------------ ------------ ------------ ------------ OPERATIONS: Net investment income (loss).... $ (1,923) $ (6,002) $ (383) $ (858) $ 6,362 $ 866 Net realized losses............. (3,015) (6,745) (5,269) (9,820) (8,821) (2,816) Net unrealized gains (loss)..... 96,395 229,353 10,059 296,953 (71,917) 16,662 ------------ ------------ ------------ ------------ ------------ ------------ Increase (decrease) in net assets from operations....... $ 91,457 $ 216,606 $ 4,407 $ 286,275 $ (74,376) $ 14,712 ------------ ------------ ------------ ------------ ------------ ------------ PARTICIPANT TRANSACTIONS: Accumulation activity: Purchase payments received.... $ 437,232 $1,763,717 $ 258,204 $2,581,300 $1,443,172 $ 238,188 Net transfers between Sub-Accounts and Fixed Account...................... 285,561 357,499 20,679 407,943 493,897 72,560 Withdrawals, surrenders, annuitizations and contract charges...................... (8,294) (8,712) (614) (56,166) (13,813) (76) ------------ ------------ ------------ ------------ ------------ ------------ Net accumulation activity... $ 714,499 $2,112,504 $ 278,269 $2,933,077 $1,923,256 $ 310,672 ------------ ------------ ------------ ------------ ------------ ------------ Increase in net assets from participant transactions....... $ 714,499 $2,112,504 $ 278,269 $2,933,077 $1,923,256 $ 310,672 ------------ ------------ ------------ ------------ ------------ ------------ Increase in net assets........ $ 805,956 $2,329,110 $ 282,676 $3,219,352 $1,848,880 $ 325,384 NET ASSETS: Beginning of period............. -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ End of period................... $ 805,956 $2,329,110 $ 282,676 $3,219,352 $1,848,880 $ 325,384 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
*For the period February 20, 1998 (commencement of operations) through December 31, 1998. **For the period March 27, 1998 (commencement of operations) through December 31, 1998. ***For the period March 12, 1998 (commencement of operations) through December 31, 1998. +For the period March 17, 1998 (commencement of operations) through December 31, 1998. See notes to financial statements -23- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
JP1 JP2 JP3 LA1 CAS EGS Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account ------------ ------------ ------------ ------------ ------------ ------------ Period Ended Period Ended Period Ended Period Ended Period Ended Period Ended December 31, December 31, December 31, December 31, December 31, December 31, 1998** 1998** 1998** 1998** 1998* 1998*** ------------ ------------ ------------ ------------ ------------ ------------ OPERATIONS: Net investment income (loss).... $ 232,080 $ 2,468 $ 3,318 $ 193,351 $ (9,437) $ (9,825) Net realized losses............. (42,054) (1,892) (3,060) (3,464) (34,447) (43,942) Net unrealized gains (losses)... 73,661 7,372 (1,240) 21,161 629,805 777,281 ------------ ------------ ------------ ------------ ------------ ------------ Increase(decrease) in net assets from operations..... $ 263,687 $ 7,948 $ (982) $ 211,048 $ 585,921 $ 723,514 ------------ ------------ ------------ ------------ ------------ ------------ PARTICIPANT TRANSACTIONS: Accumulation activity: Purchase payments received.... $1,481,091 $401,185 $126,177 $2,829,156 $1,880,023 $3,011,641 Net transfers between Sub-Accounts and Fixed Account...................... 1,474,721 78,547 65,945 363,979 2,200,342 1,178,725 Withdrawals, surrenders, annuitizations and contract charges...................... (33,652) (2,264) (770) (21,905) (47,046) (36,641) ------------ ------------ ------------ ------------ ------------ ------------ Net accumulation activity... $2,922,160 $477,468 $191,352 $3,171,230 $4,033,319 $4,153,725 ------------ ------------ ------------ ------------ ------------ ------------ Annuitization activity: Annuitizations................ $ -- $-- $-- $ -- $ -- $ -- Annuity payments.............. -- -- -- -- -- -- Annuity transfers............. -- -- -- -- -- -- Adjustments to annuity reserve...................... -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Net annuitization activity................... $ -- $-- $-- $ -- $ -- $ -- ------------ ------------ ------------ ------------ ------------ ------------ Increase in net assets from participant transactions....... $2,922,160 $477,468 $191,352 $3,171,230 $4,033,319 $4,153,725 ------------ ------------ ------------ ------------ ------------ ------------ Increase in net assets........ $3,185,847 $485,416 $190,370 $3,382,278 $4,619,240 $4,877,239 NET ASSETS: Beginning of period............. -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ End of period................... $3,185,847 $485,416 $190,370 $3,382,278 $4,619,240 $4,877,239 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
*For the period February 26, 1998 (commencement of operations) through December 31, 1998. **For the period March 27, 1998 (commencement of operations) through December 31, 1998. ***For the period February 20, 1998 (commencement of operations) through December 31, 1998. See notes to financial statements -24- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
GSS HYS MMS UTS OP1 OP2 Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account ------------ ------------ ------------ ------------ ------------ ------------ Period Ended Period Ended Period Ended Period Ended Period Ended Period Ended December 31, December 31, December 31, December 31, December 31, December 31, 1998* 1998+ 1998* 1998** 1998* 1998* ------------ ------------ ------------ ------------ ------------ ------------ OPERATIONS: Net investment income (loss).... $ (5,092) $ (239) $ 48,895 $ (7,859) $ (13,451) $ 235 Net realized gain (losses)...... 23,326 (17,756) -- (1,131) (15,929) (19,298) Net unrealized gains (losses)... 13,091 (2,792) -- 203,450 201,803 41,964 ------------ ------------ ------------ ------------ ------------ ------------ Increase (decrease) in net assets from operations..... $ 31,325 $ (20,787) $ 48,895 $ 194,460 $ 172,423 $ 22,901 ------------ ------------ ------------ ------------ ------------ ------------ PARTICIPANT TRANSACTIONS: Accumulation activity: Purchase payments received.... $1,300,822 $1,355,408 $5,275,423 $1,634,726 $2,532,266 $772,014 Net transfers between Sub-Accounts and Fixed Account...................... 323,387 786,221 (1,482,996) 1,078,739 1,176,486 114,451 Withdrawals, surrenders, annuitizations and contract charges...................... (92,714) (6,849) (11,403) (10,177) (21,619) (3,783) ------------ ------------ ------------ ------------ ------------ ------------ Net accumulation activity... $1,531,495 $2,134,780 $3,781,024 $2,703,288 $3,687,133 $882,682 ------------ ------------ ------------ ------------ ------------ ------------ Annuitization activity: Annuitizations................ $ 40,389 $ -- $ -- $ -- $ -- $-- Annuity payments.............. (1,490) -- -- -- -- -- Annuity transfers............. 40,390 -- -- -- -- -- Adjustments to annuity reserve...................... (475) -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Net annuitization activity................... $ 78,814 $ -- $ -- $ -- $ -- $-- ------------ ------------ ------------ ------------ ------------ ------------ Increase in net assets from participant transactions....... $1,610,309 $2,134,780 $3,781,024 $2,703,288 $3,687,133 $882,682 ------------ ------------ ------------ ------------ ------------ ------------ Increase in net assets........ $1,641,634 $2,113,993 $3,829,919 $2,897,748 $3,859,556 $905,583 NET ASSETS: Beginning of period............. -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ End of period................... $1,641,634 $2,113,993 $3,829,919 $2,897,748 $3,859,556 $905,583 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
*For the period February 20, 1998 (commencement of operations) through December 31, 1998. **For the period March 27, 1998 (commencement of operations) through December 31, 1998. +For the period February 26, 1998 (commencement of operations) through December 31, 1998. See notes to financial statements -25- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
OP3 OP4 SB1 SB2 SB3 SB4 Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account ------------ ------------ ------------ ------------ ------------ ------------ Period Ended Period Ended Period Ended Period Ended Period Ended Period Ended December 31, December 31, December 31, December 31, December 31, December 31, 1998** 1998* 1998** 1998** 1998*** 1998** ------------ ------------ ------------ ------------ ------------ ------------ OPERATIONS: Net investment income (loss).... $ (1,846) $ (1) $ 3,553 $ (252) $ 121,348 $ 39,286 Net realized gain (losses)...... (7,219) -- (1,757) (857) 9,630 (1,146) Net unrealized gains (losses)... 28,952 54 23,271 19,454 (66,852) 64,469 ------------ ------ ------------ ------------ ------------ ------------ Increase in net assets from operations................. $ 19,887 $ 53 $ 25,067 $ 18,345 $ 64,126 $ 102,609 ------------ ------ ------------ ------------ ------------ ------------ PARTICIPANT TRANSACTIONS: Accumulation activity: Purchase payments received.... $507,596 $ 1,000 $200,980 $263,704 $2,139,351 $1,946,618 Net transfers between Sub-Accounts and Fixed Account...................... 197,133 -- 8,030 49,888 722,156 945,488 Withdrawals, surrenders, annuitizations and contract charges...................... (8,885) -- (2,808) (1,853) (13,933) (11,783) ------------ ------ ------------ ------------ ------------ ------------ Net accumulation activity... $695,844 $ 1,000 $206,202 $311,739 $2,847,574 $2,880,323 ------------ ------ ------------ ------------ ------------ ------------ Annuitization activity: Annuitizations................ $-- $ -- $-- $-- $ -- $ -- Annuity payments.............. -- -- -- -- -- -- Annuity transfers............. -- -- -- -- -- -- Adjustments to annuity reserve...................... -- -- -- -- -- -- ------------ ------ ------------ ------------ ------------ ------------ Net annuitization activity................... $-- $ -- $-- $-- $ -- $ -- ------------ ------ ------------ ------------ ------------ ------------ Increase in net assets from participant transactions....... $695,844 $ 1,000 $206,202 $311,739 $2,847,574 $2,880,323 ------------ ------ ------------ ------------ ------------ ------------ Increase in net assets........ $715,731 $ 1,053 $231,269 $330,084 $2,911,700 $2,982,932 NET ASSETS: Beginning of period............. -- -- -- -- -- -- ------------ ------ ------------ ------------ ------------ ------------ End of period................... $715,731 $ 1,053 $231,269 $330,084 $2,911,700 $2,982,932 ------------ ------ ------------ ------------ ------------ ------------ ------------ ------ ------------ ------------ ------------ ------------
*For the period December 15, 1998 (commencement of operations) through December 31, 1998. **For the period March 27, 1998 (commencement of operations) through December 31, 1998. ***For the period February 20, 1998 (commencement of operations) through December 31, 1998. See notes to financial statements -26- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
SCA1 SCA2 SCA3 WP1 WP2 WP3 Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account ------------ ------------ ------------ ------------ ------------ ------------ Period Ended Period Ended Period Ended Period Ended Period Ended Period Ended December 31, December 31, December 31, December 31, December 31, December 31, 1998*** 1998*** 1998*** 1998* 1998** 1998** ------------ ------------ ------------ ------------ ------------ ------------ OPERATIONS: Net investment income(loss)..... $ 3 $ 13 $ (1) $ (679) $ (1,361) $ (535) Net realized losses............. -- (1) -- (4,817) (33,030) (239) Net unrealized gains (losses)... -- 21 97 (3,352) (1,858) 7,438 ------ ------------ ------ ------------ ------------ ------------ Increase(decrease) in net assets from operations..... $ 3 $ 33 $ 96 $ (8,848) $(36,249) $ 6,664 ------ ------------ ------ ------------ ------------ ------------ PARTICIPANT TRANSACTIONS: Accumulation activity: Purchase payments received.... $2,000 $18,000 $7,000 $133,941 $169,921 $113,755 Net transfers between Sub-Accounts and Fixed Account...................... -- -- -- 40,476 32,859 17,358 Withdrawals, surrenders, annuitizations and contract charges...................... -- -- -- (742) (879) (830) ------ ------------ ------ ------------ ------------ ------------ Net accumulation activity... $2,000 $18,000 $7,000 $173,675 $201,901 $130,283 ------ ------------ ------ ------------ ------------ ------------ Annuitization activity: Annuitizations................ $-- $-- $-- $-- $-- $-- Annuity payments.............. -- -- -- -- -- -- Annuity transfers............. -- -- -- -- -- -- Adjustments to annuity reserve...................... -- -- -- -- -- -- ------ ------------ ------ ------------ ------------ ------------ Net annuitization activity................... $-- $-- $-- $-- $-- $-- ------ ------------ ------ ------------ ------------ ------------ Increase in net assets from participant transactions....... $2,000 $18,000 $7,000 $173,675 $201,901 $130,283 ------ ------------ ------ ------------ ------------ ------------ Increase in net assets........ $2,003 $18,033 $7,096 $164,827 $165,652 $136,947 NET ASSETS: Beginning of period............. -- -- -- -- -- -- ------ ------------ ------ ------------ ------------ ------------ End of period................... $2,003 $18,033 $7,096 $164,827 $165,652 $136,947 ------ ------------ ------ ------------ ------------ ------------ ------ ------------ ------ ------------ ------------ ------------
*For the period February 20, 1998 (commencement of operations) through December 31, 1998. **For the period March 27, 1998 (commencement of operations) through December 31, 1998. ***For the period December 15, 1998 (commencement of operations) through December 31, 1998. See notes to financial statements -27- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F STATEMENTS OF CHANGES IN NET ASSETS -- continued
WP4 Sub-Account Total ------------ ------------ Period Ended Period Ended December 31, December 31, 1998** 1998 ------------ ------------ OPERATIONS: Net investment income (loss)............... $ (2,271) $ 788,638 Net realized losses........................ (26,102) (341,232) Net unrealized gains....................... 29,531 4,309,454 ------------ ------------ Increase in net assets from operations............................. $ 1,158 $ 4,756,860 ------------ ------------ PARTICIPANT TRANSACTIONS: Accumulation activity: Purchase payments received............... $378,201 $46,609,743 Net transfers between Sub-Accounts and Fixed Account........................... (5,371) 14,241,357 Withdrawals, surrenders, annuitizations and contract charges.................... (2,707) (569,220) ------------ ------------ Net accumulation activity.............. $370,123 $60,281,880 ------------ ------------ Annuitization activity: Annuitizations........................... $-- $ 40,389 Annuity payments......................... -- (1,490) Annuity transfers........................ -- 40,390 Adjustments to annuity reserve........... -- (475) ------------ ------------ Net annuitization activity............. $-- $ 78,814 ------------ ------------ Increase in net assets from participant transactions.............................. $370,123 $60,360,694 ------------ ------------ Increase in net assets................... $371,281 $65,117,554 NET ASSETS: Beginning of period........................ -- -- ------------ ------------ End of period.............................. $371,281 $65,117,554 ------------ ------------ ------------ ------------
**For the period March 27, 1998 (commencement of operations) though December 31, 1998. See notes to financial statements -28- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F NOTES TO FINANCIAL STATEMENTS (1) ORGANIZATION Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") is a separate account of Sun Life Assurance Company of Canada (U.S.), (the "Sponsor"), and was established on July 13, 1989 as a funding vehicle for the variable portion of Futurity contracts, Futurity II contracts (collectively, the "Contracts") and certain other group and individual fixed and variable annuity contracts issued by the Sponsor. The Variable Account is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 as a unit investment trust. The assets of the Variable Account are divided into Sub-Accounts. Each Sub-Account is invested in shares of a single corresponding investment portfolio of certain registered open-end mutual funds. With respect to the Futurity contracts the funds are: AIM Variable Insurance Funds, Inc., The Alger American Fund, Goldman Sachs Variable Insurance Trust, J.P. Morgan Series Trust II, Lord Abbett Series Fund, Inc., MFS/ Sun Life Series Trust, OCC Accumulation Trust, Salomon Brothers Variable Series Funds Inc. and Warburg Pincus Trust. With respect to the Futurity II contracts the funds are: AIM Variable Insurance Funds, Inc., The Alger American Fund, Goldman Sachs Variable Insurance Trust, J.P. Morgan Series Trust II, Lord Abbett Series Fund, Inc., MFS/Sun Life Series Trust, OCC Accumulation Trust, Sun Capital Advisers Trust and Warburg Pincus Trust (collectively, the "Funds"). (2) SIGNIFICANT ACCOUNTING POLICIES GENERAL The preparation of financial statements in conformity with generally accepted accounting principles requires the Sponsor's 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 amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENT VALUATIONS Investments in shares of the Funds are recorded at their net asset value. Realized gains and losses on sales of shares of the Funds are determined on the identified cost basis. Dividend income and capital gain distributions received by the Sub-Accounts are reinvested in additional Fund shares and are recognized on the ex-dividend date. Exchanges between Sub-Accounts requested by contract participants are recorded in the new Sub-Account upon receipt of the redemption proceeds. FEDERAL INCOME TAX STATUS The operations of the Variable Account are part of the operations of the Sponsor and are not taxed separately. The Variable Account is not taxed as a regulated investment company. The Sponsor qualifies for the federal income tax treatment granted to life insurance companies under Subchapter L of the Internal -29- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F NOTES TO FINANCIAL STATEMENTS -- continued Revenue Code. Under existing federal income tax law, investment income and capital gains earned by the Variable Account on contract owner reserves are not taxable and, therefore, no provision has been made for federal income taxes. (3) CONTRACT CHARGES A mortality and expense risk charge based on the value of the Sub-Accounts included in the Variable Account is deducted from the Variable Account at the end of each valuation period for the mortality and expense risks assumed by the Sponsor. The deductions are transferred periodically to the Sponsor. Currently, the deduction is at an effective annual rate of 1.25%. Each year on the account anniversary, an account administration fee ("Account Fee") equal to the lesser of $30 in the case of Futurity contracts and $35 in the case of Futurity II contracts or 2% of the participant's account value in Account Years one through five (thereafter, the Account fee may be changed annually, but it may not exceed the lesser of $50 or 2% of the participant's account value) is deducted from the participant's account to reimburse the Sponsor for certain administrative expenses. After the annuity commencement date the Account Fee will be deducted pro rata from each variable annuity payment made during the year. As reimbursement for administrative expenses attributable to Contracts which exceed the revenues received from the Account Fees, the Sponsor makes a deduction from the Variable Account at the end of each valuation period at an effective annual rate of 0.15% of the net assets attributable to such Contracts. The Sponsor does not deduct a sales charge from purchase payments. However, a withdrawal charge (contingent deferred sales charge) of up to 6% of certain amounts withdrawn, when applicable, may be deducted to cover certain expenses relating to the sale of the Contracts, including commissions paid to sales personnel, the costs of preparation of sales literature, and other promotional costs and acquisition expenses. (4) ANNUITY RESERVES Annuity reserves are calculated using the 1983 Individual Annuitant Mortality Table and an assumed interest rate of 3% per year. Required adjustments to the reserves are accomplished by transfers to or from the Sponsor. -30- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F NOTES TO FINANCIAL STATEMENTS -- continued (5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS
Units Transferred Between Sub-Accounts Units Outstanding and Fixed Units Withdrawn, Units Beginning of Accumulation Surrendered, Outstanding End Period Units Purchased Account and Annuitized of Year ----------------- --------------- ------------------- ----------------- --------------- Period Ended Period Ended Period Ended Period Ended Period Ended December 31, December 31, December 31, December 31, December 31, 1998 1998 1998 1998 1998 ----------------- --------------- ------------------- ----------------- --------------- FUTURITY CONTRACTS: AIM1 *........................ -- 120,297 21,989 (994) 141,292 AIM2 *........................ -- 188,055 18,286 (1,839) 204,502 AIM3 **....................... -- 211,522 126,191 (5,051) 332,662 AIM4 *........................ -- 175,562 42,064 (814) 216,812 AL1 **........................ -- 220,381 66,702 (1,093) 285,990 AL2 **........................ -- 166,134 33,387 (4,526) 194,995 AL3 **........................ -- 46,464 31,855 (847) 77,472 GS1 ***....................... -- 174,066 37,773 (887) 210,952 GS2 *......................... -- 28,820 2,730 (74) 31,476 GS3 *......................... -- 245,810 41,721 (5,043) 282,488 GS4 *......................... -- 146,654 54,644 (1,528) 199,770 GS5 +......................... -- 22,922 7,479 (7) 30,394 JP1 **........................ -- 153,409 143,890 (3,512) 293,787 JP2 **........................ -- 43,568 9,107 (256) 52,419 JP3 **........................ -- 14,226 8,529 (100) 22,655 LA1 **........................ -- 295,576 40,527 (2,298) 333,805 CAS ++........................ -- 182,671 225,749 (4,687) 403,733 EGS *......................... -- 286,458 114,747 (4,073) 397,132 GSS *......................... -- 124,697 30,755 (5,102) 150,350 HYS ++........................ -- 136,139 82,554 (769) 217,924 MMS *......................... -- 520,396 (145,427) (3,565) 371,404 UTS **........................ -- 168,365 110,939 (1,083) 278,221 OP1 *......................... -- 249,514 116,381 (2,147) 363,748 OP2 *......................... -- 80,719 12,844 (403) 93,160 OP3 **........................ -- 62,966 24,744 (1,143) 86,567 SB1 **........................ -- 20,954 660 (285) 21,329 SB2 **........................ -- 27,151 5,324 (193) 32,282 SB3 *......................... -- 208,817 69,996 (1,340) 277,473 SB4 **........................ -- 199,267 95,844 (1,190) 293,921 WP1 *......................... -- 17,004 5,576 (100) 22,480 WP2 **........................ -- 17,656 697 (100) 18,253 WP3 **........................ -- 12,602 2,213 (100) 14,715 WP4 **........................ -- 42,727 (84) (800) 41,843
*For the period February 20, 1998 (commencement of operations) through December 31, 1998. **For the period March 27, 1998 (commencement of operations) through December 31, 1998. ***For the period March 12, 1998 (commencement of operations) through December 31, 1998. +For the period March 17, 1998 (commencement of operations) through December 31, 1998. ++For the period February 26, 1998 (commencement of operations) through December 31, 1998. -31- FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F NOTES TO FINANCIAL STATEMENTS -- continued (5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS -- continued
Units Transferred Between Sub-Accounts Units Outstanding and Fixed Units Withdrawn, Units Beginning of Accumulation Surrendered, Outstanding End Period Units Purchased Account and Annuitized of Year ----------------- ----------------- ------------------- ----------------- --------------- Period Ended Period Ended Period Ended Period Ended Period Ended December 31, December 31, December 31, December 31, December 31, 1998 1998 1998 1998 1998 ----------------- ----------------- ------------------- ----------------- --------------- FUTURITY II CONTRACTS: AIM1#......................... -- 100 -- -- 100 AIM2#......................... -- 1,049 -- -- 1,049 AIM3#......................... -- 1,704 -- -- 1,704 AIM4##........................ -- 2,553 -- -- 2,553 AL1#.......................... -- 2,044 -- -- 2,044 AL2##......................... -- 1,785 -- -- 1,785 AL3#.......................... -- 100 -- -- 100 GS1###........................ -- 786 -- -- 786 GS2#.......................... -- 100 -- -- 100 GS3##......................... -- 2,341 -- -- 2,341 GS4#.......................... -- 100 -- -- 100 GS5###........................ -- 578 -- -- 578 JP1#.......................... -- 474 -- -- 474 JP2#.......................... -- 100 -- -- 100 JP3#.......................... -- 100 -- -- 100 LA1##......................... -- 1,763 -- -- 1,763 CAS#.......................... -- 2,367 -- -- 2,367 EGS###........................ -- 3,662 -- -- 3,662 GSS##......................... -- 1,027 -- -- 1,027 HYS##......................... -- 729 -- -- 729 UTS###........................ -- 821 -- -- 821 OP1##......................... -- 1,517 -- -- 1,517 OP2#.......................... -- 150 -- -- 150 OP3#.......................... -- 100 -- -- 100 OP4#.......................... -- 100 -- -- 100 SCA1#......................... -- 200 -- -- 200 SCA2#......................... -- 1,806 -- -- 1,806 SCA3#......................... -- 705 -- -- 705 WP1#.......................... -- 100 -- -- 100 WP2#.......................... -- 100 -- -- 100 WP3#.......................... -- 100 -- -- 100 WP4#.......................... -- 100 -- -- 100
#For the period December 15, 1998 (commencement of operations) through December 31, 1998. ##For the period December 17, 1998 (commencement of operations) through December 31, 1998. ###For the period December 29, 1998 (commencement of operations) through December 31, 1998. -32- INDEPENDENT AUDITORS' REPORT To the Participants in Futurity and Futurity II and the Board of Directors of Sun Life Assurance Company of Canada (U.S.): We have audited the accompanying statement of condition of AIM V.I. Capital Appreciation Sub-Account, AIM V.I. Growth Sub-Account, AIM V.I. Growth and Income Sub-Account, AIM V.I. International Equity Sub-Account, The Alger American Growth Sub-Account, The Alger American Income and Growth Sub-Account, The Alger American Small Capitalization Sub-Account, Goldman Sachs CORE Large Cap Growth Sub-Account, Goldman Sachs CORE Small Cap Equity Sub-Account, Goldman Sachs CORE U.S. Equity Sub-Account, Goldman Sachs Growth and Income Sub-Account, Goldman Sachs International Equity Sub-Account, J.P. Morgan Equity Sub-Account, J.P. Morgan International Opportunities Sub-Account, J.P. Morgan Small Company Sub-Account, Lord Abbett Growth and Income Sub-Account, MFS/Sun Life Capital Appreciation Sub-Account, MFS/Sun Life Emerging Growth Sub-Account, MFS/Sun Life Government Securities Sub-Account, MFS/Sun Life High Yield Sub-Account, MFS/Sun Life Money Market Sub-Account, MFS/Sun Life Utilities Sub-Account, OCC Equity Sub-Account, OCC Mid Cap Sub-Account, OCC Managed Sub-Account, OCC Small Cap Sub-Account, Salomon Brothers Variable Capital Sub-Account, Salomon Brothers Variable Investors Sub-Account, Salomon Brothers Variable Strategic Bond Sub-Account, Salomon Brothers Variable Total Return Sub-Account, Sun Capital Investment Grade Bond Sub-Account, Sun Capital Money Market Sub-Account, Sun Capital Real Estate Sub-Account, Warburg Pincus Emerging Markets Sub-Account, Warburg Pincus International Equity Sub-Account, Warburg Pincus Post-Venture Capital Sub-Account and Warburg Pincus Small Company Growth Sub-Account of Sun Life of Canada (U.S.) Variable Account F, (the "Sub-Accounts") as of December 31, 1998, the related statement of operations and the statement of changes in net assets for the period then ended. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities held at December 31, 1998 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Sub-Accounts as of December 31, 1998, the results of their operations and the changes in their net assets for the respective stated periods in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Boston, Massachusetts February 4, 1999 -33- SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) ANNUITY SERVICE MAILING ADDRESS: C/O RETIREMENT PRODUCTS AND SERVICES P.O. BOX 9133 BOSTON, MASSACHUSETTS 02117 TELEPHONE: Toll Free (888) 786-2435 In Massachusetts (617) 348-9600 GENERAL DISTRIBUTOR Clarendon Insurance Agency, Inc. One Sun Life Executive Park Wellesley Hills, Massachusetts 02481 AUDITORS Deloitte Touche LLP 125 Summer Street Boston, Massachusetts 02110 PART C OTHER INFORMATION Item 24. FINANCIAL STATEMENTS AND EXHIBITS (a) The following Financial Statements are included in the Registration Statement: Included in Part A: A. Condensed Financial Information - Accumulation Unit Values. B. Financial Statements of the Depositor: 1. Statutory Statements of Admitted Assets, Liabilities and Capital Stock and Surplus, December 31, 1998 and 1997; 2. Statutory Statements of Operations, Years Ended December 31, 1998, 1997 and 1996; 3. Statutory Statements of Changes in Capital Stock and Surplus, Years Ended December 31, 1998, 1997 and 1996; 4. Statutory Statements of Cash Flow, Years Ended December 31, 1998, 1997 and 1996; 5. Notes to Statutory Financial Statements; and 6. Independent Auditors' Report. Included in Part B A. Financial Statements of the Registrant: 1. Statement of Condition, December 31, 1998; 2. Statement of Operations, Year Ended December 31, 1998; 3. Statements of Changes in Net Assets, Years Ended December 31, 1998 and December 31, 1997; 4. Notes to Financial Statements; and 5. Independent Auditors' Report. (b) The following Exhibits are incorporated in the Registration Statement by reference unless otherwise indicated: (1) Resolution of Board of Directors of the depositor dated December 3, 1985 authorizing the establishment of the Registrant (Incorporated herein by reference to Exhibit 1 to the Registration Statement of the Registrant on Form N-4, File No. 333-37907, filed on October 14, 1997); (2) Not Applicable; (3)(a) Distribution Agreement between the depositor, Massachusetts Financial Services Company and Clarendon Insurance Agency, Inc. (Incorporated herein by reference to Exhibit 3(a) to Pre-Effective Amendment No. 1 to the Registration Statement of the Registrant on Form N-4, File No. 333-37907, filed on January 16, 1998); (b)(i) Specimen Sales Operations and General Agent Agreement (Incorporated herein by reference to Exhibit 3(b)(i) to Pre-Effective Amendment No. 1 to the Registration Statement of the Registrant on Form N-4, File No. 333-37907, filed on January 16, 1998); (b)(ii) Specimen Broker-Dealer Supervisory and Service Agreement (Incorporated herein by reference to Exhibit 3(b)(ii) to Pre-Effective Amendment No. 1 to the Registration Statement of the Registrant on Form N-4, File No. 333-37907, filed on January 16, 1998); and (b)(iii) Specimen Registered Representatives Agent Agreement (Incorporated herein by reference to Exhibit 3(b)(iii) to Pre-Effective Amendment No. 1 to the Registration Statement of the Registrant on Form N-4, File No. 333-37907, filed on January 16, 1998); (4)(a)(i) Form of Flexible Payment Combination Fixed/Variable Group Annuity Contract (MFS Regatta Gold) (Filed as Exhibit 4(a) to Post-Effective Amendment No. 5 to the Registration Statement of the Registrant on Form N-4, File No. 33-41628); (a)(ii) Form of Flexible Payment Combination Fixed/Variable Group Annuity Contract (MFS Regatta Platinum (Incorporated by reference to Exhibit 4(a) to Post-Effective Amendment No. 9 to the Registration Statement of the Registrant on Form N-4, File No. 33-41628, filed on March 2, 1998); (b)(i) Form of Certificate to be issued in connection with Contract filed as Exhibit 4(a)(i) (Filed as Exhibit 4(b) to Post-Effective Amendment No. 5 to the Registration Statement of the Registrant on Form N-4, File No 33-41628; (b)(ii) Form of Certificate (MFS Regatta Platinum) to be issued in connection with Contract filed as Exhibit 4(a)(ii) (Incorporated by reference to Exhibit 4(b) to Post-Effective Amendment No. 9 to the Registration Statement of the Registrant on Form N-4, File No. 33-41628, filed on March 2, 1998); (5)(a)(i) Form of Application to be used with the annuity contract filed as Exhibit 4(a)(i) (Filed as Exhibit 5(a) to Post-Effective Amendment No. 7 to the Registration Statement of the Registrant on Form N-4, File No. 33-41628; (a)(ii) Form of Application to be used with the annuity contract filed as Exhibit 4(a) (Incorporated herein by reference to Exhibit 5(a) to Post-Effective Amendment No. 9 to the Registration Statement of the Registrant on Form N-4, File No. 33-41628, filed on March 2, 1998); (b)(i) Form of Application to be used with the Certificate filed as Exhibit 4(b)(i) (Filed as Exhibit 5 (b) to Post-Effective Amendment No. 7 to the Registration Statement of the Registrant on Form N-4, File No. 33-41628); (b)(ii) Form of Application to be used with the Certificate filed as Exhibit 4(b) (Incorporated herein by reference to Exhibit 5(b) to Post-Effective Amendment No. 9 to the Registration Statement of the Registrant on Form N-4, File 33-41628, filed on March 2, 1998); (6) Certificate of Incorporation and By-laws of the depositor (Incorporated herein by reference to Exhibits 3(a) and 3(b), respectively, to the Registration Statement of the Depositor on Form S-1, File No. 333-37907, filed on October 14, 1997); (7) Not Applicable; (8)(a) Form of Participation Agreement by and between The Alger American Fund, the Depositor, and Fred Alger and Company, Incorporated.* (b)(i) Form of Participation Agreement dated February 17, 1998 by and between Goldman Sachs Variable, Insurance Trust, Goldman Sachs & Co. and the Depositor.* (ii) Form of Amendment No. 1 dated December 14, 1998 to Participation Agreement filed as Exhibit 8(b)(i).* (iii) Form of Amendment No. 2 dated as of March 15, 1999 to Participation Agreement filed as Exhibit __(b)(i).* (c) Form of Fund Participation Agreement between Depositor and J.P. Morgan Services Trust II.* (d) Form of Participation Agreement dated February 17, 1998 by and among MFS/Sun Life Services Trust, the Depositor and Massachusetts Financial Services Company.* (e) Form of Participation Agreement dated February 17, 1998 by and among OCC Accumulation Trust, the Depositor and OCC Distributors.* (f) Form of Participation Agreement dated February, 1998 by and among the Depositor, Warburg Pincus Trust, Warburg Pincus Asset Management, Inc. and Counsellors Securities, Inc.* (9) Opinion of Counsel and Consent to its use as to the legality of the securities being registered (Previously filed). (10) Consent of Deloitte & Touche, LLP* (11) Financial Statement Schedules I and VI (Incorporated herein by reference to the Depositor's Form 10-K Annual Report for the fiscal year ended December 31, 1998, filed on March 31, 1999) (12) Not Applicable; (13) Schedule for Computation of Performance Quotations (Incorporated by reference to Exhibit 13 to Post-Effective Amendment No. 10 to the Registration Statement of the Registrant on Form N-4, File No. 33-41628, filed on April 29, 1998) (14) Not Applicable; and (15) Powers of Attorney (Incorporated herein by reference to Exhibit 15 to Post-Effective Amendment No. 12 to the Registration Statement of the Registrant on Form N-4, File No. 33-41628, filed on February 22, 1999) * Filed herewith Item 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR Name and Principal Positions and Offices Business Address with Depositor ---------------- -------------- Donald A. Stewart Chairman and Director 150 King Street West Toronto, Ontario Canada M5H 1J9 C. James Prieur President and Director One Sun Life Executive Park Wellesley Hills, MA 02481 John D. McNeil Director 150 King Street West Toronto, Ontario Canada M5H 1J9 David D. Horn Director Strong Road New Vineyard, ME 04956 John S. Lane Director 150 King Street West Toronto, Ontario Canada M5H 1J9 Richard B. Bailey Director 63 Atlantic Avenue Boston, MA 02110 M. Colyer Crum Director 104 Westcliff Road Weston, MA 02193 Angus A. MacNaughton Director Metro Tower, Suite 1170 950 Tower Lane Foster City, CA 94404 S. Caesar Raboy Director 220 Boylston Street Boston, MA 02110 Name and Principal Positions and Offices Business Address with Depositor ---------------- -------------- L. Brock Thomson Vice President and Treasurer One Sun Life Executive Park Wellesley Hills, MA 02481 Robert P. Vrolyk Vice President, Finance and Actuary One Sun Life Executive Park Wellesley Hills, MA 02481 James M.A. Anderson Vice President, Investments One Sun Life Executive Park Wellesley Hills, MA 02481 Peter F. Demuth Vice President and Chief Counsel One Sun Life Executive Park and Assistant Secretary Wellesley Hills, MA 02481 Robert K. Leach Vice President, Finance One Copley Place and Product Boston, MA 02116 Edward J. Ronan Vice President, Retirement One Copley Place Products and Services Boston, MA 02116 Ellen B. King Secretary One Sun Life Executive Park Wellesley Hills, MA 02481 Item 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR REGISTRANT No person is directly or indirectly controlled by the Registrant. The Registrant is a separate account of Sun Life Assurance Company of Canada (U.S.), a wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc., a wholly-owned subsidiary of Sun Life Assurance Company of Canada - U.S. Operations Holdings, Inc., which is in turn a wholly-owned subsidiary of Sun Life Assurance Company of Canada. The following is a list of corporations directly or indirectly controlled by or under common control with Sun Life Assurance Company of Canada, showing the state or other sovereign power under the laws of which each is organized and the percentage ownership of voting securities giving rise to the control relationship:
Percent of State or Country Ownership or Jurisdiction of Voting of Incorporation Securities ---------------- ---------- Sun Life Assurance Company of Canada Canada - ------------------------------------------------------------------------------------------ Sun Life Assurance Company of Canada - U.S. Operations Holdings, Inc............. Delaware 100% Sun Life Assurance Company of Canada (U.K.) Holdings plc+..................... United Kingdom 100% Sun Life of Canada Investment Management Limited .................................. Canada 100% Sun Life of Canada Benefit Management Limited .................................. Canada 100% Spectrum United Holdings, Inc.++.......... Canada 100% Sun Canada Financial Co................... Delaware 100% McLean Budden Limited+++.................. Canada 60% Sun Life of Canada (U.S.) Holdings, Inc. Delaware 0%* Sun Life of Canada (U.S.) Financial Services Holdings, Inc......................... Delaware 0%* Sun Life Canada Reinsurance (Barbados) Limited............................... Barbados * Sun Life of Canada (U.S.) Holdings General Partner............................... Delaware * Sun Life of Canada (U.S.) Capital Trust I. Delaware * Sun Life of Canada (U.S.) Limited Partnership I......................... Delaware * Sun Life Assurance Company of Canada (U.S.) Delaware 0%** Sun Life Insurance and Annuity Company of New York ............................. New York 0%**** Sun Life of Canada (U.S.) Distributors, Inc..................... Delaware 0%**** Sun Benefit Services Company, Inc. ....... Delaware 0%**** Sun Life of Canada (U.S.) SPE 97-1, Inc..... Delaware 0%**** Sun Life Information Services Ireland Limited Republic of Ireland 0%**** Massachusetts Financial Services Company ... Delaware 0%*** New London Trust, F.S.B..................... Federally Chartered 0%**** Clarendon Insurance Agency, Inc. ........... Massachusetts 0%**** MFS Service Center, Inc..................... Delaware 0%***** MFS/Sun Life Series Trust .................. Massachusetts 0%****** Sun Capital Advisers, Inc. ................. Delaware 0%**** MFS International, Ltd. .................... Ireland 0%***** MFS Institutional Advisors, Inc. ........... Delaware 0%***** MFS Fund Distributors, Inc. ................ Delaware 0%***** MFS Retirement Services, Inc. .............. Delaware 0%***** Sun Life Financial Services Limited......... Bermuda 0%****
- ------------- * 100% of the issued and outstanding voting securities owned directly or indirectly by Sun Life Assurance Company ofCanada - U.S. Operations Holdings, Inc. ** 100% of the issued and outstanding voting securities of Sun Life Assurance Company of Canada (U.S.) is owned by Sun Life of Canada (U.S.) Holdings, Inc. *** 85% of the issued and outstanding voting securities of Massachusetts Financial Services Company is owned by Sun Life of Canada (U.S.) Financial Services Holdings, Inc. **** 100% of the issued and outstanding voting securities owned by Sun Life Assurance Company of Canada (U.S.). ***** 100% of the issued and outstanding voting securities owned by Massachusetts Financial Services Company. ****** 100% of the issued and outstanding voting securities of MFS/Sun Life Series Trust is owned by separate accounts of Sun Life Assurance Company of Canada (U.S.) and Sun Life Insurance and Annuity Company of New York. + Holding company for parent's U.K. insurance, financial services and other subsidiaries. ++ Holding company for mutual fund investment management and marketing subsidiaries. +++ Provides investment management services. Omits subsidiaries of Sun Life Assurance Company of Canada which are not "significant subsidiaries" (as that term is defined in Rule 8b-2 under Section 8 of the Investment Company Act of 1940) of Sun Life Assurance Company of Canada. None of the companies listed is a subsidiary of the Registrant; therefore, the only financial statements being filed are those of Sun Life Assurance Company of Canada (U.S.). Item 27. NUMBER OF CONTRACT OWNERS: As of March 31, 1999, there were 54,222 qualified and 99,279 non-qualified Contracts issued by the Registrant. Item 28. INDEMNIFICATION Pursuant to Section 145 of the Delaware Corporation Law, Article 8 of the By-laws of Sun Life Assurance Company of Canada (U.S.), a copy of which was filed as Exhibit 3(b) to the Registration Statement of the Depositor on Form S-1, File No. 33-29851, provides for the indemnification of directors, officers and employees of Sun Life Assurance Company of Canada (U.S.). Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of Sun Life Assurance Company of Canada (U.S.) pursuant to the certificate of incorporation, by-laws, or otherwise, Sun Life (U.S.) has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Sun Life (U.S.) of expenses incurred or paid by a director, officer, controlling person of Sun Life (U.S.) in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, Sun Life (U.S.) will submit to a court of appropriate jurisdiction the question whether such indemnification by them is against public policy as expressed in the Act, unless in the opinion of their counsel the matter has been settled by controlling precedent, and will be governed by the final adjudication of such issue. Item 29. PRINCIPAL UNDERWRITERS (a) Clarendon Insurance Agency, Inc., a wholly-owned subsidiary of the Registrant, acts as general distributor for the Registrant, Sun Life of Canada (U.S.) Variable Accounts C, D, E, G, H and I, Sun Life (N.Y.) Variable Accounts A, B and C, and Money Market Variable Account, High Yield Variable Account, Capital Appreciation Variable Account, Government Securities Variable Account, World Governments Variable Account, Total Return Variable Account, and Managed Sectors Variable Account.
Name and Principal Positions and Offices Business Address* with Underwriter ---------------- ---------------- Robert P. Vrolyk................... Director James M.A. Anderson................ Director S. Caesar Raboy.................... Director C. James Prieur.................... Director L. Brock Thompson.................. Vice President and Treasurer Roy P. Creedon..................... Secretary Donald E. Kaufman.................. Vice President Cynthia M. Orcutt.................. Vice President Laurie Lennox...................... Vice President Maura A. Murphy.................... Assistant Secretary Peter Marion....................... Tax Officer
- ------------- * The principal business address of all directors and officers of the principal underwriter except Ms. Lennox is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. The principal business address of Ms. Lennox is One Copley Place, Boston, Massachusetts 02116. (a) Inapplicable. Item 30. LOCATION OF ACCOUNTS AND RECORDS Accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder are maintained, in whole or in part, by Sun Life Assurance Company of Canada (U.S.) at its executive office at One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481, at the offices of the Sun Life Annuity Service Center at One Copley Place, Boston, Massachusetts 02116, or at the offices of Clarendon Insurance Agency, Inc., at One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. Item 31. MANAGEMENT SERVICES Not Applicable. Item 32. UNDERTAKINGS Representation with respect to Section 26(e)of the Investment Company Act of 1940: Sun Life Assurance Company of Canada (U.S.) represents that the fees and charges deducted under the Contracts, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the insurance company. The registrant is relying on the no-action letter issued by the Division of Investment Management of the Securities and Exchange Commission to American Council of Life Insurance, Ref. No. IP-6-88, dated November 28, 1988, the requirements for which have been complied with by the Registrant. SIGNATURES As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements of Securities Act Rule 485(b) for effectiveness of this Post-Effective Amendment No. 13 to the Registration Statement and has caused this Post-Effective Amendment to the Registration Statement to be signed on its behalf, in the Town of Wellesley Hills, and Commonwealth of Massachusetts on this 23rd day of April, 1999. SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F (Registrant) SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Depositor) By: /s/ C. JAMES PRIEUR ---------------------------- C. James Prieur President
Attest: /s/ EDWARD M. SHEA - -------------------------- Edward M. Shea Assistant Vice President and Senior Counsel As required by the Securities Act of 1933, this Post-Effective Amendment to the Registration Statement has been signed below by the following persons in the capacities with the Depositor, Sun Life Assurance Company of Canada (U.S.), and on the dates indicated.
SIGNATURE TITLE DATE - ----------------------------------------------------------------------------- -------------- /s/ C. JAMES PRIEUR President and Director April 23, 1999 - ------------------------------------- (Principal Executive Officer) C. James Prieur /s/ ROBERT P. VROLYK Vice President, Finance and Actuary April 23, 1999 - ------------------------------------- (Principal Financial and Accounting Robert P. Vrolyk Officer) * /s/ DONALD A. STEWART Chairman and Director April 23, 1999 - ------------------------------------- Donald A. Stewart * /s/ RICHARD B. BAILEY Director April 23, 1999 - ------------------------------------- Richard B. Bailey
* By Edward M. Shea pursuant to Power of Attorney filed as Exhibit 15 to Post-Effective Amendment No. 12 to Registrant's Registration Statement on Form N-4 (File No. 33-41628). II-1
SIGNATURE TITLE DATE - ----------------------------------------------------------------------------- -------------- * /s/ M. COLYER CRUM Director April 23, 1999 - ------------------------------------- M. Colyer Crum * /s/ DAVID D. HORN Director April 23, 1999 - ------------------------------------- David D. Horn * /s/ JOHN S. LANE Director April 23, 1999 - ------------------------------------- John S. Lane * /s/ ANGUS A. MACNAUGHTON Director April 23, 1999 - ------------------------------------- Angus A. MacNaughton * /s/ JOHN D. MCNEIL Director April 23, 1999 - ------------------------------------- John D. McNeil */s/ S. CAESAR RABOY Director April 23, 1999 - ------------------------------------- S. Caesar Raboy
* By Edward M. Shea pursuant to Power of Attorney filed as Exhibit 15 to Post-Effective Amendment No. 12 to Registrant's Registration Statement on Form N-4 (File No. 33-41628). II-2 EX-8.(A) 2 EXHIBIT 8(A) PARTICIPATION AGREEMENT THIS AGREEMENT is made this _____ day of ______________ , 1998, by and among The Alger American Fund (the "Trust"), an open-end management investment company organized as a Massachusetts business trust, Sun Life Assurance Company of Canada (U.S.), a life insurance company organized as a corporation under the laws of the State of Delaware, (the "Company"), on its own behalf and on behalf of each segregated asset account of the Company set forth in Schedule B, as may be amended from time to time (the "Accounts"), and Fred Alger and Company, Incorporated, a Delaware corporation, the Trust's distributor (the "Distributor"). WHEREAS, the Trust is registered with the Securities and Exchange Commission (the "Commission") as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), and has an effective registration statement relating to the offer and sale of the various series of its shares under the Securities Act of 1933, as amended (the "1933 Act"); WHEREAS, the Trust and the Distributor desire that Trust shares be used as an investment vehicle for separate accounts established for variable life insurance policies and variable annuity contracts to be offered by life insurance companies which have entered into fund participation agreements with the Trust (the "Participating Insurance Companies"); WHEREAS, shares of beneficial interest in the Trust are divided into the following series which are available for purchase by the Company for the Accounts and set forth on Schedule A: Alger American Small Capitalization Portfolio, Alger American Growth Portfolio, and Alger American Income and Growth Portfolio. WHEREAS, the Trust has received an order from the Commission, dated February 17, 1989 (File No. 812-7076), granting Participating Insurance Companies and their separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Portfolios of the Trust to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated life insurance companies (the "Shared Funding Exemptive Order"); WHEREAS, the Company has registered or will register under the 1933 Act certain variable life insurance policies and variable annuity contracts to be issued by the Company under which the Portfolios are to be made available as investment vehicles (the "Contracts"); WHEREAS, the Company has registered or will register each Account as a unit investment trust under the 1940 Act unless an exemption from registration under the 1940 Act is available and the Trust has been so advised; 1 WHEREAS, the Company desires to use shares of the Portfolios indicated on Schedule A as investment vehicles for the Accounts; NOW THEREFORE, in consideration of their mutual promises, the parties agree as follows: ARTICLE I. PURCHASE AND REDEMPTION OF TRUST PORTFOLIO SHARES 1.1. For purposes of this Article I, the Company shall be the Trust's agent for the receipt from each account of purchase orders and requests for redemption pursuant to the Contracts relating to each Portfolio, provided that the Company notifies the Trust of such purchase orders and requests for redemption by 9:30 a.m. Eastern time on the next following Business Day, as defined in Section 1.3. The Trust shall confirm receipt of the daily purchase orders and requests for redemption by 11:00 a.m. 1.2. The Trust shall make shares of the Portfolios available to the Accounts at the net asset value next computed after receipt of a purchase order by the Trust (or its agent), as established in accordance with the provisions of the then current prospectus of the Trust describing Portfolio purchase procedures. The Company will transmit orders from time to time to the Trust for the purchase and redemption of shares of the Portfolios. The Trustees of the Trust (the "Trustees") may refuse to sell shares of any Portfolio to any person, or suspend or terminate the offering of shares of any Portfolio if such action is required by law or by regulatory authorities having jurisdiction or if, in the sole discretion of the Trustees acting in good faith and in light of their fiduciary duties under federal and any applicable state laws, such action is deemed in the best interests of the shareholders of such Portfolio. 1.3. The Company shall pay for the purchase of shares of a Portfolio on behalf of an Account with federal funds to be transmitted by wire to the Trust, with the reasonable expectation of receipt by the Trust by 2:00 p.m. Eastern time on the next Business Day after the Trust (or its agent) receives the purchase order. Upon receipt by the Trust of the federal funds so wired, such funds shall cease to be the responsibility of the Company and shall become the responsibility of the Trust for this purpose. "Business Day" shall mean any day on which the New York Stock Exchange is open for trading and on which the Trust calculates its net asset value pursuant to the rules of the Commission. 1.4. The Trust will redeem for cash any full or fractional shares of any Portfolio, when requested by the Company on behalf of an Account, at the net asset value next computed after receipt by the Trust (or its agent) of the request for redemption, as established in accordance with the provisions of the then current prospectus of the Trust describing Portfolio redemption procedures. The Trust shall make payment for such shares in the 2 manner established from time to time by the Trust. Proceeds of redemption with respect to a Portfolio will normally be paid to the Company for an Account in federal funds transmitted by wire to the Company by order of the Trust with the reasonable expectation of receipt by the Company by 2:00 p.m. Eastern time on the next Business Day after the receipt by the Trust (or its agent) of the request for redemption. Such payment may be delayed if, for example, the Portfolio's cash position so requires or if extraordinary market conditions exist, but in no event shall payment be delayed for a greater period than is permitted by the 1940 Act. The Trust reserves the right to suspend the right of redemption, consistent with Section 22(e) of the 1940 Act and any rules thereunder. 1.5. Payments for the purchase of shares of the Trust's Portfolios by the Company under Section 1.3 and payments for the redemption of shares of the Trust's Portfolios under Section 1.4 on any Business Day may be netted against one another for the purpose of determining the amount of any wire transfer. 1.6. Issuance and transfer of the Trust's Portfolio shares will be by book entry only. Stock certificates will not be issued to the Company or the Accounts. Portfolio Shares purchased from the Trust will be recorded in the appropriate title for each Account or the appropriate subaccount of each Account. 1.7. The Trust shall furnish, on or before the ex-dividend date, notice to the Company of any income dividends or capital gain distributions payable on the shares of any Portfolio of the Trust. The Company hereby may elect to either: receive all such income dividends and capital gain distributions as are payable on a Portfolio's shares in additional shares of that Portfolio or in cash. Such election will be provided in sufficient time for the Trust to process income dividends and capital gains distributions accordingly. The Trust shall notify the Company of the number of shares so issued as payment of such dividends and distributions. 1.8. The Trust shall calculate the net asset value of each Portfolio on each Business Day, as defined in Section 1.3. The Trust shall make the net asset value per share for each Portfolio available to the Company or its designated agent on a daily basis as soon as reasonably practical after the net asset value per share is calculated and shall use its best efforts to make such net asset value per share available to the Company by 6:30 p.m. Eastern time each Business Day. 1.9. The Trust agrees that its Portfolio shares will be sold only to Participating Insurance Companies and their segregated asset accounts, to the Fund Sponsor or its affiliates and to such other entities as may be permitted by Section 817(h) of the Code, the regulations hereunder, or judicial or administrative interpretations thereof. No shares of any Portfolio will be sold directly to the general public. The Company agrees that it will use Trust shares only for the purposes of funding the Contracts through the Accounts listed in Schedule A, as amended from time to time. 3 1.10. The Trust agrees that all Participating Insurance Companies shall have the obligations and responsibilities regarding pass-through voting and conflicts of interest corresponding materially to those contained in Section 2.9 and Article IV of this Agreement. ARTICLE II. OBLIGATIONS OF THE PARTIES 2.1. The Trust shall prepare and be responsible for filing with the Commission and any state regulators requiring such filing all shareholder reports, notices, proxy materials (or similar materials such as voting instruction solicitation materials), prospectuses and statements of additional information of the Trust. The Trust shall bear the costs of registration and qualification of shares of the Portfolios, preparation and filing of the documents listed in this Section 2.1 and all taxes to which an issuer is subject on the issuance and transfer of its shares. 2.2. The Company shall distribute such prospectuses, proxy statements and periodic reports of the Trust to the Contract owners as required to be distributed to such Contract owners under applicable federal or state law. 2.3. The Trust shall bear the expense of printing copies of its current prospectus that will be distributed to existing Contract owners, and the Company shall bear the expense of printing copies of the Trust's prospectus that are used in connection with offering the Contracts issued by the Company to prospective Contract owners. If the Company requests, the Trust shall provide such documentation in camera-ready or diskette format. 2.4. The Trust shall bear the expense of printing copies of its current statement of additional information ("SAI") and of distributing to any Contract owner who requests such SAI, and the Company shall bear the expense of printing and of distributing copies of the Trust's SAI that are used in connection with offering the Contracts issued by the Company to any prospective Contract owner. If the Company so requests, the Trust shall provide such documentation in camera-ready or diskette format. 2.5. The Trust, at its expense, shall provide the Company with copies of its proxy material, periodic reports to shareholders and other communications to shareholders in such quantity as the Company shall reasonably require for purposes of distributing to Contract owners. The Trust, at the Company's expense, shall provide the Company with copies of its periodic reports to shareholders and other communications to shareholders in such quantity as the Company may, in its discretion, reasonably request for use in connection with offering the Contracts issued by the Company. If requested by the Company in lieu thereof, the Trust shall provide such documentation (including a final copy of the Trust's proxy materials, periodic reports to shareholders and other communications to shareholders, as set in type or in camera-ready copy) and other assistance as reasonably necessary in order for the Company to print such shareholder communications for 4 distribution to Contract owners. The proxy statement and perodic report mailing, printing and soliatation for current Contract owners shall be at the Trust's expense. 2.6. The Company agrees and acknowledges that the Distributor is the sole owner of the name and mark "Alger" and that all use of any designation comprised in whole or part of such name or mark under this Agreement shall inure to the benefit of the Distributor. Except as provided in Section 2.5, the Company shall not use any such name or mark on its own behalf or on behalf of the Accounts or Contracts in any registration statement, advertisement, sales literature or other materials relating to the Accounts or Contracts without the prior written consent of the Distributor unless required to do so by law. Upon termination of this Agreement for any reason, the Company shall cease all use of any such name or mark as soon as reasonably practicable. 2.7. The Company shall furnish, or cause to be furnished, to the Trust or its designee a copy of each Contract prospectus and/or statement of additional information describing the Contracts, each report to Contract owners, proxy statement, application for exemption or request for no-action letter in which the Trust or the Distributor is named contemporaneously with the filing of such document with the Commission. The Company shall furnish, or shall cause to be furnished, to the Trust or its designee each piece of sales literature or other promotional material in which the Trust or the Distributor is named, at least five Business Days prior to its use. No such material shall be used if the Trust or its designee reasonably objects to such use within three Business Days after receipt of such material. 2.8. The Company shall not give any information or make any representations or statements on behalf of the Trust or concerning the Trust or the Distributor in connection with the sale of the Contracts other than information or representations contained in and accurately derived from the registration statement or prospectus for the Trust shares (as such registration statement and prospectus may be amended or supplemented from time to time), annual and semi-annual reports of the Trust, Trust-sponsored proxy statements, or in sales literature or other promotional material approved by the Trust or its designee, except as required by legal process or regulatory authorities or with the prior written permission of the Trust, the Distributor or their respective designees. The Trust and the Distributor agree to respond to any request for approval within five (5) business days. The Company shall adopt and implement procedures reasonably designed to ensure that "broker only" materials including information therein about the Trust or the Distributor are not distributed to existing or prospective Contract owners. 2.9. The Trust shall use its best efforts to provide the Company, on a timely basis, with such information about the Trust, the Portfolios and the Distributor, in such form as the Company may reasonably require, as the Company shall reasonably request in connection with the preparation of registration statements, prospectuses and annual and semi-annual 5 reports pertaining to the Contracts. 2.10. The Trust and the Distributor shall not give, and agree that no affiliate of either of them shall give, any information or make any representations or statements on behalf of the Company or concerning the Company, the Accounts or the Contracts other than information or representations contained in and accurately derived from the registration statement or prospectus for the Contracts (as such registration statement and prospectus may be amended or supplemented from time to time), or in materials approved by the Company for distribution including sales literature or other promotional materials, except as required by legal process or regulatory authorities or with the prior written permission of the Company. The Company agrees to respond to any request for approval on a prompt and timely basis. 2.11. So long as, and to the extent that, the Commission interprets the 1940 Act to require pass-through voting privileges for Contract owners, the Company will provide pass-through voting privileges to Contract owners whose cash values are invested, through the registered Accounts, in shares of one or more Portfolios of the Trust. The Trust shall require all Participating Insurance Companies to calculate voting privileges in the same manner and the Company shall be responsible for assuring that the Accounts calculate voting privileges in the manner established by the Trust. With respect to each registered Account, the Company will vote shares of each Portfolio of the Trust held by a registered Account and for which no timely voting instructions from Contract owners are received in the same proportion as those shares for which voting instructions are received. The Company and its agents will assist in processing the solicitation of proxies for Portfolio shares held to fund the Contacts. The Company reserves the right, to the extent permitted by law, to vote shares held in any Account in its sole discretion. 2.12. The Company and the Trust will each provide to the other information about the results of any regulatory examination relating to the Contracts or the Trust, including relevant portions of any "deficiency letter" and any response thereto, provided, however, that nothing contained in this Section 2.12 shall be construed to require the Company to provide any such information to the extent such information does not relate to the Trust or the Trust to provide any such information to the extent such information does not relate to the issuance of Trust shares in connection with the Contracts. 2.13. No compensation shall be paid by the Trust to the Company, or by the Company to the Trust, under this Agreement (except for specified expense reimbursements). However, nothing herein shall prevent the parties hereto from otherwise agreeing to perform, and arranging for appropriate compensation for, other services relating to the Trust, the Accounts or both. 6 ARTICLE III. REPRESENTATIONS AND WARRANTIES 3.1. The Company represents and warrants that it is an insurance company duly organized and in good standing under the laws of the State of Delaware and that it has legally and validly established each Account as a segregated asset account under such law as of thedate set forth in Schedule B, and that Clarendon Insurance Agency, Inc. the principal underwriter for the Contracts, is registered as a broker-dealer under the Securities Exchange Act of 1934 and is a member in good standing of the National Association of Securities Dealers, Inc. 3.2. The Company represents and warrants that it has registered or, prior to any issuance or sale of the Contracts, will register each Account as a unit investment trust in accordance with the provisions of the 1940 Act and cause each Account to remain so registered to serve as a segregated asset account for the Contracts, unless an exemption from registration is available. 3.3. The Company represents and warrants that the Contracts will be registered under the 1933 Act unless an exemption from registration is available prior to any issuance or sale of the Contracts; the Contracts will be issued and sold in compliance in all material respects with all applicable federal and state laws; and the sale of the Contracts shall comply in all material respects with state insurance law suitability requirements. 3.4. The Trust represents and warrants that it is duly organized and validly existing under the laws of the Commonwealth of Massachusetts and that it does and will comply in all material respects with the 1940 Act and the rules and regulations thereunder. 3.5. The Trust and the Distributor represent and warrant that the Portfolio shares offered and sold pursuant to this Agreement will be authorized for issuance, registered under the 1933 Act and sold in accordance with all applicable federal and state laws, and the Trust shall be registered under the 1940 Act prior to and at the time of any issuance or sale of such shares. The Trust shall amend its registration statement under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares. The Trust shall register and qualify its shares for sale in accordance with the laws of the various states only if and to the extent deemed advisable by the Trust or required by law or regulation. 3.6. The Trust represents and warrants that the investments of each Portfolio will comply with the diversification requirements for variable annuity, endowment or life insurance contracts set forth in Section 817(h) of the Internal Revenue Code of 1986, as amended (the "Code"), and the rules and regulations thereunder, including without limitation Treasury Regulation 1.817-5, and will notify the Company immediately upon having a reasonable basis for believing any Portfolio has ceased to comply or might not so comply 7 and will immediately take all reasonable steps to adequately diversify the Portfolio to achieve compliance within the grace period afforded by Regulation 1.817-5. 3.7. The Trust represents and warrants that it is currently qualified as a "regulated investment company" under Subchapter M of the Code, that it will maintain such qualification and will notify the Company immediately upon having a reasonable basis for believing it has ceased to so qualify or might not so qualify in the future. 3.8. The Trust represents and warrants that it, its directors, officers, employees and others dealing with the money or securities, or both, of a Portfolio shall at all times be covered by a blanket fidelity bond or similar coverage for the benefit of the Trust in an amount not less than the minimum coverage required by Rule 17g-1 or other applicable regulations under the 1940 Act. Such bond shall include coverage for larceny and embezzlement and be issued by a reputable bonding company. 3.9. The Distributor represents that it is duly organized and validly existing under the laws of the State of Delaware and that it is registered, and will remain registered, during the term of this Agreement, as a broker-dealer under the Securities Exchange Act of 1934 and is a member in good standing of the National Association of Securities Dealers, Inc. ARTICLE IV. POTENTIAL CONFLICTS 4.1. The parties acknowledge that a Portfolio's shares may be made available for investment to other Participating Insurance Companies. In such event, the Trustees will monitor the Trust for the existence of any material irreconcilable conflict between the interests of the contract owners of all Participating Insurance Companies. A material irreconcilable conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by variable annuity contract and variable life insurance contract owners; or (f) a decision by an insurer to disregard the voting instructions of contract owners. The Trust shall promptly inform the Company of any determination by the Trustees that a material irreconcilable conflict exists and of the implications thereof. 4.2. The Company agrees to report promptly any potential or existing conflicts of which it is aware to the Trustees. The Company will assist the Trustees in carrying out their responsibilities under the Shared Funding Exemptive Order by providing the Trustees with all information reasonably necessary for and requested by the Trustees to consider any issues raised including, but not limited to, information as to a decision by the 8 Company to disregard Contract owner voting instructions. All communications from the Company to the Trustees may be made in care of the Trust. 4.3. If it is determined by a majority of the Trustees, or a majority of the disinterested Trustees, that a material irreconcilable conflict exists that affects the interests of contract owners, the Company shall, in cooperation with other Participating Insurance Companies whose contract owners are also affected, each at its own expense and to the extent reasonably practicable (as determined by the Trustees) take whatever steps are necessary to remedy or eliminate the material irreconcilable conflict, which steps could include: (a) withdrawing the assets allocable to some or all of the Accounts from the Trust or any Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another Portfolio of the Trust, or submitting the question of whether or not such segregation should be implemented to a vote of all affected Contract owners and, as appropriate, segregating the assets of any appropriate group (i.e., annuity contract owners, life insurance contract owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected Contract owners the option of making such a change; and (b) establishing a new registered management investment company or managed separate account. 4.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard Contract owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Company may be required, at the Trust's election, to withdraw the affected Account's investment in the Trust and terminate this Agreement with respect to such Account; provided, however that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested Trustees. Any such withdrawal and termination must take place within six (6) months after the Trust gives written notice that this provision is being implemented. Until the end of such six (6) month period, the Trust shall continue to accept and implement orders by the Company for the purchase and redemption of shares of the Trust. 4.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the affected Account's investment in the Trust and terminate this Agreement with respect to such Account within six (6) months after the Trustees inform the Company in writing that the Trust has determined that such decision has created a material irreconcilable conflict; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested Trustees. Until the end of such six (6) month period, the Trust shall continue to accept and implement orders by the Company for the purchase and redemption of shares of the Trust. 4.6. For purposes of Section 4.3 through 4.6 of this Agreement, a majority of the disinterested 9 Trustees shall determine whether any proposed action adequately remedies any material irreconcilable conflict, but in no event will the Trust be required to establish a new funding medium for any Contract. The Company shall not be required to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Contract owners materially adversely affected by the material irreconcilable conflict. In the event that the Trustees determine that any proposed action does not adequately remedy any material irreconcilable conflict, then the Company will withdraw the Account's investment in the Trust and terminate this Agreement within six (6) months after the Trustees inform the Company in writing of the foregoing determination; provided, however, that such withdrawal and termination shall be limited to the extent required by any such material irreconcilable conflict as determined by a majority of the disinterested Trustees. 4.7. The Company shall at least annually submit to the Trustees such reports, materials or data as the Trustees may reasonably request so that the Trustees may fully carry out the duties imposed upon them by the Shared Funding Exemptive Order, and said reports, materials and data shall be submitted more frequently if reasonably deemed appropriate by the Trustees. 4.8. If and to the extent that Rule 6e-3(T) is amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Shared Funding Exemptive Order) on terms and conditions materially different from those contained in the Shared Funding Exemptive Order, then the Trust and/or the Participating Insurance Companies, as appropriate, shall take such steps as may be necessary to comply with Rule 6e-3(T), as amended, or Rule 6e-3, as adopted, to the extent such rules are applicable. ARTICLE V. INDEMNIFICATION 5.1. INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and hold harmless the Distributor, the Trust and each of its Trustees, officers, employees and agents and each person, if any, who controls the Trust within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 5.1) against any and all losses, costs, expenses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Company, which consent shall not be unreasonably withheld) or expenses (including the reasonable costs of investigating or defending any alleged loss, costs, claim, damage, liability or expense and reasonable legal counsel fees incurred in connection therewith) (collectively, "Losses"), to which the Indemnified Parties may become subject under any statute or regulation, or at common 10 law or otherwise, insofar as such Losses are related to the sale or acquisition of the Contracts or Trust shares and: (a) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in a registration statement or prospectus for the Contracts or in the Contracts themselves or in sales literature generated or approved by the Company on behalf of the Contracts or Accounts (or any amendment or supplement to any of the foregoing) (collectively, "Company Documents" for the purposes of this Article V), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this indemnity shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and was accurately derived from written information furnished to the Company by or on behalf of the Trust for use in Company Documents or otherwise for use in connection with the sale of the Contracts or Trust shares; or (b) arise out of or result from statements or representations (other than statements or representations contained in and derived in comformity withTrust Documents as defined in Section 5.2(a)) or wrongful conduct of the Company or persons under its control, with respect to the sale or acquisition of the Contracts or Trust shares; or (c) arise out of or result from any untrue statement or alleged untrue statement of a material fact contained in Trust Documents as defined in Section 5.2(a) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such statement or omission was made in reliance upon and accurately derived from written information furnished to the Trust by or on behalf of the Company; or (d) arise out of or result from any failure by the Company to provide the services or furnish the materials required under the terms of this Agreement; or (e) arise out of or result from any material breach of any representation and/or warranty made by the Company in this Agreement or arise out of or result from any other material breach of this Agreement by the Company; or (f) arise out of or result from the provision by the Company to the Trust of insufficient or incorrect information regarding the purchase or sale of shares of any Portfolio, or the failure of the Company to provide such information on a timely basis. 5.2. INDEMNIFICATION BY THE DISTRIBUTOR. The Distributor agrees to indemnify and hold 11 harmless the Company and each of its directors, officers, employees, and agents and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for the purposes of this Section 5.2) against any and all losses, costs, expenses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Distributor, which consent shall not be unreasonably withheld) or expenses (including the reasonable costs of investigating or defending any alleged loss, costs, claim, damage, liability or expense and reasonable legal counsel fees incurred in connection therewith) (collectively, "Losses"), to which the Indemnified Parties may become subject under any statute or regulation, or at common law or otherwise, insofar as such Losses are related to the sale or acquisition of the Contracts or Trust shares and: (a) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the registration statement or prospectus for the Trust (or any amendment or supplement thereto) (collectively, "Trust Documents" for the purposes of this Article V), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this indemnity shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and was accurately derived from written information furnished to the Distributor or the Trust by or on behalf of the Company for use in Trust Documents or otherwise for use in connection with the sale of the Contracts or Trust shares and; or (b) arise out of or result from statements or representations (other than statements or representations contained in and derived in conformity with Company Documents) or wrongful conduct of the Distributor or persons under its control, with respect to the sale or acquisition of the Contracts or Portfolio shares; or (c) arise out of or result from any untrue statement or alleged untrue statement of a material fact contained in Company Documents or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such statement or omission was made in reliance upon and accurately derived from written information furnished to the Company by or on behalf of the Trust; or (d) arise out of or result from any failure by the Distributor or the Trust to provide the services or furnish the materials required under the terms of this Agreement, including, without limitation, any failure by the Trust to inform the Company of the correct net asset value per share for each Portfolio on a timely basis sufficient to permit the timely execution of all purchase and redemption orders at the correct net asset value per share; or 12 (e) arise out of or result from any material breach of any representation and/or warranty made by the Distributor or the Trust in this Agreement or arise out of or result from any other material breach of this Agreement by the Distributor or the Trust. 5.3. None of the Company, the Trust or the Distributor shall be liable under the indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect to any Losses incurred or assessed against an Indemnified Party that arise from such Indemnified Party's willful misfeasance, bad faith or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations or duties under this Agreement. 5.4. None of the Company, the Trust or the Distributor shall be liable under the indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect to any claim made against an Indemnified party unless such Indemnified Party shall have notified the other party in writing within a reasonable time after the summons, or other first notification, giving information of the nature of the claim shall have been served upon or otherwise received by such Indemnified Party (or after such Indemnified Party shall have received notice of service upon or other notification to any designated agent), but failure to notify the party against whom indemnification is sought of any such claim shall not relieve that party from any liability which it may have to the Indemnified Party in the absence of Sections 5.1 and 5.2. 5.5. In case any such action is brought against an Indemnified Party, the indemnifying party shall be entitled to participate, at its own expense, in the defense of such action. The indemnifying party also shall be entitled to assume the defense thereof, with counsel reasonably satisfactory to the party named in the action. After notice from the indemnifying party to the Indemnified Party of an election to assume such defense, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the indemnifying party will not be liable to the Indemnified Party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. ARTICLE VI. TERMINATION 6.1. This Agreement shall terminate: (a) at the option of any party upon one (1) year's advance written notice to the other parties, unless a shorter time is agreed to by the parties; 13 (b) at the option of any party upon thirty (30) days' advance written notice due to a material breach of this Agreement by the other party, unless such breach is cured within such thirty (30) day period; or (b) at the option of the Trust or the Distributor if the Contracts issued by the Company cease to qualify as annuity contracts or life insurance contracts, as applicable, under the Code or if the Contracts are not registered, issued or sold in accordance with applicable state and/or federal law; or (c) at the option of any party upon a determination by a majority of the Trustees of the Trust, or a majority of its disinterested Trustees, that a material irreconcilable conflict exists; or (d) at the option of the Company upon institution of formal proceedings against the Trust or the Distributor by the NASD, the SEC, or any state securities or insurance department or any other regulatory body regarding the Trust's or the Distributor's duties under this Agreement or related to the sale of Trust shares or the operation of the Trust; or (e) at the option of the Company if the Trust or a Portfolio fails to meet the diversification requirements specified in Section 3.6 hereof; or (f) at the option of the Company if shares of the Series are not reasonably available to meet the requirements of the Contracts issued by the Company, as determined by the Company, and upon prompt notice by the Company to the other parties; or (g) at the option of the Company in the event any of the shares of the Portfolio are not registered, issued or sold in accordance with applicable state and/or federal law, or such law precludes the use of such shares as the underlying investment media of the Contracts issued or to be issued by the Company; or (h) at the option of the Company, if the Portfolio fails to qualify as a Regulated Investment Company under Subchapter M of the Code; or (i) at the option of the Distributor if it shall determine in its sole judgment exercised in good faith, that the Company and/or its affiliated companies has suffered a material adverse change in its business, operations, financial condition or prospects since the date of this Agreement or is the subject of material adverse publicity; or (j) at the option of the Company if it shall determine in its sole judgment exercised in good faith, that the Distributor and/or its affiliated companies has suffered a 14 material adverse change in its business, operations, financial condition or prospects since the date of this Agreement or is the subject of material adverse publicity. 6.2. Notwithstanding any termination of this Agreement, the Trust shall, at the option of the Company, continue to make available additional shares of any Portfolio and redeem shares of any Portfolio pursuant to the terms and conditions of this Agreement for all Contracts in effect on the effective date of termination of this Agreement. 6.3. The provisions of Article V shall survive the termination of this Agreement, and the provisions of Article IV and Section 2.9 shall survive the termination of this Agreement as long as shares of the Trust are held on behalf of Contract owners in accordance with Section 6.2. ARTICLE VII. NOTICES Any notice shall be sufficiently given when sent by registered or certified mail to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other party. If to the Trust or its Distributor: Fred Alger Management, Inc. 30 Montgomery Street Jersey City, NJ 07302 Attn: Gregory S. Duch If to the Company: Sun Life Assurance Company of Canada (U.S.) Retirement Products & Services Division One Copley Place Suite 100 Boston, MA 02116 Attn: Margaret Hankard Sr. Associate Counsel 15 ARTICLE VIII. MISCELLANEOUS 8.1. The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 8.2. This Agreement may be executed in two or more counterparts, each of which taken together shall constitute one and the same instrument. 8.3. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 8.4. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the State of New York without regard to its conflict of laws provisions. It shall also be subject to the provisions of the federal securities laws and the rules and regulations thereunder and to any orders of the Commission granting exemptive relief therefrom and the conditions of such orders. Copies of any such orders shall be promptly forwarded by the Trust to the Company. 8.5. All liabilities of the Trust arising, directly or indirectly, under this Agreement, of any and every nature whatsoever, shall be satisfied solely out of the assets of the Trust and no Trustee, officer, agent or holder of shares of beneficial interest of the Trust shall be personally liable for any such liabilities. 8.6. Each party shall cooperate with each other party and all appropriate governmental authorities (including without limitation the Commission, the National Association of Securities Dealers, Inc. and state insurance regulators) and shall permit such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. 8.7. The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the parties hereto are entitled to under state and federal laws. 8.8. This Agreement shall not be exclusive in any respect. 8.9. Neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the prior written approval of the other party. 8.10. No provisions of this Agreement may be amended or modified in any manner except by a written agreement properly authorized and executed by both parties. 16 8.11. Each party hereto shall, except as required by law or otherwise permitted by this Agreement, treat as confidential the names and addresses of the owners of the Contracts and all information reasonably identified as confidential in writing by any other party hereto, and shall not disclose such confidential information without the written consent of the affected party unless such information has become publicly available. 8.12 During ordinary business hours, the Trust and Distributor shall afford the Company, directly or through its authorized representatives, reasonable access to all files, books, records and other materials of the Trust or Distributor, as applicable, which relate directly or indirectly to transactions arising in connection with this Agreement and to make available appropriate personnel familiar with such items for the purpose of explaining the form and content of such items. IN WITNESS WHEREOF, the parties have caused their duly authorized officers to execute this Participation Agreement as of the date and year first above written. Fred Alger and Company, Incorporated By: -------------------------------- Name: Title: The Alger American Fund By: -------------------------------- Name: Title: Sun Life Assurance Company of Canada U.S. By: -------------------------------- Name: Title: 17 SCHEDULE A - ----------- The Alger American Fund: Alger American Growth Portfolio Alger American Income and Growth Portfolio Alger American Small Capitalization Portfolio 18 SCHEDULE B ---------- NAME OF ACCOUNTS: Sun Life Of Canada ( U.S.) Variable Account F (Inception: July 13, 1989) NAME OF CONTRACTS: Futurity Variable and Fixed Annuity Contracts 19 EX-8.(B)(I) 3 PART AGMT GOLDMAN 31 PGS AUX2248 PARTICIPATION AGREEMENT THIS AGREEMENT, made and entered into this 17th day of February, 1998 by and between GOLDMAN SACHS VARIABLE INSURANCE TRUST, an unincorporated business trust formed under the laws of Delaware (the "Trust"), GOLDMAN, SACHS & CO., a New York limited partnership (the "Distributor"), and SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.), a Delaware life insurance company (the "Company"), on its own behalf and on behalf of each separate account of the Company identified herein. WHEREAS, the Trust is a series-type mutual fund offering shares of beneficial interest (the "Trust shares") consisting of one or more separate series ("Series") of shares, each such Series representing an interest in a particular investment portfolio of securities and other assets (a "Fund"), and which Series may be subdivided into various classes ("Classes") with each such Class supporting a distinct charge and expense arrangement; and WHEREAS, the Trust was established for the purpose of serving as an investment vehicle for insurance company separate accounts supporting variable annuity contracts and variable life insurance policies to be offered by insurance companies and may also be utilized by qualified retirement plans; and WHEREAS, the Distributor has the exclusive right to distribute Trust shares to qualifying investors; and WHEREAS, the Company desires that the Trust serve as an investment vehicle for a certain separate account(s) of the Company and the Distributor desires to sell shares of certain Series and/or Class(es) to such separate account(s); NOW, THEREFORE, in consideration of their mutual promises, the Trust, the Distributor and the Company agree as follows: ARTICLE I ADDITIONAL DEFINITIONS 1.1. "Account" -- the separate account of the Company described more specifically in Schedule 1 to this Agreement. If more than one separate account is described on Schedule 1, the term shall refer to each separate account so described. 1.2. "Business Day" -- each day that the Trust is open for business as provided in the Trust's Prospectus. 1.3. "Code" -- the Internal Revenue Code of 1986, as amended, and any successor thereto. 1.4. "Contracts" -- the class or classes of variable annuity contracts and/or variable life insurance policies issued by the Company and described more specifically on Schedule 2 to this Agreement. 1.5. "Contract Owners" -- the owners of the Contracts, as distinguished from all Product Owners. 1.6. "Participating Account" -- a separate account investing all or a portion of its assets in the Trust, including the Account. 1.7. "Participating Insurance Company" -- any insurance company investing in the Trust on its behalf or on behalf of a Participating Account, including the Company. 1.8. "Participating Plan" -- any qualified retirement plan investing in the Trust. 1.9. "Participating Investor" -- any Participating Account, Participating Insurance Company or Participating Plan, including the Account and the Company. 1.10. "Products" -- variable annuity contracts and variable life insurance policies supported by Participating Accounts, including the Contracts. 1.11. "Product Owners" -- owners of Products, including Contract Owners. 1.12. "Trust Board" -- the board of trustees of the Trust. 1.13. "Registration Statement" -- with respect to the Trust shares or a class of Contracts, the registration statement filed with the SEC to register such securities under the 1933 Act, or the most recently filed amendment thereto, in either case in the form in which it was declared or became effective. The Contracts' Registration Statement for each class of Contracts is described more specifically on Schedule 2 to this Agreement. The Trust's Registration Statement is filed on Form N-1A (File No. 333-35883). 1.14. "1940 Act Registration Statement" -- with respect to the Trust or the Account, the registration statement filed with the SEC to register such person as an investment company under the 1940 Act, or the most recently filed amendment thereto. The Account's 1940 Act Registration Statement is described more specifically on Schedule 2 to this Agreement. The Trust's 1940 Act Registration Statement is filed on Form N-1A (File No. 811-08361). 1.15. "Prospectus" -- with respect to shares of a Series (or Class) of the Trust or a class of Contracts, each version of the definitive prospectus or supplement thereto filed with the SEC pursuant to Rule 497 under the 1933 Act. With respect to any provision of this Agreement requiring a party to take action in accordance with a Prospectus, such reference thereto shall be deemed to be to the version for the applicable Series, Class or Contracts last so filed prior to the taking of such action. For purposes of Article IX, the term "Prospectus" shall include any statement of additional information incorporated therein. 1.16. "Statement of Additional Information" -- with respect to the shares of the Trust or a class of Contracts, each version of the definitive statement of additional information or supplement thereto filed with the SEC pursuant to Rule 497 under the 1933 Act. With respect to any provision of this Agreement requiring a party to take action in accordance with a Statement of Additional Information, such reference thereto shall be deemed to be the last version so filed prior to the taking of such action. 1.17. "SEC" -- the Securities and Exchange Commission. 2 1.18. "NASD" -- The National Association of Securities Dealers, Inc. 1.19. "1933 Act" -- the Securities Exchange Act of 1933, as amended. 1.20. "1940 Act" -- the Investment Company Act of 1940, as amended. ARTICLE II SALE OF TRUST SHARES 2.1. AVAILABILITY OF SHARES (a) The Trust has granted to the Distributor exclusive authority to distribute the Trust shares and to select which Series or Classes of Trust shares shall be made available to Participating Investors. Pursuant to such authority, and subject to Article X hereof, the Distributor shall make available to the Company for purchase on behalf of the Account, shares of the Series and Classes listed on Schedule 3 to this Agreement, such purchases to be effected at net asset value in accordance with Section 2.3 of this Agreement. Such Series and Classes shall be made available to the Company in accordance with the terms and provisions of this Agreement until this Agreement is terminated pursuant to Article X or the Distributor suspends or terminates the offering of shares of such Series or Classes in the circumstances described in Article X. (b) Notwithstanding clause (a) of this Section 2.1, Series or Classes of Trust shares in existence now or that may be established in the future will be made available to the Company only as the Distributor may so provide, subject to the Distributor's rights set forth in Article X to suspend or terminate the offering of shares of any Series or Class or to terminate this Agreement. (c) The parties acknowledge and agree that: (i) the Trust may revoke the Distributor's authority pursuant to the terms and conditions of its distribution agreement with the Distributor; and (ii) the Trust reserves the right in its sole discretion to refuse to accept a request for the purchase of Trust shares. 2.2. REDEMPTIONS. The Trust shall redeem, at the Company's request, any full or fractional Trust shares held by the Company on behalf of the Account, such redemptions to be effected at net asset value in accordance with Section 2.3 of this Agreement. Notwithstanding the foregoing, (i) the Company shall not redeem Trust shares attributable to Contract Owners except in the circumstances permitted in Article X of this Agreement, and (ii) the Trust may delay redemption of Trust shares of any Series or Class to the extent permitted by the 1940 Act, any rules, regulations or orders thereunder, or the Prospectus for such Series or Class. 2.3. PURCHASE AND REDEMPTION PROCEDURES (a) The Trust hereby appoints the Company as an agent of the Trust for the limited purpose of receiving purchase and redemption requests on behalf of the Account (but not with respect to any Trust shares that may be held in the general account of the Company) for shares of those Series or Classes made available hereunder, based on allocations of amounts to the Account or subaccounts thereof under the Contracts, other transactions relating to the Contracts or the Account and customary processing of the Contracts. Receipt of any such requests (or effectuation of such transaction or processing) on any Business Day by the Company as such limited agent of the Trust prior to the Trust's close of business as defined from time to time in the applicable Prospectus 3 for such Series or Class (which as of the date of execution of this Agreement is defined as the close of regular trading on the New York Stock Exchange (normally 4:00 p.m. New York Time)) shall constitute receipt by the Trust on that same Business Day, provided that the Company uses its best efforts to provide actual and sufficient notice of such request to the Trust by 8:00 a.m. New York Time on the next following Business Day and the Trust receives such notice no later than 9:00 a.m. New York Time on such Business Day. Such notice may be communicated by telephone to the office or person designated for such notice by the Trust, and shall be confirmed by facsimile. (b) The Company shall pay for shares of each Series or Class on the same day that it provides actual notice to the Trust of a purchase request for such shares. Payment for Series or Class shares shall be made in Federal funds transmitted to the Trust by wire to be received by the Trust by 12:00 noon New York Time on the day the Trust receives actual notice of the purchase request for Series or Class shares (unless the Trust determines and so advises the Company that sufficient proceeds are available from redemption of shares of other Series or Classes effected pursuant to redemption requests tendered by the Company on behalf of the Account). In no event may proceeds from the redemption of shares requested pursuant to an order received by the Company after the Trust's close of business on any Business Day be applied to the payment for shares for which a purchase order was received prior to the Trust's close of business on such day. If the issuance of shares is canceled because Federal funds are not timely received, the Company shall indemnify the respective Fund and Distributor with respect to all costs, expenses and losses relating thereto. Upon the Trust's receipt of Federal funds so wired, such funds shall cease to be the responsibility of the Company and shall become the responsibility of the Trust. If Federal funds are not received on time, such funds will be invested, and Series or Class shares purchased thereby will be issued, as soon as practicable after actual receipt of such funds but in any event not on the same day that the purchase order was received. (c) Payment for Series or Class shares redeemed by the Account or the Company shall be made in Federal funds transmitted by wire to the Company or any other person properly designated in writing by the Company, such funds normally to be transmitted by 6:00 p.m. New York Time on the next Business Day after the Trust receives actual notice of the redemption order for Series or Class shares (unless redemption proceeds are to be applied to the purchase of Trust shares of other Series or Classes in accordance with Section 2.3(b) of this Agreement), except that the Trust reserves the right to redeem Series or Class shares in assets other than cash and to delay payment of redemption proceeds to the extent permitted by the 1940 Act, any rules or regulations or orders thereunder, or the applicable Prospectus. The Trust shall not bear any responsibility whatsoever for the proper disbursement or crediting of redemption proceeds by the Company; the Company alone shall be responsible for such action. (d) Any purchase or redemption request for Series or Class shares held or to be held in the Company's general account shall be effected at the net asset value per share next determined after the Trust's actual receipt of such request, provided that, in the case of a purchase request, payment for Trust shares so requested is received by the Trust in Federal funds prior to close of business for determination of such value, as defined from time to time in the Prospectus for such Series or Class. (e) Prior to the first purchase of any Trust shares hereunder, the Company and the Trust shall provide each other with all information necessary to effect wire transmissions of Federal funds to the other party and all other designated persons pursuant to such protocols and security procedures as the parties may agree upon. Should 4 such information change thereafter, the Trust and the Company, as applicable, shall notify the other in writing of such changes, observing the same protocols and security procedures, at least three Business Days in advance of when such change is to take effect. The Company and the Trust shall observe customary procedures to protect the confidentiality and security of such information, but neither party shall be liable to the other party for any breach of security. (f) The procedures set forth herein are subject to any additional terms set forth in the applicable Prospectus for the Series or Class or by the requirements of applicable law. 2.4. NET ASSET VALUE. The Trust shall inform the Company of the net asset value per share for each Series or Class available to the Company as soon as reasonably practicable after the net asset value per share for such Series or Class is calculated. The Trust shall calculate such net asset value in accordance with the Prospectus for such Series or Class. 2.5. DIVIDENDS AND DISTRIBUTIONS. The Trust shall furnish notice to the Company as soon as reasonably practicable of any income dividends or capital gain distributions payable on any Series or Class shares. The Company, on its behalf and on behalf of the Account, hereby elects to receive all such dividends and distributions as are payable on any Series or Class shares in the form of additional shares of that Series or Class. The Company reserves the right, on its behalf and on behalf of the Account, to revoke this election and to receive all such dividends and capital gain distributions in cash; to be effective, such revocation must be made in writing and received by the Trust at least ten Business Days prior to a dividend or distribution date. The Trust shall notify the Company promptly of the number of Series or Class shares so issued as payment of such dividends and distributions. 2.6. BOOK ENTRY. Issuance and transfer of Trust shares shall be by book entry only. Stock certificates will not be issued to the Company or the Account. Purchase and redemption orders for Trust shares shall be recorded in an appropriate ledger for the Account or the appropriate subaccount of the Account. 2.7. PRICING ERRORS. Any material errors in the calculation of net asset value, dividends or capital gain information shall be reported immediately upon discovery to the Company. An error shall be deemed "material" based on the Trust's reasonable interpretation of the SEC's position and policy with regard to materiality, as it may be modified from time to time. Neither the Trust, any Fund, the Distributor, nor any of their affiliates shall be liable for any information provided to the Company pursuant to this Agreement which information is based on incorrect information supplied by or on behalf of the Company to the Trust or the Distributor. 2.8. LIMITS ON PURCHASERS. The Distributor and the Trust shall sell Trust shares only to insurance companies and their separate accounts and to persons or plans ("Qualified Persons") that qualify to purchase shares of the Trust under Section 817(h) of the Code and the regulations thereunder without impairing the ability of the Account to consider the portfolio investments of the Trust as constituting investments of the Account for the purpose of satisfying the diversification requirements of Section 817(h). The Distributor and the Trust shall not sell Trust shares to any insurance company or separate account unless an agreement complying with Article VIII of this Agreement is in effect to govern such sales. The Company hereby represents and warrants that it and the Account are Qualified Persons. 5 ARTICLE III REPRESENTATIONS AND WARRANTIES 3.1. COMPANY. The Company represents and warrants that: (i) the Company is an insurance company duly organized and in good standing under Delaware insurance law; (ii) the Account is a validly existing separate account, duly established and maintained in accordance with applicable law; (iii) the Account's 1940 Act Registration Statement has been or will be filed with the SEC in accordance with the provisions of the 1940 Act and the Account is duly registered as a unit investment trust thereunder; (iv) the Contracts' Registration Statement has been declared effective by the SEC; (v) the Contracts will be issued in compliance in all material respects with all applicable Federal and state laws; (vi) the Contracts have been filed, qualified and/or approved for sale, as applicable, under the insurance laws and regulations of the states in which the Contracts will be offered; (vii) the Account will maintain its registration under the 1940 Act and will comply in all material respects with the 1940 Act; (viii) the Contracts currently are, and at the time of issuance and for so long as they are outstanding will be, treated as annuity contracts or life insurance policies, whichever is appropriate, under applicable provisions of the Code; and (ix) the Company's entering into and performing its obligations under this Agreement does not and will not violate its charter documents or by-laws, rules or regulations, or any agreement to which it is a party. The Company will notify the Trust promptly if for any reason it is unable to perform its obligations under this Agreement. 3.2. TRUST. The Trust represents and warrants that: (i) the Trust is an unincorporated business trust duly formed and validly existing under the Delaware law; (ii) the Trust's 1940 Act Registration Statement has been filed with the SEC in accordance with the provisions of the 1940 Act and the Trust is duly registered as an open-end management investment company thereunder; (iii) the Trust's Registration Statement has been declared effective by the SEC; (iv) the Trust shares will be issued in compliance in all material respects with all applicable federal and state securities laws; (v) the Trust will remain registered under and will comply in all material respects with the 1940 Act during the term of this Agreement; (vi) each Fund of the Trust intends to qualify as a "regulated investment company" under Subchapter M of the Code and to comply with the diversification standards prescribed in Section 817(h) of the Code and the regulations thereunder; and (vii) the investment policies of each Fund comply in all material respects with any investment restrictions set forth on Schedule 4 to this Agreement. The Trust, however, makes no representation as to whether any aspect of its operations (including, but not limited to, fees and expenses and investment policies) otherwise complies with the insurance laws or regulations of any state. 3.3. DISTRIBUTOR. The Distributor represents and warrants that: (i) the Distributor is a limited partnership duly organized and in good standing under New York law; (ii) the Distributor is registered as a broker-dealer under federal and applicable state securities laws and is a member of the NASD; and (iii) the Distributor is registered as an investment adviser under federal securities laws. 3.4. LEGAL AUTHORITY. Each party represents and warrants that the execution and delivery of this Agreement and the consummation of the transactions contemplated herein have been duly authorized by all necessary corporate, partnership or trust action, as applicable, by such party, and, when so executed and delivered, this Agreement will be the valid and binding obligation of such party enforceable in accordance with its terms. 3.5. BONDING REQUIREMENT. Each party represents and warrants that all of its directors, officers, partners and employees dealing with the money and/or securities of the Trust are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Trust in an amount not less than the amount required by the applicable rules of 6 the NASD and the federal securities laws. The aforesaid bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. All parties shall make all reasonable efforts to see that this bond or another bond containing these provisions is always in effect, shall provide evidence thereof promptly to any other party upon written request therefor, and shall notify the other parties promptly in the event that such coverage no longer applies. ARTICLE IV REGULATORY REQUIREMENTS 4.1. TRUST FILINGS. The Trust shall amend the Trust's Registration Statement and the Trust's 1940 Act Registration Statement from time to time as required in order to effect the continuous offering of Trust shares in compliance with applicable law and to maintain the Trust's registration under the 1940 Act for so long as Trust shares are sold. 4.2. CONTRACTS FILINGS. The Company shall amend the Contracts' Registration Statement and the Account's 1940 Act Registration Statement from time to time as required in order to effect the continuous offering of the Contracts in compliance with applicable law or as may otherwise be required by applicable law, but in any event shall maintain a current effective Contracts' Registration Statement and the Account's registration under the 1940 Act for so long as the Contracts are outstanding unless the Company has supplied the Trust with an SEC no-action letter or opinion of counsel satisfactory to the Trust's counsel to the effect that maintaining such Registration Statement on a current basis is no longer required. The Company shall be responsible for filing all such Contract forms, applications, marketing materials and other documents relating to the Contracts and/or the Account with state insurance commissions, as required or customary, and shall use its best efforts: (i) to obtain any and all approvals thereof, under applicable state insurance law, of each state or other jurisdiction in which Contracts are or may be offered for sale; and (ii) to keep such approvals in effect for so long as the Contracts are outstanding. 4.3. VOTING OF TRUST SHARES. With respect to any matter put to vote by the holders of Trust shares ("Voting Shares"), the Company will provide "pass-through" voting privileges to owners of Contracts registered with the SEC as long as the 1940 Act requires such privileges in such cases. In cases in which "pass-through" privileges apply, the Company will (i) solicit voting instructions from Contract Owners of SEC-registered Contracts; (ii) vote Voting Shares attributable to Contract Owners in accordance with instructions or proxies timely received from such Contract Owners; and (iii) vote Voting Shares held by it that are not attributable to reserves for SEC-registered Contracts or for which it has not received timely voting instructions in the same proportion as instructions received in a timely fashion from Owners of SEC-registered Contracts. The Company shall be responsible for ensuring that it calculates "pass-through" votes for the Account in a manner consistent with the provisions set forth above, the Prospectuses for the Contracts and the Trust, and with other Participating Insurance Companies. The Trust and the Distributor undertake to require every other Participating Insurance Company to vote Shares held by it in accordance with this Section 4.3. The Distributor and the Trust will inform the Company if it learns that any Participating Insurance Company is calculating votes in a manner different than set forth in this Section 4.3. Neither the Company nor any of its affiliates will in any way recommend action in connection with, or oppose or interfere with, the solicitation of proxies for the Trust shares held for such Contract Owners, except with respect to matters as to which the Company has the right under Rule 6e-2 or 6e-3(T) under the 1940 Act, to vote Voting Shares without regard to voting instructions from Contract Owners. 4.4. STATE INSURANCE RESTRICTIONS. The Company acknowledges and agrees that it is the responsibility of the Company and other Participating Insurance Companies to determine 7 investment restrictions and any other restrictions, limitations or requirements under state insurance law applicable to any Fund or the Trust or the Distributor, and that neither the Trust nor the Distributor shall bear any responsibility to the Company, other Participating Insurance Companies or any Product Owners for any such determination or the correctness of such determination. Schedule 4 sets forth the investment restrictions that the Company and/or other Participating Insurance Companies have determined are applicable to any Fund and with which the Trust has agreed to comply as of the date of this Agreement. The Company shall inform the Trust of any investment restrictions imposed by state insurance law that the Company determines may become applicable to the Trust or a Fund from time to time as a result of the Account's investment therein, other than those set forth on Schedule 4 to this Agreement. Upon receipt of any such information from the Company or any other Participating Insurance Company, the Trust shall determine whether it is in the best interests of shareholders to comply with any such restrictions. The Trust shall inform the Company of any investment restrictions brought to its attention by any other Participating Insurance Company. If the Trust determines that it is not in the best interests of shareholders (it being understood that "shareholders" for this purpose shall mean Product Owners) to comply with a restriction determined to be applicable by the Company or another Participating Insurance Company, the Trust shall so inform the Company, and the Trust and the Company shall discuss alternative accommodations in the circumstances. If the Trust determines that it is in the best interests of shareholders to comply with such restrictions, the Trust and the Company shall amend Schedule 4 to this Agreement to reflect such restrictions, subject to obtaining any required shareholder approval thereof. 4.5. DRAFTS OF FILINGS. The Trust and the Company shall provide to each other copies of draft versions of any Registration Statements, Prospectuses, Statements of Additional Information, periodic and other shareholder or Contract Owner reports, proxy statements, solicitations for voting instructions, applications for exemptions, requests for no-action letters, and all amendments or supplements to any of the above, prepared by or on behalf of either of them and that mentions the other party by name. Such drafts shall be provided to the other party at least 5 business days in advance of filing such materials with regulatory authorities in order to allow such other party a reasonable opportunity to review the materials. 4.6. COPIES OF FILINGS. The Trust and the Company shall provide to each other at least one complete copy of all Registration Statements, Prospectuses, Statements of Additional Information, periodic and other shareholder or Contract Owner reports, proxy statements, solicitations of voting instructions, applications for exemptions, requests for no-action letters, and all amendments or supplements to any of the above, that relate to the Trust, the Contracts or the Account, as the case may be, promptly after the filing by or on behalf of each such party of such document with the SEC or other regulatory authorities (it being understood that this provision is not intended to require the Trust to provide to the Company copies of any such documents prepared, filed or used by Participating Investors other than the Company and the Account). 4.7. REGULATORY RESPONSES. Each party shall promptly provide to all other parties copies of responses to no-action requests, notices, orders and other rulings received by such party with respect to any filing covered by Section 4.6 of this Agreement. 4.8. COMPLAINTS AND PROCEEDINGS (a) The Trust and/or the Distributor shall immediately notify the Company of: (i) the issuance by any court or regulatory body of any stop order, cease and desist order, or other similar order (but not including an order of a regulatory body exempting or approving a proposed transaction or arrangement) with respect to the Trust's Registration Statement or the Prospectus of any Series or Class; (ii) any request by the SEC for any 8 amendment to the Trust's Registration Statement or the Prospectus of any Series or Class; (iii) the initiation of any proceedings for that purpose or for any other purposes relating to the registration or offering of the Trust shares; or (iv) any other action or circumstances that may prevent the lawful offer or sale of Trust shares or any Class or Series in any state or jurisdiction, including, without limitation, any circumstance in which (A) such shares are not registered and, in all material respects, issued and sold in accordance with applicable state and federal law or (B) such law precludes the use of such shares as an underlying investment medium for the Contracts. The Trust will make every reasonable effort to prevent the issuance of any such stop order, cease and desist order or similar order and, if any such order is issued, to obtain the lifting thereof at the earliest possible time. (b) The Company shall immediately notify the Trust and the Distributor of: (i) the issuance by any court or regulatory body of any stop order, cease and desist order, or other similar order (but not including an order of a regulatory body exempting or approving a proposed transaction or arrangement) with respect to the Contracts' Registration Statement or the Contracts' Prospectus; (ii) any request by the SEC for any amendment to the Contracts' Registration Statement or Prospectus; (iii) the initiation of any proceedings for that purpose or for any other purposes relating to the registration or offering of the Contracts; or (iv) any other action or circumstances that may prevent the lawful offer or sale of the Contracts or any class of Contracts in any state or jurisdiction, including, without limitation, any circumstance in which such Contracts are not registered, qualified and approved, and, in all material respects, issued and sold in accordance with applicable state and federal laws. The Company will make every reasonable effort to prevent the issuance of any such stop order, cease and desist order or similar order and, if any such order is issued, to obtain the lifting thereof at the earliest possible time. (c) Each party shall immediately notify the other parties when it receives notice, or otherwise becomes aware of, the commencement of any litigation or proceeding against such party or a person affiliated therewith in connection with the issuance or sale of Trust shares or the Contracts. (d) The Company shall provide to the Trust and the Distributor any complaints it has received from Contract Owners pertaining to the Trust or a Fund, and the Trust and Distributor shall each provide to the Company any complaints it has received from Contract Owners relating to the Contracts. 4.9. COOPERATION. Each party hereto shall cooperate with the other parties and all appropriate government authorities (including without limitation the SEC, the NASD and state securities and insurance regulators) and shall permit such authorities reasonable access to its books and records in connection with any investigation or inquiry by any such authority relating to this Agreement or the transactions contemplated hereby. However, such access shall not extend to attorney-client privileged information. 4.10. DISTRIBUTOR. During the term of this agreement, the Distributor (i) will be duly organized and in good standing under the laws of the state of its organization; (ii) will be registered as a broker dealer under federal and applicable state securities laws and will be a member of the NASD, or its successor; and will be registered as an investment adviser under the federal securities laws. 9 ARTICLE V SALE, ADMINISTRATION AND SERVICING OF THE CONTRACTS 5.1. SALE OF THE CONTRACTS. The Company shall be fully responsible for the sale and marketing of the Contracts. The Company shall provide Contracts, the Contracts' and Trust's Prospectuses, Contracts' and Trust's Statements of Additional Information, and all amendments or supplements to any of the foregoing to Contract Owners and prospective Contract Owners, all in accordance with federal and state laws. The Company shall ensure that all persons offering the Contracts are duly licensed and registered under applicable insurance and securities laws. The Company shall use all reasonable efforts to cause each sale of a Contract to satisfy applicable suitability requirements under insurance and securities laws and regulations, including without limitation the rules of the NASD. The Company shall adopt and implement procedures reasonably designed to ensure that information concerning the Trust and the Distributor that is intended for use only by brokers or agents selling the Contracts (i.e., information that is not intended for distribution to Contract Owners or prospective Contract Owners) is so used. 5.2. ADMINISTRATION AND SERVICING OF THE CONTRACTS. The Company shall be fully responsible for the underwriting, issuance, service and administration of the Contracts and for the administration of the Account, including, without limitation, the calculation of performance information for the Contracts, the timely payment of Contract Owner redemption requests and processing of Contract transactions, and the servicing of the Contracts, such functions to be performed in all respects at a level of service commensurate with those standards prevailing in the variable insurance industry. The Company shall provide to Contract Owners all Trust reports, solicitations for voting instructions including any related Trust proxy solicitation materials, and updated Trust Prospectuses as required under the federal securities laws. 5.3. CUSTOMER COMPLAINTS. The Company, with such assistance as may be required from the Trust, shall promptly address all customer complaints and resolve such complaints consistent with high ethical standards and principles of ethical conduct. 5.4. TRUST PROSPECTUSES AND REPORTS. In order to enable the Company to fulfill its obligations under this Agreement and the federal securities laws, the Trust shall provide the Company with a copy, in camera-ready form or form otherwise suitable for printing or duplication, or printed copies, as the parties may agree, of: (i) the Trust's Prospectus for the Series and Classes listed on Schedule 3 and any supplement thereto; (ii) each Statement of Additional Information and any supplement thereto; (iii) any Trust proxy solicitation material for such Series or Classes; and (iv) any Trust periodic shareholder reports. The Trust and the Company may agree upon alternate arrangements, but in all cases, the Trust reserves the right to approve the printing of any such material. The Trust shall provide the Company at least 10 days advance written notice when any such material shall become available, provided, however, that in the case of a supplement, the Trust shall provide the Company notice reasonable in the circumstances, it being understood that circumstances surrounding such supplement may not allow for advance notice and, in such case, the Company will use its best efforts to distribute such supplement to its Contract Owners, as required by law, as soon as reasonably practicable after such supplement becomes available. The Company may not alter any material so provided by the Trust or the Distributor (including without limitation presenting or delivering such material in a different medium, e.g., electronic or Internet) without the prior written consent of the Distributor. 5.5. TRUST ADVERTISING MATERIAL. No piece of advertising or sales literature or other promotional material in which the Trust or the Distributor is named (including, without limitation, material for prospective and/or existing Contract Owners, brokers, rating or ranking agencies, or the press, whether in print, radio, television, video, Internet, or other electronic 10 medium) shall be used by the Company or any person directly or indirectly authorized by the Company, including without limitation, underwriters, distributors, and sellers of the Contracts, except with the prior written consent of the Trust or the Distributor, as applicable, as to the form, content and medium of such material, which consent may not be unreasonably withheld. Any such piece shall be furnished to the Trust for such consent at least 10 Business Days prior to its use. The Trust or the Distributor shall respond to any request for written consent within 7 Business Days after receipt of such material, but failure to respond shall not relieve the Company of the obligation to obtain the prior written consent of the Trust or the Distributor. After receiving the Trust's or Distributor's consent to the use of any such material, no further material changes or changes relating to information concerning the Trust may be made without obtaining the Trust's or Distributor's consent to such changes. The Trust or Distributor may at any time in its sole discretion revoke such written consent for reasonable cause, and upon notification of such revocation in writing, the Company shall promptly discontinue its use of the material subject to such revocation. Until further notice to the Company, the Trust has delegated its rights and responsibilities under this provision to the Distributor. 5.6. CONTRACTS ADVERTISING MATERIAL. No piece of advertising or sales literature or other promotional material in which the Company is named shall be used by the Trust or the Distributor, except with the prior written consent of the Company, which consent may not be unreasonably withheld. Any such piece shall be furnished to the Company for such consent at least 10 Business Days prior to its use. The Company shall respond to any request for written consent within 7 Business Days after receipt of such material, but failure to respond shall not relieve the Trust or the Distributor of the obligation to obtain the prior written consent of the Company. The Company may at any time in its sole discretion revoke any written consent for reasonable cause, and upon notification of such revocation in writing, the Trust and the Distributor shall promptly discontinue their use of the material subject to such revocation. 5.7. TRADE NAMES. No party shall use any other party's names, logos, trademarks or service marks, whether registered or unregistered, without the prior written consent of such other party, or after written consent therefor has been revoked. The Company shall not use in advertising, publicity or otherwise the name of the Trust, Distributor, or any of their affiliates nor any trade name, trademark, trade device, service mark, symbol or any abbreviation, contraction or simulation thereof of the Trust, Distributor, or their affiliates without the prior written consent of the Trust or the Distributor in each instance, unless required to do so by applicable law or regulation. 5.8. REPRESENTATIONS BY COMPANY. Except with the prior written consent of the Trust, the Company shall not give any information or make any representations or statements about the Trust or the Funds nor shall it authorize or allow any other person to do so except information or representations contained in the Trust's Registration Statement or the Trust's Prospectuses or in reports or proxy statements for the Trust, or in sales literature or other promotional material approved in writing by the Trust or its designee in accordance with this Article V, or in published reports or statements of the Trust in the public domain. 5.9. REPRESENTATIONS BY TRUST AND DISTRIBUTOR. Except with the prior written consent of the Company, neither the Trust nor the Distributor shall give any information or make any representations on behalf of the Company or concerning the Company, the Account or the Contracts other than the information or representations contained in the Contracts' Registration Statement or Contracts' Prospectus or in published reports of the Account which are in the public domain or in sales literature or other promotional material approved in writing by the Company in accordance with this Article V. 11 5.10. ADVERTISING. For purposes of this Article V, the phrase "sales literature or other promotional material" includes, but is not limited to, any material constituting sales literature or advertising under the NASD rules, the 1940 Act or the 1933 Act. ARTICLE VI COMPLIANCE WITH CODE 6.1. SECTION 817(h). Each Fund of the Trust shall comply with Section 817(h) of the Code and the regulations issued thereunder to the extent applicable to the Fund as an investment company underlying the Account, and the Trust shall notify the Company immediately upon having a reasonable basis for believing that a Fund has ceased to so qualify or that it might not so qualify in the future. 6.2. SUBCHAPTER M. Each Fund of the Trust shall maintain the qualification of the Fund as a registered investment company (under Subchapter M or any successor or similar provision), and the Trust shall notify the Company immediately upon having a reasonable basis for believing that a Fund has ceased to so qualify or that it might not so qualify in the future. 6.3. CONTRACTS. The Company shall ensure the continued treatment of the Contracts as annuity contracts or life insurance policies, whichever is appropriate, under applicable provisions of the Code and shall notify the Trust and the Distributor immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. ARTICLE VII EXPENSES 7.1. EXPENSES. All expenses incident to each party's performance under this Agreement (including expenses expressly assumed by such party pursuant to this Agreement) shall be paid by such party to the extent permitted by law. 7.2. TRUST EXPENSES. Expenses incident to the Trust's performance of its duties and obligations under this Agreement include, but are not limited to, the costs of: (a) registration and qualification of the Trust shares under the federal securities laws; (b) preparation and filing with the SEC of the Trust's Prospectuses, Trust's Statement of Additional Information, Trust's Registration Statement, Trust proxy materials and shareholder reports; (c) preparation of all statements and notices required by any Federal or state securities law; (d) printing, distribution and solicitation of voting instructions with respect to all proxy materials required to be distributed to existing Contract Owners to the extent the content is initiated by the Trust; printing and mailing of all other materials and reports (other than those specified as being paid for by the Company below) required to be provided by the Trust to existing Contract Owners; (e) all taxes on the issuance or transfer of Trust shares; 12 (f) payment of all applicable fees relating to the Trust, including, without limitation, all fees due under Rule 24f-2 in connection with sales of Trust shares to qualified retirement plans, custodial, auditing, transfer agent and advisory fees, fees for insurance coverage and Trustees' fees; (g) any expenses permitted to be paid or assumed by the Trust pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act; (h) printing of the Trust's Prospectuses for distribution by the Company to existing Contract Owners. If the Trust's Prospectuses are printed by the Company in one document with the prospectus for the Contracts and/or the prospectuses for other funds available under the Contracts, then the expenses of such printing will be apportioned between the Company and the Trust in proportion to the number of pages of the Contract's prospectus, other fund prospectuses and the Trust's Prospectuses, taking account of other relevant factors affecting the expense of printing, such as covers, columns, graphs and charts; the Trust to bear the cost of printing the Trust's portion of such document (relating to the Trust's Prospectuses) for distribution only to owners of existing Contracts and the Company to bear the expense of printing the portion of such documents relating to the Account; provided, however, the Company shall bear all printing expenses of such combined documents where used for distribution to prospective purchasers; and (i) printing of all supplements to the Trust's Prospectuses, the content of which is initiated by the Trust, and distribution of such supplements to existing Contract Owners to the extent such distribution does not coincide with a scheduled mailing and printing of annual and semi-annual reports of the Trust for distribution by the Company to existing Contract Owners or of any other required documents, including, but not limited to, mailing of periodic account reports or Contract Owner statements. 7.3. COMPANY EXPENSES. Expenses incident to the Company's performance of its duties and obligations under this Agreement include, but are not limited to, the costs of: (a) registration and qualification of the Contracts under the federal securities laws; (b) preparation and filing with the SEC of the Contracts' Prospectus and Contracts' Registration Statement; (c) the sale, marketing and distribution of the Contracts, including printing and dissemination of Contract Prospectuses and printing of the Trust's Prospectuses intended for distribution to prospective Contract Owners and for other marketing purposes, and compensation for Contract sales; (d) printing, distribution and solicitation of voting instructions with respect to all proxy materials required to be distributed to existing Contract Owners to the extent the content is initiated by the Company; (e) payment of all applicable fees relating to the Contracts, including, without limitation, all fees due under Rule 24f-2; 13 (f) preparation, printing and dissemination of all statements, materials and notices to Contract Owners required by any Federal or state insurance law other than those paid for by the Trust; and (g) preparation, printing and dissemination of all marketing materials for the Contracts and Trust (to the extent it relates to the Contracts) except where other arrangements are made in advance. 7.4. 12b-1 PAYMENTS. The Trust shall pay no fee or other compensation to the Company under this Agreement, except that if the Trust or any Series or Class adopts and implements a plan pursuant to Rule 12b-1 under the 1940 Act to finance distribution expenses, then payments may be made to the Company in accordance with such plan. The Trust currently does not intend to make any payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or in contravention of such rule, although it may make payments pursuant to Rule 12b-1 in the future. To the extent that it decides to finance distribution expenses pursuant to Rule 12b-1 and such formulation is required by the 1940 Act or any rules or order thereunder, the Trust undertakes to have a Board of Trustees, a majority of whom are not interested persons of the Trust, formulate and approve any plan under Rule 12b-1 to finance distribution expenses. ARTICLE VIII POTENTIAL CONFLICTS 8.1. EXEMPTIVE ORDER. The parties to this Agreement acknowledge that the Trust has filed an application with the SEC to request an order (the "Exemptive Order") granting relief from various provisions of the 1940 Act and the rules thereunder to the extent necessary to permit Trust shares to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated Participating Insurance Companies and other Qualified Persons (as defined in Section 2.8 hereof). It is anticipated that the Exemptive Order, when and if issued, shall require the Trust and each Participating Insurance Company to comply with conditions and undertakings substantially as provided in this Article VIII. The Trust will not enter into a participation agreement with any other Participating Insurance Company unless it imposes the same conditions and undertakings on that company as are imposed on the Company pursuant to this Article VIII. 8.2. COMPANY MONITORING REQUIREMENTS. To the extent reasonably practicable, the Company will monitor its operations and those of the Trust for the purpose of identifying any material irreconcilable conflicts or potential material irreconcilable conflicts between or among the interests of Participating Plans, Product Owners of variable life insurance policies and Product Owners of variable annuity contracts. 8.3. COMPANY REPORTING REQUIREMENTS. The Company shall report any conflicts or potential conflicts to the Trust Board and will provide the Trust Board, at least annually, with all information reasonably necessary for the Trust Board to consider any issues raised by such existing or potential conflicts or by the conditions and undertakings required by the Exemptive Order. The Company also shall assist the Trust Board in carrying out its obligations including, but not limited to: (a) informing the Trust Board whenever it disregards Contract Owner voting instructions with respect to variable life or variable annuity insurance policies, and (b) providing such other information and reports as the Trust Board may reasonably request. The Company will carry out these obligations with a view only to the interests of Contract Owners. 8.4. TRUST BOARD MONITORING AND DETERMINATION. The Trust Board shall monitor the Trust for the existence of any material irreconcilable conflicts between or among the interests 14 of Participating Plans, Product Owners of variable life insurance policies and Product Owners of variable annuity contracts and determine what action, if any, should be taken in response to those conflicts. A majority vote of Trustees who are not interested persons of the Trust as defined in the 1940 Act (the "disinterested trustees") shall represent a conclusive determination as to the existence of a material irreconcilable conflict between or among the interests of Product Owners and Participating Plans and as to whether any proposed action adequately remedies any material irreconcilable conflict. The Trust Board shall give prompt written notice to the Company and Participating Plan of any such determination. 8.5. UNDERTAKING TO RESOLVE CONFLICT. In the event that a material irreconcilable conflict of interest arises between Product Owners of variable life insurance policies or Product Owners of variable annuity contracts and Participating Plans, the Company will, at its own expense, take whatever action is necessary to remedy such conflict as it adversely affects Contract Owners up to and including (1) establishing a new registered management investment company, and (2) withdrawing assets from the Trust attributable to reserves for the Contracts subject to the conflict and reinvesting such assets in a different investment medium (including another Fund of the Trust) or submitting the question of whether such withdrawal should be implemented to a vote of all affected Contract Owners, and, as appropriate, segregating the assets supporting the Contracts of any group of such owners that votes in favor of such withdrawal, or offering to such owners the option of making such a change. The Company will carry out the responsibility to take the foregoing action with a view only to the interests of Contract Owners. 8.6. WITHDRAWAL. If a material irreconcilable conflict arises because of the Company's decision to disregard the voting instructions of Contract Owners of variable life insurance policies and that decision represents a minority position or would preclude a majority vote at any Fund shareholder meeting, then, at the request of the Trust Board, the Company will redeem the shares of the Trust to which the disregarded voting instructions relate. No charge or penalty, however, will be imposed in connection with such a redemption. 8.7. EXPENSES ASSOCIATED WITH REMEDIAL ACTION. In no event shall the Trust be required to bear the expense of establishing a new funding medium for any Contract. The Company shall not be required by this Article to establish a new funding medium for any Contract if an offer to do so has been declined by vote of a majority of the Contract Owners materially adversely affected by the irreconcilable material conflict. 8.8. SUCCESSOR RULES. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provisions of the 1940 Act or the rules promulgated thereunder with respect to mixed and shared funding on terms and conditions materially different from those contained in the Exemptive Order, then (i) the Trust and/or the Company, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, or Rule 6e-3, as adopted, as applicable, to the extent such rules are applicable, and (ii) Sections 8.2 through 8.5 of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. ARTICLE IX INDEMNIFICATION 9.1. INDEMNIFICATION BY THE COMPANY. The Company hereby agrees to, and shall, indemnify and hold harmless the Trust, the Distributor and each person who controls or is affiliated with the Trust or the Distributor within the meaning of such terms under the 1933 Act or 1940 Act (but not any Participating Insurance Companies or Qualified Persons) and any officer, trustee, partner, director, employee or agent of the foregoing, against any and all losses, 15 claims, damages, expenses, costs or liabilities, joint or several (including any investigative, legal and other expenses reasonably incurred in connection with, and any amounts paid in settlement of, any action, suit or proceeding or any claim asserted), to which they or any of them may become subject under any statute or regulation, at common law or otherwise, insofar as such losses, claims, damages, expenses, costs or liabilities: (a) arise out of or are based upon any untrue statement of any material fact contained in the Contracts Registration Statement, Contracts Prospectus, sales literature or other promotional material for the Contracts or the Contracts themselves (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made; provided that this obligation to indemnify shall not apply if such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by the Trust or the Distributor for use in the Contracts Registration Statement, Contracts Prospectus or in the Contracts or sales literature or promotional material for the Contracts (or any amendment or supplement to any of the foregoing) or otherwise for use in connection with the sale of the Contracts or Trust shares; or (b) arise out of any untrue statement of a material fact contained in the Trust Registration Statement, any Prospectus for Series or Classes or sales literature or other promotional material of the Trust (or any amendment or supplement to any of the foregoing), or the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon and in conformity with information furnished to the Trust or Distributor in writing by or on behalf of the Company; or (c) arise out of or are based upon any wrongful conduct of, or violation of federal or state law by, the Company or persons under its control or subject to its authorization, including without limitation, any broker-dealers or agents authorized to sell the Contracts, with respect to the sale, marketing or distribution of the Contracts or Trust shares, including, without limitation, any impermissible use of broker-only material, unsuitable or improper sales of the Contracts or unauthorized representations about the Contracts or the Trust; or (d) arise as a result of any failure by the Company or persons under its control (or subject to its authorization) to provide services, furnish materials or make payments as required under this Agreement; or (e) arise out of any material breach by the Company or persons under its control (or subject to its authorization) of this Agreement; or (f) any breach of any warranties of the Company contained in Article III hereof, any failure by the Company to transmit a request for redemption or purchase of Trust shares or payment therefor on a timely basis in accordance with the procedures set forth in Article II, or any unauthorized use by the Company of the names or trade names of the Trust or the Distributor. This indemnification is in addition to any liability that the Company may otherwise have; provided, however, that no party shall be entitled to indemnification if such loss, claim, damage, 16 expense, cost or liability is caused by the wilful misfeasance, bad faith, gross negligence or reckless disregard of duty by the party seeking indemnification. 9.2. INDEMNIFICATION BY THE TRUST. The Trust hereby agrees to, and shall, indemnify and hold harmless the Company and each person who controls or is affiliated with the Company within the meaning of such terms under the 1933 Act or 1940 Act and any officer, director, employee or agent of the foregoing, against any and all losses, claims, damages, expenses, costs or liabilities, joint or several (including any investigative, legal and other expenses reasonably incurred in connection with, and any amounts paid in settlement of, any action, suit or proceeding or any claim asserted), to which they or any of them may become subject under any statute or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities: (a) arise out of or are based upon any untrue statement of any material fact contained in the Trust Registration Statement, any Prospectus for Series or Classes or sales literature or other promotional material of the Trust (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made; provided that this obligation to indemnify shall not apply if such statement or omission was made in reliance upon and in conformity with information furnished in writing by the Company to the Trust or the Distributor for use in the Trust Registration Statement, Trust Prospectus or sales literature or promotional material for the Trust (or any amendment or supplement to any of the foregoing) or otherwise for use in connection with the sale of the Contracts or Trust shares; or (b) arise out of any untrue statement of a material fact contained in the Contracts Registration Statement, Contracts Prospectus or sales literature or other promotional material for the Contracts (or any amendment or supplement to any of the foregoing), or the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon information furnished in writing by the Trust to the Company; or (c) arise out of or are based upon wrongful conduct of the Trust or its Trustees or officers with respect to the sale of Trust shares; or (d) arise as a result of any failure by the Trust to provide services, furnish materials or make payments as required under the terms of this Agreement; or (e) arise out of any material breach by the Trust of this Agreement (including any breach of Section 6.1 of this Agreement and any warranties contained in Article III hereof); it being understood that in no way shall the Trust be liable to the Company with respect to any violation of insurance law, compliance with which is a responsibility of the Company under this Agreement or otherwise or as to which the Company failed to inform the Trust in accordance with Section 4.4 hereof. This indemnification is in addition to any liability that the Trust may otherwise have; provided, however, that no party shall be entitled to indemnification if such loss, 17 claim, damage, expense, cost or liability is caused by the wilful misfeasance, bad faith, gross negligence or reckless disregard of duty by the party seeking indemnification. 9.3. INDEMNIFICATION BY THE DISTRIBUTOR. The Distributor hereby agrees to, and shall, indemnify and hold harmless the Company and each person who controls or is affiliated with the Company within the meaning of such terms under the 1933 Act or 1940 Act and any officer, director, employee or agent of the foregoing, against any and all losses, claims, expenses, costs, damages or liabilities, joint or several (including any investigative, legal and other expenses reasonably incurred in connection with, and any amounts paid in settlement of, any action, suit or proceeding or any claim asserted), to which they or any of them may become subject under any statute or regulation, at common law or otherwise, insofar as such losses, claims, damages, expenses, costs or liabilities: (a) arise out of or are based upon any untrue statement of any material fact contained in the Trust Registration Statement, any Prospectus for Series or Classes or sales literature or other promotional material of the Trust (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made; provided that this obligation to indemnify shall not apply if such statement or omission was made in reliance upon and in conformity with information furnished in writing by the Company to the Trust or Distributor for use in the Trust Registration Statement, Trust Prospectus or sales literature or promotional material for the Trust (or any amendment or supplement to any of the foregoing) or otherwise for use in connection with the sale of the Contracts or Trust shares; or (b) arise out of any untrue statement of a material fact contained in the Contracts Registration Statement, Contracts Prospectus or sales literature or other promotional material for the Contracts (or any amendment or supplement to any of the foregoing), or the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon information furnished in writing by the Distributor or the Trust to the Company; or (c) arise out of or are based upon wrongful conduct of the Distributor or the Trust or persons under their respective control with respect to the sale of Trust shares; or (d) arise as a result of any failure by the Trust, the Distributor or persons under their respective control to provide services, furnish materials or make payments as required under the terms of this Agreement, including, without limitation, any failure of the Trust, under circumstances within its or its investment adviser's or custodian's control, to inform the Company of the current net asset value per share for each Series or Class available to the Company on a timely basis sufficient to ensure the timely execution of all purchase and redemption orders at the correct net asset value per share; or (e) arise out of any material breach by the Trust, Distributor or persons under their respective control of this Agreement (including any breach of Section 6.1 of this Agreement and any warranties contained in Article III hereof); 18 it being understood that in no way shall the Distributor be liable to the Company with respect to any violation of insurance law, compliance with which is a responsibility of the Company under this Agreement or otherwise or as to which the Company failed to inform the Distributor in accordance with Section 4.4 hereof. This indemnification is in addition to any liability that the Distributor may otherwise have; provided, however, that no party shall be entitled to indemnification if such loss, claim, damage or liability is caused by the wilful misfeasance, bad faith, gross negligence or reckless disregard of duty by the party seeking indemnification. 9.4. RULE OF CONSTRUCTION. It is the parties' intention that, in the event of an occurrence for which the Trust has agreed to indemnify the Company, the Company shall seek indemnification from the Trust only in circumstances in which the Trust is entitled to seek indemnification from a third party with respect to the same event or cause thereof. 9.5. INDEMNIFICATION PROCEDURES. After receipt by a party entitled to indemnification ("indemnified party") under this Article IX of notice of the commencement of any action, if a claim in respect thereof is to be made by the indemnified party against any person obligated to provide indemnification under this Article IX ("indemnifying party"), such indemnified party will notify the indemnifying party in writing of the commencement thereof as soon as practicable thereafter, provided that the omission to so notify the indemnifying party will not relieve it from any liability under this Article IX, except to the extent that the omission results in a failure of actual notice to the indemnifying party and such indemnifying party is damaged solely as a result of the failure to give such notice. The indemnifying party, upon the request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the reasonable fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. A successor by law of the parties to this Agreement shall be entitled to the benefits of the indemnification contained in this Article IX. The indemnification provisions contained in this Article IX shall survive any termination of this Agreement. ARTICLE X RELATIONSHIP OF THE PARTIES; TERMINATION 10.1. RELATIONSHIP OF PARTIES. The Company is to be an independent contractor vis-a-vis the Trust, the Distributor, or any of their affiliates for all purposes hereunder and will have no authority to act for or represent any of them (except to the limited extent the Company acts as agent of the Trust pursuant to Section 2.3(a) of this Agreement). In addition, no officer or employee of the Company will be deemed to be an employee or agent of the Trust, Distributor, or any of their affiliates. The Company will not act as an "underwriter" or "distributor" of the Trust, as those terms variously are used in the 1940 Act, the 1933 Act, and rules and regulations promulgated thereunder. 19 10.2. NON-EXCLUSIVITY AND NON-INTERFERENCE. The parties hereto acknowledge that the arrangement contemplated by this Agreement is not exclusive; the Trust shares may be sold to other insurance companies and investors (subject to Section 2.8 hereof) and the cash value of the Contracts may be invested in other investment companies, provided, however, that until this Agreement is terminated pursuant to this Article X: (a) the Company shall, for so long as it intends to use the Trust's shares as underlying investment vehicles under the Contracts, promote the Trust and the Funds made available hereunder on the same basis as other funding vehicles available under the Contracts; (b) the Company shall not, without prior notice to the Distributor (unless otherwise required by applicable law), take any action to operate the Account as a management investment company under the 1940 Act; (c) the Company shall not, without cause, solicit, induce or encourage Contract Owners to change or modify the Trust to change the Trust's distributor or investment adviser, to transfer or withdraw Contract values allocated to a Fund, or to exchange their Contracts for contracts not allowing for investment in the Trust; except with 30 days prior written notice to the Distributor under circumstances where the Company has determined, in its sole discretion exercised in good faith, that such solicitation, inducement or encouragement may be in the best interests of Contract Owners (unless otherwise required by applicable law). (d) the Company shall not, without the consent of the Distributor, substitute another investment company for one or more Funds without providing written notice to the Distributor at least 60 days in advance of effecting any such substitution, unless required to do so by applicable law or regulation; and (e) the Company shall not withdraw the Account's investment in the Trust or a Fund of the Trust except as necessary to facilitate Contract Owner requests and routine Contract processing. 10.3. TERMINATION OF AGREEMENT. This Agreement shall not terminate until (i) the Trust is dissolved, liquidated, or merged into another entity, or (ii) as to any Fund that has been made available hereunder, the Account no longer invests in that Fund and the Company has confirmed in writing to the Distributor, if so requested by the Distributor, that it no longer intends to invest in such Fund. However, certain obligations of, or restrictions on, the parties to this Agreement may terminate as provided in Sections 10.4 through 10.6 and the Company may be required to redeem Trust shares pursuant to Section 10.7 or in the circumstances contemplated by Article VIII. Article IX and Sections 5.7, 10.8 and 10.9 shall survive any termination of this Agreement. 10.4. TERMINATION OF OFFERING OF TRUST SHARES. The obligation of the Trust and the Distributor to make Trust shares available to the Company for purchase pursuant to Article II of this Agreement shall terminate at the option of the Distributor upon written notice to the Company as provided below: (a) upon institution of formal proceedings against the Company, or the Distributor's reasonable determination that institution of such proceedings is being considered by the NASD, the SEC, the insurance commission of any state or any other regulatory body regarding the Company's duties under this Agreement or related 20 to the sale of the Contracts, the operation of the Account, the administration of the Contracts or the purchase of Trust shares, or an expected or anticipated ruling, judgment or outcome which would, in the Distributor's reasonable judgment exercised in good faith, materially impair the Company's or Trust's ability to meet and perform the Company's or Trust's obligations and duties hereunder, such termination effective upon 15 days prior written notice; (b) in the event any of the Contracts are not registered, issued or sold in accordance with applicable federal and/or state law, such termination effective immediately upon receipt of written notice; (c) if the Distributor shall determine, in its sole judgment exercised in good faith, that either (1) the Company shall have suffered a material adverse change in its business or financial condition or (2) the Company shall have been the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of either the Trust or the Distributor, such termination effective upon 30 days prior written notice; (d) if the Distributor suspends or terminates the offering of Trust shares of any Series or Class to all Participating Investors or only designated Participating Investors, if such action is required by law or by regulatory authorities having jurisdiction or if, in the sole discretion of the Distributor acting in good faith, suspension or termination is necessary in the best interests of the shareholders of any Series or Class (it being understood that "shareholders" for this purpose shall mean Product Owners), such notice effective immediately upon receipt of written notice, it being understood that a lack of Participating Investor interest in a Series or Class may be grounds for a suspension or termination as to such Series or Class and that a suspension or termination shall apply only to the specified Series or Class; (e) upon the Company's assignment of this Agreement (including, without limitation, any transfer of the Contracts or the Account to another insurance company pursuant to an assumption reinsurance agreement) unless the Trust consents thereto, such termination effective upon 30 days prior written notice; (f) if the Company is in material breach of any provision of this Agreement, which breach has not been cured to the satisfaction of the Trust within 15 days after written notice of such breach has been delivered to the Company, such termination effective upon expiration of such 15-day period; or (g) upon the determination of the Trust's Board to dissolve, liquidate or merge the Trust as contemplated by Section 10.3(i), upon termination of the Agreement pursuant to Section 10.3(ii), or upon notice from the Company pursuant to Section 10.5 or 10.6, such termination pursuant hereto to be effective upon 15 days prior written notice; or (h) at any time more than one year after the date of this Agreement, upon six months prior written notice; provided the foregoing shall not apply in the event that all or a portion of the Account assets invested in the Trust are transferred to another investment company advised or sub-advised by the Trust's investment adviser unless the parties otherwise agree. 21 Except in the case of an option exercised under clause (b), (d) or (g), the obligations shall terminate only as to new Contracts and the Distributor shall continue to make Trust shares available to the extent necessary to permit owners of Contracts in effect on the effective date of such termination (hereinafter referred to as "Existing Contracts") to reallocate investments in the Trust, redeem investments in the Trust and/or invest in the Trust upon the making of additional purchase payments under the Existing Contracts. 10.5. TERMINATION OF INVESTMENT IN A FUND. The Company may elect to cease investing in a Fund, promoting a Fund as an investment option under the Contracts, or withdraw its investment or the Account's investment in a Fund, subject to compliance with applicable law: (a) immediately at the option of the Company, if the Trust informs the Company pursuant to Section 4.4 that it will not cause such Fund to comply with investment restrictions as requested by the Company and the Trust and the Company are unable to agree upon any reasonable alternative accommodations; (b) upon 15 days written notice, if shares in such Fund are not reasonably available to meet the requirements of the Contracts as determined by the Company (including any non-availability as a result of notice given by the Distributor pursuant to Section 10.4(d)), and the Distributor, after receiving written notice from the Company of such non-availability, fails to make available, within 10 days after receipt of such notice, a sufficient number of shares in such Fund or an alternate Fund to meet the requirements of the Contracts; (c) immediately at the option of the Company, if such Fund fails to meet the diversification requirements specified in Section 817(h) of the Code and any regulations thereunder and the Trust, upon written request, fails to provide reasonable assurance that it will take action to cure or correct such failure; or (d) immediately at the option of the Company, if such Fund ceases to qualify as a regulated investment company under Subchapter M of the Code, as defined therein, or any successor or similar provision, or if the Company reasonably believes that the Fund may fail to so qualify, and the Fund, upon written request, fails to provide reasonable assurance that it will take action to cure or correct such failure within 15 days. Such termination shall apply only as to the affected Fund and shall not apply to any other Fund in which the Company or the Account invests. 10.6. TERMINATION OF INVESTMENT BY THE COMPANY. The Company may elect to cease investing in all Series or Classes of the Trust made available hereunder, promoting the Trust as an investment option under the Contracts, or withdraw its investment or the Account's investment in the Trust, subject to compliance with applicable law, upon written notice to the Trust within 15 days of the occurrence of any of the following events (unless provided otherwise below): (a) upon institution of formal proceedings against the Trust or the Distributor, or the Company's reasonable determination that institution of such proceedings is being considered by the NASD, the SEC, the insurance commission of any state or any other regulatory body regarding the Trust's or the Distributor's duties under this Agreement, the sale of Trust shares, or an expected or anticipated ruling, 22 judgment or outcome which would, in the Company's reasonable judgment exercised in good faith, materially impair the Distributor's or Trust's ability to meet and perform the Distributor's or Trust's obligations and duties hereunder, such termination effective upon 15 days prior written notice; (b) if, with respect to the Trust or a Fund, the Trust or the Fund ceases to qualify as a regulated investment company under Subchapter M of the Code, as defined therein, or any successor or similar provision, or if the Company reasonably believes that the Trust may fail to so qualify, and the Trust, upon written request, fails to provide reasonable assurance that it will take action to cure or correct such failure within 15 days; or (c) if the Trust or Distributor is in material breach of a provision of this Agreement, which breach has not been cured to the satisfaction of the Company within 15 days after written notice of such breach has been delivered to the Trust or the Distributor, as the case may be; or (d) in the event any of the Trust's shares are not registered, issued or sold in material compliance with applicable federal and/or state law, such termination effective immediately upon receipt of written notice; or (e) at any time more than one year after the date of this Agreement, upon six months prior written notice; provided the foregoing shall not apply in the event that all or a portion of the Account assets invested in the Trust are transferred to another investment company advised or sub-advised by the Trust's investment adviser unless the parties otherwise agree; or (f) if the Company shall determine, in its sole judgment exercised in good faith, that either (1) the Distributor or the Trust's investment adviser shall have suffered a material adverse change in its business or financial condition or (2) the Distributor, the Trust's investment adviser or the Trust shall have been the subject of material adverse publicity (excluding with respect to the Trust, market events impacting the Trust's performance) which is likely to have a material adverse impact upon the business and operations of either the Trust, its investment adviser or the Distributor, such termination effective upon 30 days prior written notice. (g) upon the assignment of this Agreement by the Distributor unless the Company consents thereto, such termination effective upon 30 days prior written notice. 10.7. COMPANY REQUIRED TO REDEEM. The parties understand and acknowledge that it is essential for compliance with Section 817(h) of the Code that the Contracts qualify as annuity contracts or life insurance policies, as applicable, under the Code. Accordingly, if any of the Contracts cease to qualify as annuity contracts or life insurance policies, as applicable, under the Code, or if the Trust reasonably believes that any such Contracts may fail to so qualify, the Trust shall have the right to require the Company to redeem Trust shares attributable to such Contracts upon notice to the Company and the Company shall so redeem such Trust shares in order to ensure that the Trust complies with the provisions of Section 817(h) of the Code applicable to ownership of Trust shares. Notice to the Company shall specify the period of time the Company has to redeem the Trust shares or to make other arrangements satisfactory to the Trust and its counsel, such period of time to be determined with reference to the requirements of Section 817(h) of the Code. In addition, the Company may be required to redeem Trust shares pursuant to action taken or request made by the Trust Board in accordance with the Exemptive Order described in Article VIII or any conditions or undertakings set forth or referenced therein, or 23 other SEC rule, regulation or order that may be adopted after the date hereof. The Company agrees to redeem shares in the circumstances described herein and to comply with applicable terms and provisions. Also, in the event that the Distributor suspends or terminates the offering of a Series or Class pursuant to Section 10.4(d) of this Agreement, the Company, upon request by the Distributor, will cooperate in taking appropriate action to withdraw the Account's investment in the respective Fund. 10.8. CONFIDENTIALITY. The Company will keep confidential any information acquired as a result of this Agreement regarding the business and affairs of the Trust, the Distributor, and their affiliates. ARTICLE XI APPLICABILITY TO NEW ACCOUNTS AND NEW CONTRACTS The parties to this Agreement may amend the schedules to this Agreement from time to time to reflect, as appropriate, changes in or relating to the Contracts, any Series or Class, additions of new classes of Contracts to be issued by the Company and separate accounts therefor investing in the Trust. Such amendments may be made effective by executing the form of amendment included on each schedule attached hereto. The provisions of this Agreement shall be equally applicable to each such class of Contracts, Series, Class or separate account, as applicable, effective as of the date of amendment of such Schedule, unless the context otherwise requires. The parties to this Agreement may amend this Agreement from time to time by written agreement signed by all of the parties. ARTICLE XII NOTICE, REQUEST OR CONSENT Any notice, request or consent to be provided pursuant to this Agreement is to be made in writing and shall be given: If to the Trust: Douglas C. Grip President Goldman Sachs Variable Insurance Trust One New York Plaza New York, NY 10004 If to the Distributor: Douglas C. Grip Vice President Goldman Sachs & Co. One New York Plaza New York, NY 10004 If to the Company: Margaret Hankard Senior Associate Counsel Sun Life Assurance Company of Canada (U.S.) Retirement Products and Services Division 1 Copley Place Suite 100 Boston, MA 02116 24 or at such other address as such party may from time to time specify in writing to the other party. Each such notice, request or consent to a party shall be sent by registered or certified United States mail with return receipt requested or by overnight delivery with a nationally recognized courier, and shall be effective upon receipt. Notices pursuant to the provisions of Article II may be sent by facsimile to the person designated in writing for such notices. ARTICLE XIII MISCELLANEOUS 13.1. INTERPRETATION. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the state of Delaware, without giving effect to the principles of conflicts of laws, subject to the following rules: (a) This Agreement shall be subject to the provisions of the 1933 Act, 1940 Act and Securities Exchange Act of 1934, as amended, and the rules, regulations and rulings thereunder, including such exemptions from those statutes, rules, and regulations as the SEC may grant, and the terms hereof shall be limited, interpreted and construed in accordance therewith. (b) The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. (c) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. (d) The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the parties hereto are entitled to under state and federal laws. 13.2. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which together shall constitute one and the same instrument. 13.3. NO ASSIGNMENT. Neither this Agreement nor any of the rights and obligations hereunder may be assigned by the Company, the Distributor or the Trust without the prior written consent of the other parties. 13.4. DECLARATION OF TRUST. A copy of the Declaration of Trust of the Trust is on file with the Secretary of State of the state of Delaware, and notice is hereby given that this instrument is executed on behalf of the Trustees of the Trust as trustees, and is not binding upon any of the Trustees, officers or shareholders of the Trust individually, but binding only upon the assets and property of the Trust. No Series of the Trust shall be liable for the obligations of any other Series of the Trust. 13.5. ACCESS TO INFORMATION BY COMPANY. During ordinary business hours, the Trust and the Distributor shall afford the Company, directly or through its authorized representatives, reasonable access to all files, books, records and other materials of the Trust or the Distributor, as applicable, which relate, directly or indirectly, to transactions arising in connection with the Agreement and to make available appropriate personnel familiar with such items for the purpose of explaining the form and content of such items. This Section 13.5 shall survive the termination 25 of this Agreement, but only to the extent necessary to wind up termination of investment of the Accounts in the Trust pursuant to the terms of this Agreement or to the extent required by appropriate regulatory agencies. 26 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and behalf by its duly authorized officer on the date specified below. GOLDMAN SACHS VARIABLE INSURANCE TRUST (Trust) Date: By: -------------- ------------------------------------------ Name: Michael J. Richman Title: Secretary GOLDMAN, SACHS & CO. (Distributor) Date: By: -------------- ------------------------------------------ Name: Howard Surloff Title: Vice President SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Company) Date: By: ------------------------------------------ Name: Robert K. Leach Title: Vice President, Retirement Products and Services Division 27 SCHEDULE 1 Accounts of the Company Investing in the Trust Effective as of the date the Agreement was executed, the following separate accounts of the Company are subject to the Agreement:
- -------------------------------------------------------------------------------- Date Established by Board of SEC 1940 Act Type of Product Name of Account and Directors of the Registration Supported by Subaccounts Company Number Account - -------------------------------------------------------------------------------- Sun Life of Canada July 13, 1989 811-5846 Combination U.S. Variable Fixed/Variable Account F Annuity - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- [Form of Amendment to Schedule 1] Effective as of _____________, the following separate accounts of the Company are hereby added to this Schedule 1 and made subject to the Agreement:
- -------------------------------------------------------------------------------- Date Established by Board of SEC 1940 Act Type of Product Name of Account Directors of the Registration Supported by and Subaccounts Company Number Account - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this Schedule 1 in accordance with Article XI of the Agreement. - -------------------------------------- ------------------------------------- Goldman Sachs Variable Insurance Trust Sun Life Assurance Company of Canada (U.S.) - -------------------------------------- Goldman, Sachs & Co. 28 SCHEDULE 2 Classes of Contracts Supported by Separate Accounts Listed on Schedule 1 Effective as of the date the Agreement was executed, the following classes of Contracts are subject to the Agreement:
- -------------------------------------------------------------------------------- SEC 1933 Act Policy Marketing Registration Contract Form Name Number Number Annuity or Life - -------------------------------------------------------------------------------- Futurity 333-37907 Annuity - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- [Form of Amendment to Schedule 2] Effective as of _______, the following classes of Contracts are hereby added to this Schedule 2 and made subject to the Agreement:
- -------------------------------------------------------------------------------- SEC 1933 Act Policy Marketing Registration Contract Form Name Number Number Annuity or Life - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this Schedule 2 in accordance with Article XI of the Agreement. - -------------------------------------- ------------------------------------- Goldman Sachs Variable Insurance Trust Sun Life Assurance Company Canada (U.S.) - -------------------------------------- Goldman, Sachs & Co. 29 SCHEDULE 3 Trust Classes and Series Available Under Each Class of Contracts Effective as of the date the Agreement was executed, the following Trust Classes and Series are available under the Contracts:
- -------------------------------------------------------------------------------- Contracts Marketing Name Trust Classes and Series - -------------------------------------------------------------------------------- Futurity Growth and Income Fund CORE Large Cap Growth Fund CORE U.S. Equity Fund CORE Small Cap Equity Fund International Equity Fund - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- [Form of Amendment to Schedule 3] Effective as of ______________, this Schedule 3 is hereby amended to reflect the following changes in Trust Classes and Series:
- -------------------------------------------------------------------------------- Contracts Marketing Name Trust Classes and Series - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this Schedule 3 in accordance with Article XI of the Agreement. - -------------------------------------- ------------------------------------- Goldman Sachs Variable Insurance Trust Sun Life Assurance Company of Canada (U.S.) - -------------------------------------- Goldman, Sachs & Co. 30 SCHEDULE 4 Investment Restrictions Applicable to the Trust Effective as of the date the Agreement was executed, the following investment restrictions are applicable to the Trust: - -------------------------------------------------------------------------------- [Form of Amendment to Schedule 4] Effective as of _____________, this Schedule 4 is hereby amended to reflect the following changes: IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this Schedule 4 in accordance with Article XI of the Agreement. - -------------------------------------- ------------------------------------- Goldman Sachs Variable Insurance Trust Sun Life Assurance Company of Canada (U.S.) - -------------------------------------- Goldman, Sachs & Co. 31 EX-8.(B)(II) 4 PART AGMT, GOLDMAN AMEND.1 (2 PGS) AUX2246 PARTICIPATION AGREEMENT AMENDMENT NO. 1 This Amendment No 1 to the Participation Agreement and Schedule thereto is made as of December 14, 1998, by and between GOLDMAN SACHS VARIABLE INSURANCE TRUST, an unincorporated business trust formed under the laws of Delaware (the "Trust"), GOLDMAN, SACHS & CO., a New York limited partnership (the "Distributor"), and SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.), a Delaware life insurance company (the "Company"), on its own behalf and on behalf of each separate account of the Company identified in the Participation Agreement. Capitalized terms used in this Amendment without definition shall have the respective meanings given to such terms in the Participation Agreement referred to below. WHEREAS, the Trust, the Distributor and the Company entered into a Participation Agreement dated February 17, 1998; and WHEREAS, the Trust, the Distributor and the Company desire to amend the notice provisions of the Participation Agreement, correct certain references to the Contract listed on Schedule 2 and add an additional Contract to Schedule 2. NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter contained, the parties hereby agree to amend the Participation Agreement and Schedule, pursuant to the terms of the Participation Agreement, as follows: 1. Article XII of the Participation Agreement is hereby amended by replacing the individual listed to which any notice, request or consent to the Company shall be given with the following: Maura Murphy Senior Associate Counsel Sun Life Assurance Company of Canada (U.S.) One Sun Life Executive Park Wellesley Hills, MA 02481 2. Schedule 2 of the Participation Agreement is hereby amended to correct information relating to the Futurity Contract and to add the Futurity II Contract as follows: - ------------------------------------------------------------------------------- SEC 1933 Act Policy Marketing Registration Contract Form Annuity or Life Name Number Number - ------------------------------------------------------------------------------- Futurity 333-3907 FUT-MVA-CONT-1 Annuity - ------------------------------------------------------------------------------- Futurity II 33-41628 RP-GR-CONT-98-1 RP-IND-MVA-98-1 - ------------------------------------------------------------------------------- IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this Agreement and Schedule 2 thereto. GOLDMAN SACHS VARIABLE INSURANCE TRUST (Trust) By: ----------------------------------------- Name: Michael J. Richman Title: Secretary GOLDMAN, SACHS & CO. (Distributor) By: ----------------------------------------- Name: Valerie A. Zondorak Title: Vice President SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Company) By: ----------------------------------------- Name: Robert K. Leach Title: Vice President, Retirement Products and Services Division EX-8.(B)(III) 5 PART AGMT,GOLDMAN AMEND.2 (3 PGS) AUX2246 PARTICIPATION AGREEMENT AMENDMENT NO. 2 This Amendment No 2 to the Participation Agreement and Schedule thereto is made as of March 15, 1999, by and between GOLDMAN SACHS VARIABLE INSURANCE TRUST, an unincorporated business trust formed under the laws of Delaware (the "Trust"), GOLDMAN, SACHS & CO., a New York limited partnership (the "Distributor"), and SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.), a Delaware life insurance company (the "Company"), on its own behalf and on behalf of each separate account of the Company identified in the Participation Agreement. Capitalized terms used in this Amendment without definition shall have the respective meanings given to such terms in the Participation Agreement referred to below. WHEREAS, the Trust, the Distributor and the Company entered into a Participation Agreement dated February 17, 1998; and WHEREAS, the Trust, the Distributor and the Company desire to add an additional separate account to schedule 1 and two additional Contracts to Schedule 2. NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter contained, the parties hereby agree to amend the Participation Agreement and Schedule, pursuant to the terms of the Participation Agreement, as follows: 1. Schedule 1 of the Participation Agreement is hereby amended to add Variable Account I as follows:
Date Established by Name of Account and Board of Directors of SEC1940 Act Type of Product Subaccounts the Company Registration Number Supported by Account ----------------------- --------------------- ------------------- -------------------- Sun Life of Canada U.S. December 1, 1998 811-09137 Combination Variable Account I Fixed/Variable Life Insurance
2. Schedule 2 of the Participation Agreement is hereby amended add the Futurity Focus Contract and to add the Futurity Variable Universal Life Insurance Contract as follows:
SEC 1933 Act Policy Marketing Name Registration Number Contract Form Number Annuity or Life - ---------------------- ------------------- -------------------- --------------- Futurity Focus 333-0527 RC-MVA-CONT-96 Annuity RC-MVA-CERT-96 Futurity Variable Universal 333-68601 FPVUL-1999 Life Life Insurance
IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this Agreement and Schedules 1 and 2 thereto. GOLDMAN SACHS VARIABLE INSURANCE TRUST (Trust) By: ----------------------------------------- Name: Michael J. Richman Title: Secretary GOLDMAN, SACHS & CO. (Distributor) By: ----------------------------------------- Name: Valerie A. Zondorak Title: Vice President SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Company) By: ----------------------------------------- Name: Title: EX-8.(C) 6 PART AGMT,J.P. MORGAN 11 PGS AUX2260 12//98 FUND PARTICIPATION AGREEMENT This Agreement is entered into as of the ___ day of _____, 199_, between _____________________________________ ("Insurance Company"), a life insurance company organized under the laws of the State of ________, and J.P. Morgan Series Trust II ("Fund"), a business trust organized under the laws of Delaware, with respect to the Fund's portfolio or portfolios set forth on Schedule 1 hereto, as such Schedule may be revised from time to time (the "Series"; if there are more than one Series to which this Agreement applies, the provisions herein shall apply severally to each such Series). ARTICLE I 1. DEFINITIONS 1.1. "Act" shall mean the Investment Company Act of 1940, as amended. 1.2. "Board" shall mean the Board of Trustees of the Fund having the responsibility for management and control of the Fund. 1.3. "Business Day" shall mean any day for which the Fund calculates net asset value per share as described in the Fund's Prospectus. 1.4. "Commission" shall mean the Securities and Exchange Commission. 1.5. "Contract" shall mean a variable annuity or variable life insurance contract that uses the Fund as an underlying investment medium. Individuals who participate under a group Contract are "Participants". 1.6. "Contractholder" shall mean any entity that is a party to a Contract with a Participating Company. 1.7. "Disinterested Board Members" shall mean those members of the Board that are not deemed to be "interested persons" of the Fund, as defined by the Act. 1.8. "Participating Companies" shall mean any insurance company (including Insurance Company), which offers variable annuity and/or variable life insurance contracts to the public and which has entered into an agreement with the Fund for the purpose of making Fund shares available to serve as the underlying investment medium for the aforesaid Contracts. 1.9. "Plans" shall mean qualified pension and retirement benefit plans. 1.10. "Prospectus" shall mean the Fund's current prospectus and statement of additional information, as most recently filed with the Commission, with respect to the Series. 1.11. "Separate Account" shall mean _____________________ Company Variable Annuity Separate Account, a separate account established by Insurance Company in accordance with the laws of the State of __________. 1.12. "Software Program" shall mean the software program used by the Fund for providing Fund and account balance information including net asset value per share. 1.13. "Insurance Company's General Account(s)" shall mean the general account(s) of Insurance Company and its affiliates which invest in the Fund. ARTICLE II 2. REPRESENTATIONS 2.1 Insurance Company represents and warrants that (a) it is an insurance company duly organized and in good standing under applicable law; (b) it has legally and validly established the Separate Account pursuant to the __________ Insurance Code for the purpose of offering to the public certain individual variable annuity contracts; (c) it has registered the Separate Account as a unit investment trust under the Act to serve as the segregated investment account for the Contracts; (d) each Separate Account is eligible to invest in shares of the Fund without such investment disqualifying the Fund as an investment medium for insurance company separate accounts supporting variable annuity contracts or variable life insurance contracts; and (e) each Separate Account shall comply with all applicable legal requirements. 2.2 Insurance Company represents and warrants that (a) the Contracts will be described in a registration statement filed under the Securities Act of 1933, as amended ("1933 Act"); (b) the Contracts will be issued and sold in compliance in all material respects with all applicable federal and state laws; and (c) the sale of the Contracts shall comply in all material respects with state insurance law requirements. Insurance Company agrees to inform the Fund promptly of any investment restrictions imposed by state insurance law and applicable to the Fund. 2.3 Insurance Company represents and warrants that the income, gains and losses, whether or not realized, from assets allocated to the Separate Account are, in accordance with the applicable Contracts, to be credited to or charged against such Separate Account without regard to other income, gains or losses from assets allocated to any other accounts of Insurance Company. Insurance Company represents and warrants that the assets of the Separate Account are and will be kept separate from Insurance Company's General Account and any other separate accounts Insurance Company may have, and will not be charged with liabilities from any business that Insurance Company may conduct or the liabilities of any companies affiliated with Insurance Company. 2.4 Fund represents that the Fund is registered with the Commission under the Act as an open-end management investment company and possesses, and shall maintain, all legal and regulatory licenses, approvals, consents and/or exemptions required for the Fund to operate and offer its shares as an underlying investment medium for Participating Companies. The Fund has established five portfolios and may in the future establish other portfolios. 2.5 Fund represents that it is currently qualified as a Regulated Investment Company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and that it will make every effort to maintain such qualification (under Subchapter M or any successor or similar provision) and that it will notify Insurance Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 2.6 Insurance Company represents and agrees that the Contracts are currently, and at the time of issuance will be, treated as life insurance policies or annuity contracts, whichever is appropriate, under applicable provisions of the Code, and that it will make every effort to maintain such treatment and that it will notify the Fund and its investment adviser immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. Insurance Company agrees that any prospectus offering a Contract that is a "modified endowment contract," as that term is defined in Section 7702A of the Code, will identify such Contract as a modified endowment contract (or policy). 2.7 Fund agrees that the Fund's assets shall be managed and invested in a manner that complies with the requirements of Section 817(h) of the Code. 2.8 Insurance Company agrees that the Fund shall be permitted (subject to the other terms of this Agreement) to make Series' shares available to other Participating Companies and contractholders and to Plans. 2.9 Fund represents and warrants that any of its trustees, officers, employees, investment advisers, and other individuals/entities who deal with the money and/or securities of the Fund are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Fund in an amount not less than that required by Rule 17g-1 under the Act. The aforesaid Bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. 2.10 Insurance Company represents and warrants that all of its employees and agents who deal with the money and/or securities of the Fund are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage in an amount not less than the coverage required to be maintained by the Fund. The aforesaid Bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. 2.11 Insurance Company agrees that the Fund's investment adviser shall be deemed a third party beneficiary under this Agreement and may enforce any and all rights conferred by virtue of this Agreement. ARTICLE III 3. FUND SHARES 3.1 The Contracts funded through the Separate Account will provide for the investment of certain amounts in the Series' shares 3.2 Fund agrees to make the shares of its Series available for purchase at the then applicable net asset value per share by Insurance Company and the Separate Account on each Business Day pursuant to rules of the Commission. Notwithstanding the foregoing, the Fund may refuse to sell the shares of any Series to any person, or suspend or terminate the offering of the shares of any Series if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Board, acting in good faith and in light of its fiduciary duties under federal and any applicable state laws, necessary and in the best interests of the shareholders of such Series. 3.3 Fund agrees that shares of the Fund will be sold only to Participating Companies and their separate accounts and to the general accounts of those Participating Companies and their affiliates and to Plans. No shares of any Series will be sold to the general public. 3.4 Fund shall use its best efforts to provide closing net asset value, dividend and capital gain information for each Series available on a per-share and Series basis to Insurance Company by 7:00 p.m. Eastern Time on each Business Day. Any material errors in the calculation of net asset value, dividend and capital gain information shall be reported immediately upon discovery to Insurance Company. Non-material errors will be corrected in the next Business Day's net asset value per share for the Series in question. 3.5 At the end of each Business Day, Insurance Company will use the information described in Sections 3.2 and 3.4 to calculate the Separate Account unit values for the day. Using this unit value, Insurance Company will process the day's Separate Account transactions received by it by the close of trading on the floor of the New York Stock Exchange (currently 4:00 p.m. Eastern time) to determine the net dollar amount of Series shares which will be purchased or redeemed at that day's closing net asset value per share for such Series. The net purchase or redemption orders will be transmitted to the Fund by Insurance Company by 8:30 a.m. Eastern Time on the Business Day next following Insurance Company's receipt of that information. Subject to Sections 3.6 and 3.8, all purchase and redemption orders for Insurance Company's General Accounts shall be effected at the net asset value per share of the relevant Series next calculated after receipt of the order by the Fund or its Transfer Agent. 3.6 Fund appoints Insurance Company as its agent for the limited purpose of accepting orders for the purchase and redemption of shares of each Series for the Separate Account. Fund will execute orders for any Series at the applicable net asset value per share determined as of the close of trading on the day of receipt of such orders by Insurance Company acting as agent ("effective trade date"), provided that the Fund receives notice of such orders by 8:30 a.m. Eastern Time on the next following Business Day and, if such orders request the purchase of Series shares, the conditions specified in Section 3.8, as applicable, are satisfied. A redemption or purchase request for any Series that does not satisfy the conditions specified above and in Section 3.8, as applicable, will be effected at the net asset value computed for such Series on the Business Day immediately preceding the next following Business Day upon which such conditions have been satisfied. 3.7 Insurance Company will make its best efforts to notify Fund in advance of any unusually large purchase or redemption orders. 3.8 If Insurance Company's order requests the purchase of Series shares, Insurance Company will pay for such purchases by wiring Federal Funds to Fund or its designated custodial account on the day the order is transmitted. Insurance Company shall make all reasonable efforts to transmit to the Fund payment in Federal Funds by 12:00 noon Eastern Time on the Business Day the Fund receives the notice of the order pursuant to Section 3.5. Fund will execute such orders at the applicable net asset value per share determined as of the close of trading on the effective trade date if Fund receives payment in Federal Funds by 12:00 noon Eastern Time on the Business Day the Fund receives the notice of the order pursuant to Section 3.5. If payment in Federal Funds for any purchase is not received or is received by the Fund after 12:00 noon Eastern Time on such Business Day, Insurance Company shall promptly upon the Fund's request, reimburse the Fund for any charges, costs, fees, interest or other expenses incurred by the Fund in connection with any advances to, or borrowings or overdrafts by, the Fund, or any similar expenses incurred by the Fund, as a result of portfolio transactions effected by the Fund based upon such purchase request. If Insurance Company's order requests the redemption of Series shares valued at or greater than $1 million dollars, the Fund may wire such amount to Insurance Company within seven days of the order. 3.9 Fund has the obligation to ensure that Series shares are registered with applicable federal agencies at all times. 3.10 Fund will confirm each purchase or redemption order made by Insurance Company. Transfer of Series shares will be by book entry only. No share certificates will be issued to Insurance Company. Insurance Company will record shares ordered from Fund in an appropriate title for the corresponding account. 3.11 Fund shall credit Insurance Company with the appropriate number of shares. 3.12 On each ex-dividend date of the Fund or, if not a Business Day, on the first Business Day thereafter, Fund shall communicate to Insurance Company the amount of dividend and capital gain, if any, per share of each Series. All dividends and capital gains of any Series shall be automatically reinvested in additional shares of the relevant Series at the applicable net asset value per share of such Series on the payable date. Fund shall, on the day after the payable date or, if not a Business Day, on the first Business Day thereafter, notify Insurance Company of the number of shares so issued. ARTICLE IV 4. STATEMENTS AND REPORTS 4.1 Fund shall provide monthly statements of account as of the end of each month for all of Insurance Company's accounts by the fifteenth (15th) Business Day of the following month. 4.2 Fund shall distribute to Insurance Company copies of the Fund's Prospectuses, proxy materials, notices, periodic reports and other printed materials (which the Fund customarily provides to its shareholders) in quantities as Insurance Company may reasonably request for distribution to each Contractholder and Participant. 4.3 Fund will provide to Insurance Company at least one complete copy of all registration statements, Prospectuses, reports, proxy statements, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Fund or its shares, contemporaneously with the filing of such document with the Commission or other regulatory authorities. 4.4 Insurance Company will provide to the Fund at least one copy of all registration statements, Prospectuses, reports, proxy statements, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Contracts or the Separate Account, contemporaneously with the filing of such document with the Commission. ARTICLE V 5. EXPENSES 5.1 The charge to the Fund for all expenses and costs of the Series, including but not limited to management fees, administrative expenses and legal and regulatory costs, will be made in the determination of the relevant Series' daily net asset value per share so as to accumulate to an annual charge at the rate set forth in the Fund's Prospectus. Excluded from the expense limitation described herein shall be brokerage commissions and transaction fees and extraordinary expenses. 5.2 Except as provided in this Article V and, in particular in the next sentence, Insurance Company shall not be required to pay directly any expenses of the Fund or expenses relating to the distribution of its shares. Insurance Company shall pay the following expenses or costs: a. Such amount of the production expenses of any Fund materials, including the cost of printing the Fund's Prospectus, or marketing materials for prospective Insurance Company Contractholders and Participants as the Fund's investment adviser and Insurance Company shall agree from time to time. b. Distribution expenses of any Fund materials or marketing materials for prospective Insurance Company Contractholders and Participants. c. Distribution expenses of Fund materials or marketing materials for Insurance Company Contractholders and Participants. Except as provided herein, all other Fund expenses shall not be borne by Insurance Company. ARTICLE VI EXEMPTIVE RELIEF 6.1 Insurance Company has reviewed a copy of the order dated December 1996 of the Securities and Exchange Commission under Section 6(c) of the Act and, in particular, has reviewed the conditions to the relief set forth in the related Notice. As set forth therein, Insurance Company agrees to report any potential or existing conflicts promptly to the Board, and in particular whenever contract voting instructions are disregarded, and recognizes that it will be responsible for assisting the Board in carrying out its responsibilities under such application. Insurance Company agrees to carry out such responsibilities with a view to the interests of existing Contractholders. 6.2 If a majority of the Board, or a majority of Disinterested Board Members, determines that a material irreconcilable conflict exists with regard to Contractholder investments in the Fund, the Board shall give prompt notice to all Participating Companies. If the Board determines that Insurance Company is responsible for causing or creating said conflict, Insurance Company shall at its sole cost and expense, and to the extent reasonably practicable (as determined by a majority of the Disinterested Board Members), take such action as is necessary to remedy or eliminate the irreconcilable material conflict. Such necessary action may include, but shall not be limited to: a. Withdrawing the assets allocable to the Separate Account from the Series and reinvesting such assets in a different investment medium, or submitting the question of whether such segregation should be implemented to a vote or all affected Contractholders; and/or b. Establishing a new registered management investment company. 6.3 If a material irreconcilable conflict arises as a result of a decision by Insurance Company to disregard Contractholder voting instructions and said decision represents a minority position or would preclude a majority vote by all Contractholders having an interest in the Fund, Insurance Company may be required, at the Board's election, to withdraw the Separate Account's investment in the Fund. 6.4 For the purpose of this Article, a majority of the Disinterested Board Members shall determine whether or not any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Fund be required to bear the expense of establishing a new funding medium for any Contract. Insurance Company shall not be required by this Article to establish a new funding medium for any Contract if an offer to do so has been declined by vote of a majority of the Contractholders materially adversely affected by the irreconcilable material conflict. 6.5 No action by Insurance Company taken or omitted, and no action by the Separate Account or the Fund taken or omitted as a result of any act or failure to act by Insurance Company pursuant to this Article VI shall relieve Insurance Company of its obligations under, or otherwise affect the operation of, Article V. ARTICLE VII 7. VOTING OF FUND SHARES 7.1 Fund shall provide Insurance Company with copies at no cost to Insurance Company, of the Fund's proxy material, reports to shareholders and other communications to shareholders in such quantity as Insurance Company shall reasonably require for distributing to Contractholders or Participants. Insurance Company shall: (a) solicit voting instructions from Contractholders or Participants on a timely basis and in accordance with applicable law; (b) vote the Series shares in accordance with instructions received from Contractholders or Participants; and (c) vote Series shares for which no instructions have been received in the same proportion as Series shares for which instructions have been received. Insurance Company agrees at all times to votes its General Account shares in the same proportion as Series shares for which instructions have been received from Contractholders or Participants. Insurance Company further agrees to be responsible for assuring that voting Series shares for the Separate Account is conducted in a manner consistent with other Participating Companies. 7.2 Insurance Company agrees that it shall not, without the prior written consent of the Fund and its investment adviser, solicit, induce or encourage Contractholders to (a) change or supplement the Fund's current investment adviser or (b) change, modify, substitute, add to or delete the Fund from the current investment media for the Contracts. ARTICLE VIII 8. MARKETING AND REPRESENTATIONS 8.1 The Fund or its underwriter shall periodically furnish Insurance Company with the following documents, in quantities as Insurance Company may reasonably request: a. Current Prospectus and any supplements thereto; b. other marketing materials. Expenses for the production of such documents shall be borne by Insurance Company in accordance with Section 5.2 of this Agreement. 8.2 Insurance Company shall designate certain persons or entities which shall have the requisite licenses to solicit applications for the sale of Contracts. No representation is made as to the number or amount of Contracts that are to be sold by Insurance Company. Insurance Company shall make reasonable efforts to market the Contracts and shall comply with all applicable federal and state laws in connection therewith. 8.3 Insurance Company shall furnish, or shall cause to be furnished, to the Fund, each piece of sales literature or other promotional material in which the Fund, its investment adviser or the administrator is named, at least fifteen Business Days prior to its use. No such material shall be used unless the Fund approves such material. Such approval (if given) must be in writing and shall be presumed not given if not received within ten Business Days after receipt of such material. The Fund shall use all reasonable efforts to respond within ten days of receipt. 8.4 Insurance Company shall not give any information or make any representations or statements on behalf of the Fund or concerning the Fund or any Series in connection with the sale of the Contracts other than the information or representations contained in the registration statement or Prospectus, as may be amended or supplemented from time to time, or in reports or proxy statements for the Fund, or in sales literature or other promotional material approved by the Fund. 8.5 Fund shall furnish, or shall cause to be furnished, to Insurance Company, each piece of the Fund's sales literature or other promotional material in which Insurance Company or the Separate Account is named, at least fifteen Business Days prior to its use. No such material shall be used unless Insurance Company approves such material. Such approval (if given) must be in writing and shall be presumed not given if not received within ten Business Days after receipt of such material. Insurance Company shall use all reasonable efforts to respond within ten days of receipt. 8.6 Fund shall not, in connection with the sale of Series shares, give any information or make any representations on behalf of Insurance Company or concerning Insurance Company, the Separate Account, or the Contracts other than the information or representations contained in a registration statement or prospectus for the Contracts, as may be amended or supplemented from time to time, or in published reports for the Separate Account which are in the public domain or approved by Insurance Company for distribution to Contractholders or Participants, or in sales literature or other promotional material approved by Insurance Company. 8.7 For purposes of this Agreement, the phrase "sales literature or other promotional material" or words of similar import include, without limitation, advertisements (such as material published, or designed for use, in a newspaper, magazine or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures or other public media), sales literature (such as any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, or reprints or excerpts of any other advertisement, sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, registration statements, prospectuses, statements of additional information, shareholder reports and proxy materials, and any other material constituting sales literature or advertising under National Association of Securities Dealers, Inc. rules, the Act or the 1933 Act. ARTICLE IX 9. INDEMNIFICATION 9.1 Insurance Company agrees to indemnify and hold harmless the Fund, its investment adviser, any sub-investment adviser of a Series, and their affiliates, and each of their directors, trustees, officers, employees, agents and each person, if any, who controls or is associated with any of the foregoing entities or persons within the meaning of the 1933 Act (collectively, the "Indemnified Parties" for purposes of Section 9.1), against any and all losses, claims, damages or liabilities joint or several (including any investigative, legal and other expenses reasonably incurred in connection with, and any amounts paid in settlement of, any action, suit or proceeding or any claim asserted) for which the Indemnified Parties may become subject, under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect to thereof) (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in information furnished by Insurance Company for use in the registration statement or Prospectus or sales literature or advertisements of the Fund or with respect to the Separate Account or Contracts, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) arise out of or as a result of conduct, statements or representations (other than statements or representations contained in the Prospectus and sales literature or advertisements of the Fund) of Insurance Company or its agents, with respect to the sale and distribution of Contracts for which Series shares are an underlying investment; (iii) arise out of the wrongful conduct of Insurance Company or persons under its control with respect to the sale or distribution of the Contracts or Series shares; (iv) arise out of Insurance Company's incorrect calculation and/or untimely reporting of net purchase or redemption orders; or (v) arise out of any breach by Insurance Company of a material term of this Agreement or as a result of any failure by Insurance Company to provide the services and furnish the materials or to make any payments provided for in this Agreement. Insurance Company will reimburse any Indemnified Party in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that with respect to clauses (i) and (ii) above Insurance Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or omission or alleged omission made in such registration statement, prospectus, sales literature, or advertisement in conformity with written information furnished to Insurance Company by the Fund specifically for use therein; and provided, further, that Insurance Company shall not be liable for special, consequential or incidental damages. This indemnity agreement will be in addition to any liability which Insurance Company may otherwise have. 9.2 The Fund agrees to indemnify and hold harmless Insurance Company and each of its directors, officers, employees, agents and each person, if any, who controls Insurance Company within the meaning of the 1933 Act against any losses, claims, damages or liabilities to which Insurance Company or any such director, officer, employee, agent or controlling person may become subject, under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) (1) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement or Prospectus or sales literature or advertisements of the Fund; (2) arise out of or are based upon the omission to state in the registration statement or Prospectus or sales literature or advertisements of the Fund any material fact required to be stated therein or necessary to make the statements therein not misleading; or (3) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement or Prospectus or sales literature or advertisements with respect to the Separate Account or the Contracts and such statements were based on information provided to Insurance Company by the Fund; and the Fund will reimburse any legal or other expenses reasonably incurred by Insurance Company or any such director, officer, employee, agent or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Fund will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or omission or alleged omission made in such Registration Statement, Prospectus, sales literature or advertisements in conformity with written information furnished to the Fund by Insurance Company specifically for use therein; and provided, further, that the Fund shall not be liable for special, consequential or incidental damages. This indemnity agreement will be in addition to any liability which the Fund may otherwise have. 9.3 The Fund shall indemnify and hold Insurance Company harmless against any and all liability, loss, damages, costs or expenses which Insurance Company may incur, suffer or be required to pay due to the Fund's (1) incorrect calculation of the daily net asset value, dividend rate or capital gain distribution rate of a Series; (2) incorrect reporting of the daily net asset value, dividend rate or capital gain distribution rate; and (3) untimely reporting of the net asset value, dividend rate or capital gain distribution rate; provided that the Fund shall have no obligation to indemnify and hold harmless Insurance Company if the incorrect calculation or incorrect or untimely reporting was the result of incorrect information furnished by Insurance Company or information furnished untimely by Insurance Company or otherwise as a result of or relating to a breach of this Agreement by Insurance Company; and provided, further, that the Fund shall not be liable for special, consequential or incidental damages. 9.4 Promptly after receipt by an indemnified party under this Article of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Article, notify the indemnifying party of the commencement thereof. The omission to so notify the indemnifying party will not relieve the indemnifying party from any liability under this Article IX, except to the extent that the omission results in a failure of actual notice to the indemnifying party and such indemnifying party is damaged solely as a result of the failure to give such notice. In case any such action is brought against any indemnified party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and to the extent that the indemnifying party has given notice to such effect to the indemnified party and is performing its obligations under this Article, the indemnifying party shall not be liable for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, other than reasonable costs of investigation. Notwithstanding the foregoing, in any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent. A successor by law of the parties to this Agreement shall be entitled to the benefits of the indemnification contained in this Article IX. 9.5 Insurance Company shall indemnify and hold the Fund, its investment adviser and any sub-investment adviser of a Series harmless against any tax liability incurred by the Fund under Section 851 of the Code arising from purchases or redemptions by Insurance Company's General Accounts or the account of its affiliates. ARTICLE X 10. COMMENCEMENT AND TERMINATION 10.1 This Agreement shall be effective as of the date hereof and shall continue in force until terminated in accordance with the provisions herein. 10.2 This Agreement shall terminate without penalty as to one or more Series at the option of the terminating party: a. At the option of Insurance Company or the Fund at any time from the date hereof upon 180 days' notice, unless a shorter time is agreed to by the parties; b. At the option of Insurance Company, if shares of any Series are not reasonably available to meet the requirements of the Contracts as determined by Insurance Company. Prompt notice of election to terminate shall be furnished by Insurance Company, said termination to be effective ten days after receipt of notice unless the Fund makes available a sufficient number of shares to meet the requirements of the Contracts within said ten-day period; c. At the option of Insurance Company, upon the institution of formal proceedings against the Fund by the Commission, National Association of Securities Dealers or any other regulatory body, the expected or anticipated ruling, judgment or outcome of which would, in Insurance Company's reasonable judgment, materially impair the Fund's ability to meet and perform the Fund's obligations and duties hereunder. Prompt notice of election to terminate shall be furnished by Insurance Company with said termination to be effective upon receipt of notice; d. At the option of the Fund, upon the institution of formal proceedings against Insurance Company by the Commission, National Association of Securities Dealers or any other regulatory body, the expected or anticipated ruling, judgment or outcome of which would, in the Fund's reasonable judgment, materially impair Insurance Company's ability to meet and perform Insurance Company's obligations and duties hereunder. Prompt notice of election to terminate shall be furnished by the Fund with said termination to be effective upon receipt of notice; e. At the option of the Fund, if the Fund shall determine, in its sole judgment reasonably exercised in good faith, that Insurance Company has suffered a material adverse change in its business or financial condition or is the subject of material adverse publicity and such material adverse change or material adverse publicity is likely to have a material adverse impact upon the business and operation of the Fund or its investment adviser, the Fund shall notify Insurance Company in writing of such determination and its intent to terminate this Agreement, and after considering the actions taken by Insurance Company and any other changes in circumstances since the giving of such notice, such determination of the Fund shall continue to apply on the sixtieth (60th) day following the giving of such notice, which sixtieth day shall be the effective date of termination; f. Upon termination of the Investment Advisory Agreement between the Fund and its investment adviser or its successors unless Insurance Company specifically approves the selection of a new Fund investment adviser. The Fund shall promptly furnish notice of such termination to Insurance Company; g. In the event the Fund's shares are not registered, issued or sold in accordance with applicable federal law, or such law precludes the use of such shares as the underlying investment medium of Contracts issued or to be issued by Insurance Company. Termination shall be effective immediately upon such occurrence without notice; h. At the option of the Fund upon a determination by the Board in good faith that it is no longer advisable and in the best interests of shareholders for the Fund to continue to operate pursuant to this Agreement. Termination pursuant to this Subsection (h) shall be effective upon notice by the Fund to Insurance Company of such termination; i. At the option of the Fund if the Contracts cease to qualify as annuity contracts or life insurance policies, as applicable, under the Code, or if the Fund reasonably believes that the Contracts may fail to so qualify; j. At the option of either party to this Agreement, upon another party's breach of any material provision of this Agreement; k. At the option of the Fund, if the Contracts are not registered, issued or sold in accordance with applicable federal and/or state law; or l. Upon assignment of this Agreement, unless made with the written consent of the non-assigning party. Any such termination pursuant to Section 10.2a, 10.2d, 10.2e, 10.2f or 10.2k herein shall not affect the operation of Article V of this Agreement. Any termination of this Agreement shall not affect the operation of Article IX of this Agreement. 10.3 Notwithstanding any termination of this Agreement pursuant to Section 10.2 hereof, the Fund and its investment adviser may, at the option of the Fund, continue to make available additional Series shares for so long as the Fund desires pursuant to the terms and conditions of this Agreement as provided below, for all Contracts in effect on the effective date of termination of this Agreement (hereinafter referred to as "Existing Contracts"). Specifically, without limitation, if the Fund so elects to make additional Series shares available, the owners of the Existing Contracts or Insurance Company, whichever shall have legal authority to do so, shall be permitted to reallocate investments in the Series, redeem investments in the Fund and/or invest in the Fund upon the making of additional purchase payments under the Existing Contracts. In the event of a termination of this Agreement pursuant to Section 10.2 hereof, the Fund, as promptly as is practicable under the circumstances, shall notify Insurance Company whether the Fund will continue to make Series shares available after such termination. If Series shares continue to be made available after such termination, the provisions of this Agreement shall remain in effect and thereafter either the Fund or Insurance Company may terminate the Agreement, as so continued pursuant to this Section 10.3, upon prior written notice to the other party, such notice to be for a period that is reasonable under the circumstances but, if given by the Fund, need not be for more than six months. ARTICLE XI 11. AMENDMENTS 11.1 Any other changes in the terms of this Agreement shall be made by agreement in writing between Insurance Company and Fund. ARTICLE XII 12. NOTICE 12.1 Each notice required by this Agreement shall be given by certified mail, return receipt requested, to the appropriate parties at the following addresses: Insurance Company: Fund: J.P. Morgan Series Trust II c/o Morgan Guaranty Trust Company 522 Fifth Avenue New York, New York 10036 Attention: Kathleen H. Tripp Notice shall be deemed to be given on the date of receipt by the addresses as evidenced by the return receipt. ARTICLE XIII 13. MISCELLANEOUS 13.1 This Agreement has been executed on behalf of the Fund by the undersigned officer of the Fund in his capacity as an officer of the Fund. The obligations of this Agreement shall only be binding upon the assets and property of the Fund and shall not be binding upon any Trustee, officer or shareholder of the Fund individually. ARTICLE XIV 14. LAW 14.1 This Agreement shall be construed in accordance with the internal laws of the State of New York, without giving effect to principles of conflict of laws. IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be duly executed and attested as of the date first above written. INSURANCE COMPANY By: -------------------------------- Its: ------------------------------- J.P.MORGAN SERIES TRUST II By: -------------------------------- Its: ------------------------------- SCHEDULE 1 NAME OF SERIES EX-8.(D) 7 PART AGMT, MFS 16PGS AUX2244 PARTICIPATION AGREEMENT AMONG MFS/SUN LIFE SERIES TRUST, SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) AND MASSACHUSETTS FINANCIAL SERVICES COMPANY THIS AGREEMENT, made and entered into as of this 17th day of February 1998, by and among MFS/SUN LIFE SERIES TRUST, a Massachusetts business trust (the "Trust"), SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.), a Delaware corporation (the "Company"), on its own behalf and on behalf of each of the segregated asset accounts of the Company set forth in Schedule A hereto, as may be amended from time to time (the "Accounts"), and MASSACHUSETTS FINANCIAL SERVICES COMPANY, a Delaware corporation ("MFS"). WHEREAS, the Trust is registered as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), and its shares are registered or will be registered under the Securities Act of 1933, as amended (the "1933 Act"); WHEREAS, shares of beneficial interest of the Trust are divided into several series of shares, each representing the interests in a particular managed pool of securities and other assets; WHEREAS, the series of shares of the Trust offered by the Trust to the Company and the Accounts are set forth on Schedule A attached hereto (each, a "Portfolio," and, collectively, the "Portfolios"); WHEREAS, MFS is duly registered as an investment adviser under the Investment Advisers Act of 1940, as amended, and any applicable state securities law, and is the Trust's investment adviser; WHEREAS, the Company will issue certain variable annuity and/or variable life insurance contracts (individually, the "Policy" or, collectively, the "Policies") which, if required by applicable law, will be registered under the 1933 Act; WHEREAS, the Accounts are duly organized, validly existing segregated asset accounts, established by resolution of the Board of Directors of the Company, to set aside and invest assets attributable to the aforesaid variable annuity and/or variable life insurance contracts that are allocated to the Accounts (the Policies and the Accounts covered by this Agreement, and each corresponding Portfolio covered by this Agreement in which the Accounts invest, are specified in Schedule A attached hereto as may be modified from time to time); WHEREAS, the Company has registered or will register the Accounts as unit investment trusts under the 1940 Act (unless exempt therefrom); WHEREAS, Clarendon Insurance Agency, Inc. ("Clarendon"), the underwriter for the Policies, is registered as a broker-dealer with the Securities and Exchange Commission ("SEC") under the 1934 Act and is a member in good standing of the National Association of Securities Dealers, Inc. ("NASD"); and WHEREAS, to the extent permitted by applicable insurance laws and regulations, the Company intends to purchase shares in one or more of the Portfolios specified in Schedule A attached hereto (the "Shares") on behalf of the Accounts to fund the Policies, and the Trust intends to sell such Shares to the Accounts at net asset value; NOW, THEREFORE, in consideration of their mutual promises, the Trust, MFS, and the Company agree as follows: ARTICLE I. SALE OF TRUST SHARES 1.1. The Trust agrees to sell to the Company those Shares which the Accounts order (based on orders placed by Policy holders on that Business Day, as defined below) and which are available for purchase by such Accounts, executing such orders on a daily basis at the net asset value next computed after receipt by the Trust or its designee of the order for the Shares. For purposes of this Section 1.1, the Company shall be the designee of the Trust for receipt of such orders from Policy owners and receipt by such designee shall constitute receipt by the Trust; PROVIDED that the Trust receives notice of such orders by 9:00 a.m. New York time on the next following Business Day. "Business Day" shall mean any day on which the New York Stock Exchange, Inc. (the "NYSE") is open for trading and on which the Trust calculates its net asset value pursuant to the rules of the SEC. 1.2. The Trust agrees to make the Shares available indefinitely for purchase at the applicable net asset value per share by the Company and the Accounts on those days on which the Trust calculates its net asset value pursuant to rules of the SEC and the Trust shall calculate such net asset value on each day which the NYSE is open for trading. Notwithstanding the foregoing, the Board of Trustees of the Trust (the "Board") may refuse to sell any Shares to the Company and the Accounts, or suspend or terminate the offering of the Shares if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Board acting in good faith and in light of its fiduciary duties under federal and any applicable state laws, necessary in the best interest of the Shareholders of such Portfolio. 1.3. The Trust agrees to redeem for cash, on the Company's request, any full or fractional Shares held by the Accounts (based on orders placed by Policy owners on that Business Day), executing such requests on a daily basis at the net asset value next computed after receipt by the Trust or its designee of the request for redemption. For purposes of this Section 1.3, the Company shall be the designee of the Trust for receipt of requests for redemption from Policy owners and receipt by such designee shall constitute receipt by the Trust; provided that the Trust receives notice of such request for redemption by 9:00 a.m. New York time on the next following Business Day. The Company will not resell the Shares except to the Trust or its agents. 1.4. Each purchase, redemption and exchange order placed by the Company shall be placed separately for each Portfolio and shall not be netted with respect to any Portfolio. However, with respect to payment of the purchase price by the Company and of redemption proceeds by the Trust, the Company and the Trust shall net purchase and redemption orders with respect to each Portfolio and shall transmit one net payment for all of the Portfolios in accordance with Section 1.5 hereof. 1.5. In the event of net purchases, the Company shall pay for the Shares by 2:00 p.m. New York time on the next Business Day after an order to purchase the Shares is made in accordance with the provisions of Section 1.1. hereof. In the event of net redemptions, the Trust shall pay the redemption proceeds by 2:00 p.m. New York time on the next Business Day after an order to redeem the shares is made in accordance with the provisions of Section 1.3. hereof. All such payments shall be in federal funds transmitted by wire. 1.6. Issuance and transfer of the Shares will be by book entry only. Stock certificates will not be issued to the Company or the Accounts. The Shares ordered from the Trust will be recorded in an appropriate title for the Accounts or the appropriate subaccounts of the Accounts. 1.7. The Trust shall furnish same day notice (by wire or telephone followed by written confirmation) to the Company of any dividends or capital gain distributions payable on the Shares. The Company hereby elects to receive all such dividends and distributions as are payable on a Portfolio's Shares in additional Shares of that Portfolio. The Company reserves the right to revoke this election and to receive all such -2- dividends and distributions in cash. The Trust shall notify the Company of the number of Shares so issued as payment of such dividends and distributions. 1.8. The Trust or its custodian shall make the net asset value per share for each Portfolio available to the Company on each Business Day as soon as reasonably practical after the net asset value per share is calculated and shall use its best efforts to make such net asset value per share available by 6:30 p.m. New York time. In the event that the Trust is unable to meet the 6:30 p.m. time stated herein, it shall provide additional time for the Company to place orders for the purchase and redemption of Shares. Such additional time shall be equal to the additional time which the Trust takes to make the net asset value available to the Company. If the Trust provides materially incorrect share net asset value information, the Trust shall make an adjustment to the number of shares purchased or redeemed for the Accounts to reflect the correct net asset value per share. Any material error in the calculation or reporting of net asset value per share, dividend or capital gains information shall be reported promptly upon discovery to the Company. ARTICLE II. CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS 2.1. The Company represents and warrants that the Policies are or will be registered under the 1933 Act or are exempt from or not subject to registration thereunder, and that the Policies will be issued, sold, and distributed in compliance in all material respects with all applicable state and federal laws, including without limitation the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act. The Company further represents and warrants that it is an insurance company duly organized and in good standing under applicable law and that it has legally and validly established the Account as a segregated asset account under applicable law and has registered or, prior to any issuance or sale of the Policies, will register the Accounts as unit investment trusts in accordance with the provisions of the 1940 Act (unless exempt therefrom) to serve as segregated investment accounts for the Policies, and that it will maintain such registration for so long as any Policies are outstanding. The Company shall amend the registration statements under the 1933 Act for the Policies and the registration statements under the 1940 Act for the Accounts from time to time as required in order to effect the continuous offering of the Policies or as may otherwise be required by applicable law. The Company shall register and qualify the Policies for sales in accordance with the securities laws of the various states only if and to the extent deemed necessary by the Company. 2.2. The Company represents and warrants that the Policies are currently and at the time of issuance will be treated as life insurance, endowment or annuity contracts under applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code"), that it will maintain such treatment and that it will notify the Trust or MFS immediately upon having a reasonable basis for believing that the Policies have ceased to be so treated or that they might not be so treated in the future. 2.3. The Company represents and warrants that Clarendon, the underwriter for the Policies, is a member in good standing of the NASD and is a registered broker-dealer with the SEC. The Company represents and warrants that it will, and will cause Clarendon to, sell and distribute the Policies in accordance in all material respects with all applicable state and federal securities laws, including without limitation the 1933 Act, the 1934 Act, and the 1940 Act. 2.4. The Trust and MFS represent and warrant that the Shares sold pursuant to this Agreement shall be registered under the 1933 Act, duly authorized for issuance and sold in compliance with the laws of The Commonwealth of Massachusetts and all applicable federal and state securities laws and that the Trust is and shall remain registered under the 1940 Act. The Trust shall amend the registration statement for its Shares under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its Shares. The Trust shall register and qualify the Shares for sale in accordance with the laws of the various states only if and to the extent deemed necessary by the Trust. -3- 2.5. The Trust and MFS represent that the Trust will sell and distribute the Shares in accordance in all material respects with all applicable state and federal securities laws, including without limitation the 1933 Act, the 1934 Act, and the 1940 Act. 2.6. The Trust represents that it is lawfully organized and validly existing under the laws of The Commonwealth of Massachusetts and that it does and will comply in all material respects with the 1940 Act and any applicable regulations thereunder. 2.7. MFS represents and warrants that it is and shall remain duly registered under all applicable federal securities laws and that it shall perform its obligations for the Trust in compliance in all material respects with any applicable federal securities laws and with the securities laws of The Commonwealth of Massachusetts. MFS represents and warrants that it is not subject to state securities laws other than the securities laws of The Commonwealth of Massachusetts and that it is exempt from registration as an investment adviser under the securities laws of The Commonwealth of Massachusetts. ARTICLE III. PROSPECTUS AND PROXY STATEMENTS; VOTING 3.1. The Trust or its designee shall provide the Company, free of charge, with as many copies of the current prospectus for the Trust and any supplements thereto as the Company may reasonably request for distribution to existing Policy owners.. The Trust or its designee shall provide the Company, at the Company's expense, with as many copies of the current prospectus for the Trust and any supplements thereto as the Company may reasonably request for distribution to prospective purchasers of Policies. If requested by the Company in lieu thereof, the Trust or its designee shall provide such documentation (including a "camera ready" copy of the prospectus as set in type or, at the request of the Company, as a diskette containing the prospectus) and other assistance as is reasonably necessary in order for the parties hereto once each year (or more frequently if the prospectus for the Trust is supplemented or amended) to have the prospectus for the Policies and the prospectus for the Trust printed together in one document; the expenses of such printing to be apportioned between (a) the Company and (b) the Trust or its designee in proportion to the number of pages of the Policy and Trust prospectuses, taking account of other relevant factors affecting the expense of printing, such as covers, columns, graphs and charts; the Trust or its designee to bear the cost of printing the Trust's prospectus portion of such document for distribution to owners of existing Policies and the Company to bear the expenses of printing the portion of such document relating to the Accounts; PROVIDED, however, that the Company shall bear all printing expenses of such combined documents where used for distribution to prospective purchasers. Alternatively, the Company may print the Trust's prospectus in combination with other fund prospectuses in accordance with the expense allocation provisions set forth in the immediately preceding sentence (provided that the applicable fund will bear expenses with respect to its prospectus). In the event that the Company requests that the Trust or its designee provides the Trust's prospectus in a "camera ready" or diskette format, the Trust shall be responsible for providing the prospectus in the format in which it or MFS is accustomed to formatting prospectuses and shall bear the expense of providing the prospectus in such format (E.G., typesetting expenses), and the Company shall bear the expense of adjusting or changing the format to conform with any of its prospectuses. 3.2. The prospectus for the Trust shall state that the statement of additional information for the Trust is available from the Trust or its designee. The Trust or its designee, at its expense, shall print and provide such statement of additional information to the Company (or a master of such statement suitable for duplication by the Company) for distribution to any owner of a Policy. The Trust or its designee, at the Company's expense, shall print and provide such statement to the Company (or a master of such statement suitable for duplication by the Company) for distribution to a prospective purchaser who requests such statement. 3.3. The Trust or its designee shall provide the Company free of charge copies, if and to the extent applicable to the Shares, of the Trust's proxy materials, reports to Shareholders and other communications to Shareholders in such quantity as the Company shall reasonably require for distribution to Policy owners. -4- 3.4. Notwithstanding the provisions of Sections 3.1, 3.2, and 3.3 above, or of Article V below, the Company shall pay the expense of printing or providing such documents to the extent such cost is considered a distribution expense. Distribution expenses would include by way of illustration, but are not limited to, the printing of the Trust's prospectus or prospectuses for distribution to prospective purchasers. 3.5. If and to the extent required by law, the Company shall: (a) solicit voting instructions from Policy owners; (b) vote the Shares in accordance with instructions received from Policy owners; and (c) vote the Shares for which no instructions have been received in the same proportion as the Shares of such Portfolio for which instructions have been received from Policy owners; so long as and to the extent that the SEC continues to interpret the 1940 Act to require pass through voting privileges for variable contract owners. The Company will in no way recommend action in connection with or oppose or interfere with the solicitation of proxies for the Shares held for such Policy owners. The Company reserves the right to vote shares held in any segregated asset account in its own right, to the extent permitted by law. ARTICLE IV. SALES MATERIAL AND INFORMATION 4.1. The Company shall furnish, or shall cause to be furnished, to the Trust or its designee, each piece of sales literature or other promotional material in which the Trust, MFS, any other investment adviser to the Trust, or any affiliate of MFS are named, at least three (3) Business Days prior to its use. No such material shall be used if the Trust, MFS, or their respective designees reasonably objects to such use within three (3) Business Days after receipt of such material. 4.2. The Company shall not give any information or make any representations or statement on behalf of the Trust, MFS, any other investment adviser to the Trust, or any affiliate of MFS or concerning the Trust or any other such entity in connection with the sale of the Policies other than the information or representations contained in the registration statement, prospectus or statement of additional information for the Trust, as such registration statement, prospectus and statement of additional information may be amended or supplemented from time to time, or in reports or proxy statements for the Trust, or in sales literature or other promotional material approved by the Trust, MFS or their respective designees, except with the permission of the Trust, MFS or their respective designees. The Trust, MFS or their respective designees each agrees to respond to any request for approval on a prompt and timely basis. The Company shall cause to be adopted and implemented procedures reasonably designed to ensure that information concerning the Trust, MFS or any of their affiliates which is intended for use only by brokers or agents selling the Policies (I.E., information that is not intended for distribution to Policy owners or prospective Policy owners) is so used, and neither the Trust, MFS nor any of their affiliates shall be liable for any losses, damages or expenses relating to the improper use of such broker only materials. 4.3. The Trust or its designee shall furnish, or shall cause to be furnished, to the Company or its designee, each piece of sales literature or other promotional material in which the Company and/or the Accounts is named, at least three (3) Business Days prior to its use. No such material shall be used if the Company or its designee reasonably objects to such use within three (3) Business Days after receipt of such material. 4.4. The Trust and MFS shall not give any information or make any representations on behalf of the Company or concerning the Company, the Accounts, or the Policies in connection with the sale of the Policies other than the information or representations contained in a registration statement, prospectus, or statement of additional information for the Policies, as such registration statement, prospectus and statement -5- of additional information may be amended or supplemented from time to time, or in reports for the Accounts, or in sales literature or other promotional material approved by the Company or its designee, except with the permission of the Company. The Company or its designee agrees to respond to any request for approval on a prompt and timely basis. The parties hereto agree that this Section 4.4. is neither intended to designate nor otherwise imply that MFS is an underwriter or distributor of the Policies. 4.5. The Company and the Trust (or its designee in lieu of the Company or the Trust, as appropriate) will each provide to the other at least one complete copy of all registration statements, prospectuses, statements of additional information, reports, proxy statements, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Policies, or to the Trust or its Shares, prior to or contemporaneously with the filing of such document with the SEC or other regulatory authorities. The Company and the Trust shall also each promptly inform the other of the results of any examination by the SEC (or other regulatory authorities) that relates to the Policies, the Trust or its Shares, and the party that was the subject of the examination shall provide the other party with a copy of relevant portions of any "deficiency letter" or other correspondence or written report regarding any such examination. 4.6. The Trust and MFS will provide the Company with as much notice as is reasonably practicable of any proxy solicitation for any Portfolio, and of any material change in the Trust's registration statement, particularly any change resulting in change to the registration statement or prospectus or statement of additional information for any Account. The Trust and MFS will cooperate with the Company so as to enable the Company to solicit proxies from Policy owners or to make changes to its prospectus, statement of additional information or registration statement, in an orderly manner. The Trust and MFS will make reasonable efforts to attempt to have changes affecting Policy prospectuses become effective simultaneously with the annual updates for such prospectuses. 4.7. For purpose of this Article IV and Article VIII, the phrase "sales literature or other promotional material" includes but is not limited to advertisements (such as material published, or designed for use in, a newspaper, magazine, or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, or other public media), and sales literature (such as brochures, circulars, reprints or excerpts or any other advertisement, sales literature, or published articles), distributed or made generally available to customers or the public, educational or training materials or communications distributed or made generally available to some or all agents or employees. ARTICLE V. FEES AND EXPENSES 5.1. The Trust shall pay no fee or other compensation to the Company under this Agreement, and the Company shall pay no fee or other compensation to the Trust, except that if the Trust or any Portfolio adopts and implements a plan pursuant to Rule 12b-1 under the 1940 Act to finance distribution and Shareholder servicing expenses, then, subject to obtaining any required exemptive orders or regulatory approvals, the Trust may make payments to the Company or to the underwriter for the Policies if and in amounts agreed to by the Trust in writing. Each party, however, shall, in accordance with the allocation of expenses specified in Articles III and V hereof, reimburse other parties for expenses initially paid by one party but allocated to another party. In addition, nothing herein shall prevent the parties hereto from otherwise agreeing to perform, and arranging for appropriate compensation for, other services relating to the Trust and/or to the Accounts. 5.2. The Trust or its designee shall bear the expenses for the cost of registration and qualification of the Shares under all applicable federal and state laws, including preparation and filing of the Trust's registration statement, and payment of filing fees and registration fees; preparation and filing of the Trust's proxy materials and reports to Shareholders; setting in type and printing its prospectus and statement of additional information (to the extent provided by and as determined in accordance with Article III above); setting in type and printing the proxy materials and reports to Shareholders (to the extent provided by and as determined in accordance with Article III above); the preparation of all statements and notices required of the -6- Trust by any federal or state law with respect to its Shares; all taxes on the issuance or transfer of the Shares; and the costs of distributing the Trust's prospectuses, any supplements thereto and proxy materials to owners of Policies funded by the Shares and any expenses permitted to be paid or assumed by the Trust pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act. The Trust shall not bear any expenses of marketing the Policies. 5.3. The Company shall bear the expenses of printing and distributing the Trust's prospectus or prospectuses in connection with new sales of the Policies and of distributing the Trust's shareholder reports to Policy owners. The Company shall bear all expenses associated with the registration, qualification, and filing of the Policies under applicable federal securities and state insurance laws; the cost of preparing, printing and distributing the Policy prospectus and statement of additional information, if any; and the cost of preparing, printing and distributing annual individual account statements for Policy owners as required by state insurance laws. 5.4. MFS will monthly reimburse the Company certain of the administrative costs and expenses incurred by the Company as a result of operations necessitated by the beneficial ownership by Policy owners of shares of the Portfolios of the Trust, equal to 0.25% per annum of the aggregate net assets of the Trust attributable to variable life or variable annuity contracts offered by the Company or its affiliates. In no event shall such fee be paid by the Trust, its shareholders or by the Policy holders. ARTICLE VI. DIVERSIFICATION AND RELATED LIMITATIONS 6.1. The Trust and MFS represent and warrant that each Portfolio of the Trust will meet the diversification requirements of Section 817 (h) (1) of the Code and Treas. Reg. 1.817-5, relating to the diversification requirements for variable annuity, endowment, or life insurance contracts, as they may be amended from time to time (and any revenue rulings, revenue procedures, notices, and other published announcements of the Internal Revenue Service interpreting these sections), as if those requirements applied directly to each such Portfolio, and they shall immediately notify the Company upon having a reasonable basis for believing that a Portfolio has ceased to qualify or that it might not so qualify in the future. 6.2. The Trust and MFS represent that each Portfolio will elect to be qualified as a Regulated Investment Company under Subchapter M of the Code and that they will maintain such qualification (under Subchapter M or any successor or similar provision), and they shall immediately notify the Company upon having a reasonable basis for believing that a Portfolio has ceased to qualify or that it might not so qualify in the future. ARTICLE VII. POTENTIAL MATERIAL CONFLICTS 7.1. The Trust agrees that the Board, constituted with a majority of disinterested trustees, will monitor each Portfolio of the Trust for the existence of any material irreconcilable conflict between the interests of the variable annuity contract owners and the variable life insurance policy owners of the Company and/or affiliated companies ("contract owners") investing in the Trust. The Board shall have the sole authority to determine if a material irreconcilable conflict exists, and such determination shall be binding on the Company only if approved in the form of a resolution by a majority of the Board, or a majority of the disinterested trustees of the Board. The Board will give prompt notice of any such determination to the Company. 7.2. The Company agrees that it will be responsible for promptly reporting any potential or existing conflicts of which it is aware to the Board including, but not limited to, an obligation by the Company to inform the Board whenever contract owner voting instructions are disregarded. The Company also agrees that, if a material irreconcilable conflict arises, it will at its own cost remedy such conflict up to and including (a) withdrawing the assets allocable to some or all of the Accounts from the Trust or any Portfolio and -7- reinvesting such assets in a different investment medium, including (but not limited to) another Portfolio of the Trust, or submitting to a vote of all affected contract owners whether to withdraw assets from the Trust or any Portfolio and reinvesting such assets in a different investment medium and, as appropriate, segregating the assets attributable to any appropriate group of contract owners that votes in favor of such segregation, or offering to any of the affected contract owners the option of segregating the assets attributable to their contracts or policies, and (b) establishing a new registered management investment company and segregating the assets underlying the Policies, unless a majority of Policy owners materially adversely affected by the conflict have voted to decline the offer to establish a new registered management investment company. 7.3. A majority of the disinterested trustees of the Board shall determine whether any proposed action by the Company adequately remedies any material irreconcilable conflict. In the event that the Board determines that any proposed action does not adequately remedy any material irreconcilable conflict, the Company will withdraw from investment in the Trust each of the Accounts designated by the disinterested trustees and terminate this Agreement within six (6) months after the Board informs the Company in writing of the foregoing determination; PROVIDED, HOWEVER, that such withdrawal and termination shall be limited to the extent required to remedy any such material irreconcilable conflict as determined by a majority of the disinterested trustees of the Board. ARTICLE VIII. INDEMNIFICATION 8.1. INDEMNIFICATION BY THE COMPANY The Company agrees to indemnify and hold harmless the Trust, MFS, any affiliates of MFS, and each of their respective directors/trustees, officers and each person, if any, who controls the Trust or MFS within the meaning of Section 15 of the 1933 Act, and any agents or employees of the foregoing (each an "Indemnified Party," or collectively, the "Indemnified Parties" for purposes of this Section 8.1) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Company) or expenses (including, without limitation, reasonable counsel fees) to which any Indemnified Party may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or acquisition of the Shares or the Policies and: (a) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement, prospectus or statement of additional information for the Policies or contained in the Policies or sales literature or other promotional material for the Policies (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading PROVIDED that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reasonable reliance upon and in conformity with information furnished to the Company or its designee by or on behalf of the Trust or MFS for use in the registration statement, prospectus or statement of additional information for the Policies or in the Policies or sales literature or other promotional material (or any amendment or supplement) or otherwise for use in connection with the sale of the Policies or Shares; or (b) arise out of or as a result of statements or representations (other than statements or representations contained in the registration statement, prospectus, statement of additional information or sales literature or other promotional material of the Trust not supplied by the Company or its designee, or persons under its control and on which the Company has reasonably relied) or wrongful conduct of the Company or persons under its control, with respect to the sale or distribution of the Policies or Shares; or -8- (c) arise out of any untrue statement or alleged untrue statement of a material fact contained in the registration statement, prospectus, statement of additional information, or sales literature or other promotional literature of the Trust, or any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement or statements therein not misleading, if such statement or omission was made in reliance upon information furnished to the Trust by or on behalf of the Company; or (d) arise out of or result from any material breach of any representation and/or warranty made by the Company in this Agreement or arise out of or result from any other material breach of this Agreement by the Company; or (e) arise as a result of any failure by the Company to provide the services and furnish the materials under the terms of this Agreement; as limited by and in accordance with the provisions of this Article VIII. 8.2. INDEMNIFICATION BY THE TRUST The Trust agrees to indemnify and hold harmless the Company and each of its directors and officers and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act, and any agents or employees of the foregoing (each an "Indemnified Party," or collectively, the "Indemnified Parties" for purposes of this Section 8.2) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Trust) or expenses (including, without limitation, reasonable counsel fees) to which any Indemnified Party may become subject under any statute, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or acquisition of the Shares or the Policies and: (a) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement, prospectus, statement of additional information or sales literature or other promotional material of the Trust (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, PROVIDED that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reasonable reliance upon and in conformity with information furnished to the Trust, MFS or their respective designees by or on behalf of the Company for use in the registration statement, prospectus or statement of additional information for the Trust or in sales literature or other promotional material for the Trust (or any amendment or supplement) or otherwise for use in connection with the sale of the Policies or Shares; or (b) arise out of or as a result of statements or representations (other than statements or representations contained in the registration statement, prospectus, statement of additional information or sales literature or other promotional material for the Policies not supplied by the Trust, MFS or any of their respective designees or persons under their respective control and on which any such entity has reasonably relied) or wrongful conduct of the Trust or persons under its control, with respect to the sale or distribution of the Policies or Shares; or (c) arise out of any untrue statement or alleged untrue statement of a material fact contained in the registration statement, prospectus, statement of additional information, or sales literature or other promotional literature of the Accounts or relating to the Policies, or any -9- amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement or statements therein not misleading, if such statement or omission was made in reliance upon information furnished to the Company by or on behalf of the Trust or MFS; or (d) arise out of or result from any material breach of any representation and/or warranty made by the Trust in this Agreement (including a failure, whether unintentional or in good faith or otherwise, to comply with the diversification requirements specified in Article VI of this Agreement) or arise out of or result from any other material breach of this Agreement by the Trust; or (e) arise out of or result from the materially incorrect or untimely calculation or reporting of the daily net asset value per share or dividend or capital gain distribution rate; or (f) arise as a result of any failure by the Trust to provide the services and furnish the materials under the terms of the Agreement; as limited by and in accordance with the provisions of this Article VIII. 8.3. Neither the Company nor the Trust shall be liable under the indemnification provisions contained in this Agreement with respect to any losses, claims, damages, liabilities or expenses to which an Indemnified Party would otherwise be subject by reason of such Indemnified Party's willful misfeasance, willful misconduct, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement. 8.4. Promptly after receipt by an Indemnified Party under this Section 8.4. of notice of commencement of any action, such Indemnified Party will, if a claim in respect thereof is to be made against the indemnifying party under this section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any Indemnified Party otherwise than under this section. In case any such action is brought against any Indemnified Party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, assume the defense thereof, with counsel satisfactory to such Indemnified Party. After notice from the indemnifying party of its intention to assume the defense of an action, the Indemnified Party shall bear the expenses of any additional counsel obtained by it, and the indemnifying party shall not be liable to such Indemnified Party under this section for any legal or other expenses subsequently incurred by such Indemnified Party in connection with the defense thereof other than reasonable costs of investigation. 8.5. Each of the parties agrees promptly to notify the other parties of the commencement of any litigation or proceeding against it or any of its respective officers, directors, trustees, employees or 1933 Act control persons in connection with the Agreement, the issuance or sale of the Policies, the operation of the Accounts, or the sale or acquisition of Shares. 8.6. A successor by law of the parties to this Agreement shall be entitled to the benefits of the indemnification contained in this Article VIII. The indemnification provisions contained in this Article VIII shall survive any termination of this Agreement. ARTICLE IX. APPLICABLE LAW 9.1. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of The Commonwealth of Massachusetts. -10- 9.2. This Agreement shall be subject to the provisions of the 1933, 1934 and 1940 Acts, and the rules and regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the SEC may grant and the terms hereof shall be interpreted and construed in accordance therewith. ARTICLE X. NOTICE OF FORMAL PROCEEDINGS The Trust, MFS, and the Company agree that each such party shall promptly notify the other parties to this Agreement, in writing, of the institution of any formal proceedings brought against such party or its designees by the NASD, the SEC, or any insurance department or any other regulatory body regarding such party's duties under this Agreement or related to the sale of the Policies, the operation of the Accounts, or the purchase of the Shares. ARTICLE XI. TERMINATION 11.1. This Agreement shall terminate with respect to the Accounts, or one, some, or all Portfolios: (a) at the option of any party upon six (6) months' advance written notice to the other parties; or (b) at the option of the Company to the extent that the Shares of Portfolios are not reasonably available to meet the requirements of the Policies or are not "appropriate funding vehicles" for the Policies, as reasonably determined by the Company. Without limiting the generality of the foregoing, the Shares of a Portfolio would not be "appropriate funding vehicles" if, for example, such Shares did not meet the diversification or other requirements referred to in Article VI hereof; or if the Company would be permitted to disregard Policy owner voting instructions pursuant to Rule 6e-2 or 6e-3(T) under the 1940 Act. Prompt notice of the election to terminate for such cause and an explanation of such cause shall be furnished to the Trust by the Company; or (c) at the option of the Trust or MFS upon institution of formal proceedings against the Company by the NASD, the SEC, or any insurance department or any other regulatory body regarding the Company's duties under this Agreement or related to the sale of the Policies, the operation of the Accounts, or the purchase of the Shares; or (d) at the option of the Company upon institution of formal proceedings against the Trust by the NASD, the SEC, or any state securities or insurance department or any other regulatory body regarding the Trust's or MFS' duties under this Agreement or related to the sale of the Shares; or (e) at the option of the Company, the Trust or MFS upon receipt of any necessary regulatory approvals and/or the vote of the Policy owners having an interest in the Accounts (or any subaccounts) to substitute the shares of another investment company for the corresponding Portfolio Shares in accordance with the terms of the Policies for which those Portfolio Shares had been selected to serve as the underlying investment media. The Company will give thirty (30) days' prior written notice to the Trust of the date of any proposed vote or other action taken to replace the Shares; or (f) termination by either the Trust or MFS by written notice to the Company, if either one or both of the Trust or MFS respectively, shall determine, in their sole judgment exercised in good faith, that the Company has suffered a material adverse change in its business, operations, financial condition, or prospects since the date of this Agreement or is the subject of material adverse publicity; or -11- (g) termination by the Company by written notice to the Trust and MFS, if the Company shall determine, in its sole judgment exercised in good faith, that the Trust or MFS has suffered a material adverse change in this business, operations, financial condition or prospects since the date of this Agreement or is the subject of material adverse publicity; or (h) at the option of any party to this Agreement, upon another party's material breach of any provision of this Agreement after providing the breaching party thirty (30) days written notice and an opportunity to cure the breach during the notice period; or (i) upon assignment of this Agreement, unless made with the written consent of the parties hereto. 11.2. The notice shall specify the Portfolio or Portfolios, Policies and, if applicable, the Accounts as to which the Agreement is to be terminated. 11.3. It is understood and agreed that the right of any party hereto to terminate this Agreement pursuant to Section 11.1(a) may be exercised for cause or for no cause. 11.4. Except as necessary to implement Policy owner initiated transactions, or as required by state insurance laws or regulations, the Company shall not redeem the Shares attributable to the Policies (as opposed to the Shares attributable to the Company's assets held in the Accounts), and the Company shall not prevent Policy owners from allocating payments to a Portfolio that was otherwise available under the Policies, until thirty (30) days after the Company shall have notified the Trust of its intention to do so. 11.5. Notwithstanding any termination of this Agreement, the Trust and MFS shall, at the option of the Company, continue to make available additional shares of the Portfolios pursuant to the terms and conditions of this Agreement, for all Policies in effect on the effective date of termination of this Agreement (the "Existing Policies"), except as otherwise provided under Article VII of this Agreement. Specifically, without limitation, the owners of the Existing Policies shall be permitted to transfer or reallocate investment under the Policies, redeem investments in any Portfolio and/or invest in the Trust upon the making of additional purchase payments under the Existing Policies and MFS shall continue to reimburse the Company pursuant to Section 5.4 of this Agreement. -12- ARTICLE XII. NOTICES Any notice shall be sufficiently given when sent by registered or certified mail, overnight courier or facsimile to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other party. If to the Trust: MFS VARIABLE INSURANCE TRUST 500 Boylston Street Boston, Massachusetts 02116 Facsimile No.: (617) 954-6624 Attn: Stephen E. Cavan, Secretary If to the Company: SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) Retirement Products and Services One Copley Place, Suite 200 Boston, Massachusetts 02116 Facsimile No.:(617) 348-1586 Attn: Margaret Hankard, Esq. If to MFS: MASSACHUSETTS FINANCIAL SERVICES COMPANY 500 Boylston Street Boston, Massachusetts 02116 Facsimile No.: (617) 954-6624 Attn: Stephen E. Cavan, General Counsel ARTICLE XIII. MISCELLANEOUS 13.1. Subject to the requirement of legal process and regulatory authority, each party hereto shall treat as confidential the names and addresses of the owners of the Policies and all information reasonably identified as confidential in writing by any other party hereto and, except as permitted by this Agreement or as otherwise required by applicable law or regulation, shall not disclose, disseminate or utilize such names and addresses and other confidential information without the express written consent of the affected party until such time as it may come into the public domain. 13.2. The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 13.3. This Agreement may be executed simultaneously in one or more counterparts, each of which taken together shall constitute one and the same instrument. 13.4. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 13.5. The Schedule attached hereto, as modified from time to time, is incorporated herein by reference and is part of this Agreement. -13- 13.6. Each party hereto shall cooperate with each other party in connection with inquiries by appropriate governmental authorities (including without limitation the SEC, the NASD, and state insurance regulators) relating to this Agreement or the transactions contemplated hereby. 13.7. The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the parties hereto are entitled to under state and federal laws. 13.8. A copy of the Trust's Declaration of Trust is on file with the Secretary of State of The Commonwealth of Massachusetts. The Company acknowledges that the obligations of or arising out of this instrument are not binding upon any of the Trust's trustees, officers, employees, agents or shareholders individually, but are binding solely upon the assets and property of the Trust in accordance with its proportionate interest hereunder. The Company further acknowledges that the assets and liabilities of each Portfolio are separate and distinct and that the obligations of or arising out of this instrument are binding solely upon the assets or property of the Portfolio on whose behalf the Trust has executed this instrument. The Company also agrees that the obligations of each Portfolio hereunder shall be several and not joint, in accordance with its proportionate interest hereunder, and the Company agrees not to proceed against any Portfolio for the obligations of another Portfolio. -14- IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and on its behalf by its duly authorized representative and its seal to be hereunder affixed hereto as of the date specified above. SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) By its authorized officer, By: _______________________________ Robert K. Leach Vice President, Financial Products MFS/SUN LIFE SERIES TRUST, ON BEHALF OF THE PORTFOLIOS By its authorized officer and not individually, By: _______________________________ James R. Bordewick, Jr. Assistant Secretary MASSACHUSETTS FINANCIAL SERVICES COMPANY By its authorized officer, By: _______________________________ Jeffrey L. Shames Chairman and Chief Executive Officer -15- As of February 17, 1998 SCHEDULE A ACCOUNTS, POLICIES AND PORTFOLIOS SUBJECT TO THE PARTICIPATION AGREEMENT --------------------------------------
NAME OF SEPARATE PORTFOLIOS ACCOUNT AND DATE POLICIES FUNDED APPLICABLE TO ESTABLISHED BY BOARD OF DIRECTORS BY SEPARATE ACCOUNT POLICIES - --------------------------------------------------------------------------------------------- SUN LIFE OF CANADA (U.S.) FUTURITY VARIABLE ANNUITY CAPITAL APPRECIATION SERIES VARIABLE ACCOUNT F EMERGING GROWTH SERIES (EST. JULY 13, 1989) GOVERNMENT SECURITIES SERIES HIGH YIELD SERIES MONEY MARKET SERIES UTILITIES SERIES
EX-8.(E) 8 PART AGMT, OCC 35 PGS AUX2250 PARTICIPATION AGREEMENT By and Among OCC ACCUMULATION TRUST And SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) And OCC DISTRIBUTORS THIS AGREEMENT, made and entered into this 17 day of February 1998 by and among Sun Life Assurance Company of Canada (U.S.), a Delaware corporation (hereinafter the "Company"), on its own behalf and on behalf of each separate account of the Company named in Schedule 1 to this Agreement, as may be amended from time to time (each account referred to as the "Account"), OCC ACCUMULATION TRUST, an open-end diversified management investment company organized under the laws of the State of Massachusetts (hereinafter the "Fund") and OCC DISTRIBUTORS, a Delaware general partnership (hereinafter the "Underwriter"). WHEREAS, the Fund engages in business as an open-end diversified, management investment company and was established for the purpose of serving as the investment vehicle for separate accounts established for variable life insurance contracts and variable annuity contracts to be offered by insurance companies which have entered into participation agreements substantially identical to this Agreement (hereinafter "Participating Insurance Companies"); and WHEREAS, beneficial interests in the Fund are divided into several series of shares, each representing the interest in a particular managed portfolio of securities and other assets (the "Portfolios"); and WHEREAS, the Fund has obtained an order from the Securities & Exchange Commission (alternatively referred to as the "SEC" or the "Commission"), dated February 22, 1995 (File No. 812-9290), granting Participating Insurance Companies and variable annuity separate accounts and variable life insurance separate accounts relief from the provisions of Sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended, (hereinafter the "1940 Act") and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Fund to be sold to and held by variable annuity separate accounts and variable life insurance separate accounts of both affiliated and unaffiliated Participating Insurance Companies and qualified pension and retirement plans (hereinafter the "Mixed and Shared Funding Exemptive Order");and WHEREAS, the Fund is registered as an open-end management investment company under the 1940 Act and its shares are registered under the Securities Act of 1933, as amended (hereinafter the "1933 Act"); and WHEREAS, the Company has registered or will register certain variable annuity contracts (the "Contracts") under the 1933 Act; and WHEREAS, the Account is a duly organized, validly existing segregated asset account, established by resolution of the Board of Directors of the Company under the insurance laws of the State of Delaware, to set aside and invest assets attributable to the Contracts; and WHEREAS, the Company has registered the Account as a unit investment trust under the 1940 Act; and 2 WHEREAS, the Underwriter is registered as a broker-dealer with the SEC under the Securities Exchange Act of 1934, as amended (hereinafter the "1934 Act"), and is a member in good standing of the National Association of Securities Dealers, Inc. (hereinafter "NASD"); and WHEREAS, to the extent permitted by applicable insurance laws and regulations, the Company intends to purchase shares in the Portfolios named in Schedule 2, as it may be amended from time to time, on behalf of the Account to fund the Contracts and the Underwriter is authorized to sell such shares to unit investment trusts such as the Account at net asset value; NOW, THEREFORE, in consideration of their mutual promises, the Company, the Fund and the Underwriter agree as follows: ARTICLE I. SALE OF FUND SHARES 1.1. The Underwriter agrees to sell to the Company those shares of the Fund which the Company orders on behalf of the Account, executing such orders on a daily basis at the net asset value next computed after receipt and acceptance by the Fund or its agent of the order for the shares of the Fund. For purposes of this Section 1.1, the Company shall be the designee of the Fund for receipt of such orders from each Account and receipt by such designee shall constitute receipt by the Fund; provided that the Fund receives notice of such order by 10:00 a.m. Eastern Time on the next following Business Day. The Underwriter shall confirm to the Company the receipt of such notice by 11:30 a.m. on such next following Business Day. "Business Day" shall mean any day on which the New York Stock Exchange is open for trading and on which the Fund calculates its net asset value pursuant to the rules of the SEC. 3 1.2. The Company shall pay for Fund shares on the next Business Day after it places an order to purchase Fund shares in accordance with Section 1.1 hereof. Payment shall be in federal funds transmitted by wire. 1.3. The Fund agrees to make its shares available indefinitely for purchase at the applicable net asset value per share by Participating Insurance Companies and their separate accounts on those days on which the Fund calculates its net asset value pursuant to rules of the SEC; provided, however, that the Board of Trustees of the Fund (hereinafter the "Directors") may refuse to sell shares of any Portfolio to any person, or suspend or terminate the offering of shares of any Portfolio if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Directors, acting in good faith and in light of their fiduciary duties under federal and any applicable state laws, necessary in the best interests of the shareholders of any Portfolio. 1.4. The Fund and the Underwriter agree that shares of the Fund will be sold only to Participating Insurance Companies and their separate accounts, qualified pension and retirement plans or such other persons as are permitted under applicable provisions of the Internal Revenue Code of 1986, as amended, (the "Internal Revenue Code"), and regulations promulgated thereunder, the sale to which will not impair the tax treatment currently afforded the Contracts. No shares of any Portfolio will be sold to the general public. 1.5. The Fund and the Underwriter will not sell Fund shares to any insurance company or separate account unless an agreement containing provisions substantially the same as Articles I, III, V, and VII of this Agreement are in effect to govern such sales. The Fund shall make available upon written request from the Company (i) a list of all other Participating 4 Insurance Companies and (ii) a copy of the Participation Agreement executed by any other Participating Insurance Company. 1.6. The Fund agrees to redeem for cash, upon the Company's request, any full or fractional shares of the Fund held by the Company, executing such requests on a daily basis at the net asset value next computed after receipt and acceptance by the Fund or its agent of the request for redemption. For purposes of this Section 1.6, the Company shall be the designee of the Fund for receipt of requests for redemption from each Account and receipt by such designee shall constitute receipt by the Fund; provided the Fund receives notice of request for redemption by 10:00 a.m. Eastern Time on the next following Business Day. Payment shall be in federal funds transmitted by wire to the Company's account as designated by the Company in writing from time to time, on the same Business Day the Fund receives notice of the redemption order from the Company except that the Fund reserves the right to delay payment of redemption proceeds, but in no event may such payment be delayed longer than the period permitted under Section 22(e) of the 1940 Act. Neither the Fund nor the Underwriter shall bear any responsibility whatsoever for the proper disbursement or crediting of redemption proceeds; the Company alone shall be responsible for such action. If notification of redemption is received after 10:00 a.m. Eastern Time, payment for redeemed shares will be made on the next following Business Day. 1.7. The Company agrees to purchase and redeem the shares of the Portfolios named in Schedule 2 offered by the then current prospectus of the Fund in accordance with the provisions of such prospectus. 1.8. Issuance and transfer of the Fund's shares will be by book entry only. Stock certificates will not be issued to the Company or any Account. Purchase and redemption orders 5 for Fund shares will be recorded in an appropriate title for each Account or the appropriate subaccount of each Account. 1.9. The Fund shall furnish notice as soon as reasonably practicable to the Company of any income, dividends or capital gain distributions payable on the Fund's shares. The Company hereby elects to receive all such dividends and distributions as are payable on the Portfolio shares in the form of additional shares of that Portfolio. The Company reserves the right to revoke this election and to receive all such dividends and distributions in cash. The Fund shall notify the Company of the number of shares so issued as payment of such dividends and distributions. 1.10. The Fund shall make the net asset value per share for each Portfolio available to the Company on a daily basis as soon as reasonably practical after the net asset value per share is calculated and shall use its best efforts to make such net asset value per share available by 5:30 p.m., Eastern Time, each business day. ARTICLE II. REPRESENTATIONS AND WARRANTIES 2.1. The Company represents and warrants that the Contracts are or will be registered under the 1933 Act and that the Contracts will be issued and sold in compliance with all applicable federal and state laws. The Company further represents and warrants that it is an insurance company duly organized and in good standing under applicable law and that it has legally and validly established each Account as a segregated asset account under applicable state law and has registered each Account as a unit investment trust in accordance with the provisions of the 1940 Act to serve as segregated investment accounts for the Contracts, and that it will maintain such registration for so long as any Contracts are outstanding. The Company shall 6 amend the registration statement under the 1933 Act for the Contracts and the registration statement under the 1940 Act for the Account from time to time as required in order to effect the continuous offering of the Contracts or as may otherwise be required by applicable law. The Company shall register and qualify the Contracts for sale in accordance with the securities laws of the various states only if and to the extent deemed necessary by the Company. 2.2. The Company represents that the Contracts are currently and at the time of issuance will be treated as annuity contracts under applicable provisions of the Internal Revenue Code and that it will maintain such treatment and that it will notify the Fund and the Underwriter immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. 2.3. The Fund represents and warrants that Fund shares sold pursuant to this Agreement shall be registered under the 1933 Act and duly authorized for issuance in accordance with applicable law and that the Fund is and shall remain registered under the 1940 Act for as long as the Fund shares are sold. The Fund shall amend the registration statement for its shares under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares. The Fund shall register and qualify the shares for sale in accordance with the laws of the various states only if and to the extent deemed advisable by the Fund or the Underwriter. 2.4. The Fund represents that it is currently qualified as a Regulated Investment Company under Subchapter M of the Internal Revenue Code, and that it will maintain such qualification (under Subchapter M or any successor or similar provision) and that it will notify the Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 7 2.5. The Fund represents that its investment objectives, policies and restrictions comply with applicable state investment laws as they may apply to the Fund. The Fund makes no representation as to whether any aspect of its operations (including, but not limited to, fees and expenses and investment policies) complies with the insurance laws and regulations of any state. The Company alone shall be responsible for informing the Fund of any insurance restrictions imposed by state insurance laws which are applicable to the Fund. To the extent feasible and consistent with market conditions, the Fund will adjust its investments to comply with the aforementioned state insurance laws upon written notice from the Company of such requirements and proposed adjustments, it being agreed and understood that in any such case the Fund shall be allowed a reasonable period of time under the circumstances after receipt of such notice to make any such adjustment. 2.6. The Fund currently does not intend to make any payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise, although it may make such payments in the future. To the extent that it decides to finance distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have its Board of Trustees, a majority of whom are not interested persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance distribution expenses. 2.7. The Underwriter represents and warrants that it is, and will continue to be, a member in good standing of the National Association of Securities Dealers, Inc., ("NASD") and is, and will continue to be, registered as a broker-dealer with the SEC. The Underwriter further represents that it will sell and distribute the Fund shares in accordance with all applicable federal and state securities laws, including without limitation the 1933 Act, the 1934 Act, and the 1940 Act. 8 2.8. The Fund represents that it is lawfully organized and validly existing under the laws of Massachusetts and that it does and will comply with applicable provisions of the 1940 Act. 2.9. The Underwriter represents and warrants that the Fund's Adviser, OpCap Advisors, is and shall remain duly registered under all applicable federal and state securities laws and that the Adviser will perform its obligations to the Fund in accordance with the laws of Massachusetts and any applicable state and federal securities laws. 2.10. The Fund and Underwriter represent and warrant that all of their directors, officers, employees, investment advisers, and other individuals/entities having access to the funds and/or securities of the Fund are and will continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Fund in an amount not less than the minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or related provisions as may be promulgated from time to time. The aforesaid Bond includes coverage for larceny and embezzlement and is issued by a reputable bonding company. ARTICLE III. PROSPECTUSES AND PROXY STATEMENTS; VOTING 3.1. The Underwriter shall provide the Company, at the Underwriter's expense, with as many copies of the Fund's current prospectus as the Company may reasonably request for use with prospective contractowners and applicants. The Underwriter shall print, at the Fund's or Underwriter's expense, as many copies of said prospectus and any supplements thereto, as necessary for distribution to existing contractowners or participants. If requested by the Company in lieu thereof, the Fund shall provide such documentation including a final copy 9 of a current prospectus set in type at the Fund's expense and other assistance as is reasonably necessary in order for the Company at least annually (or more frequently if the Fund prospectus is amended more frequently) to have the new prospectus for the Contracts and the Fund's new prospectus printed together in one document. In such case the Fund shall bear its share of expenses as described above. 3.2. The Fund's prospectus shall state that the Statement of Additional Information for the Fund is available from the Underwriter or alternatively from the Company (or, in the Fund's discretion, the Prospectus shall state that such Statement is available from the Fund), and the Underwriter (or the Fund) shall provide such Statement, at its expense, to the Company and to any owner of or participant under a Contract who requests such Statement or, at the Company's expense, to any prospective contractowner and applicant who requests such statement. 3.3. The Fund, at its expense, shall provide the Company with copies of its proxy material, if any, reports to shareholders and other communications to shareholders in such quantity as the Company shall reasonably require and shall bear the costs of distributing them to existing contractowners or participants. 3.4. If and to the extent required by law the Company shall: (i) solicit voting instructions from contractowners or participants; (ii) vote the Fund shares held in the Account in accordance with instructions received from contractowners or participants; and (iii) vote Fund shares held in the Account for which no timely instructions have been received, in the same proportion as Fund shares of such Portfolio for which instructions have been received from the Company's contractowners or participants; 10 so long as and to the extent that the SEC continues to interpret the 1940 Act to require pass through voting privileges for variable contractowners. The Company reserves the right to vote Fund shares held in any segregated asset account in its own right, to the extent permitted by law. The Company shall be responsible for assuring that each of its separate accounts participating in the Fund calculates voting privileges in a manner consistent with this section. 3.5. The Fund will comply with all provisions of the 1940 Act requiring voting by shareholders, and in particular as required, the Fund will either provide for annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund is not one of the trusts described in Section 16(c) of that Act) as well as with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in accordance with the SEC interpretation of the requirements of Section 16(a) with respect to periodic elections of directors and with whatever rules the Commission may promulgate with respect thereto. ARTICLE IV. SALES MATERIAL AND INFORMATION 4.1. The Company shall furnish, or shall cause to be furnished, to the Fund or the Underwriter, each piece of sales literature or other promotional material in which the Fund or the Fund's adviser or the Underwriter is named, at least fifteen business days prior to its use. No such material shall be used if the Fund or the Underwriter reasonably objects in writing to such use within ten business days after receipt of such material. 4.2. The Company shall not give any information or make any representations or statements on behalf of the Fund or concerning the Fund in connection with the sale of the Contracts other than the information or representations contained in the registration statement or prospectus for the Fund shares, as such registration statement and prospectus may be amended or 11 supplemented from time to time, or in reports or proxy statements for the Fund, or in sales literature or other promotional material approved by the Fund or by the Underwriter, or in shareholder reports of the Fund except with the permission of the Fund or the Underwriter. The Fund and the Underwriter agree to respond to any request for approval within ten Business Days of receipt of such request. 4.3. The Fund or the Underwriter shall furnish, or shall cause to be furnished, to the Company or its designee, each piece of sales literature or other promotional material in which the Company or its separate account is named, at least fifteen business days prior to its use. No such material shall be used if the Company reasonably objects in writing to such use within ten business days after receipt of such material. 4.4. The Fund and the Underwriter shall not give any information or make any representations on behalf of the Company or concerning the Company, each Account, or the Contracts other than the information or representations contained in a registration statement or prospectus for the Contracts, as such registration statement and prospectus may be amended or supplemented from time to time, or in published reports for each Account which are in the public domain or approved by the Company for distribution to contractowners or participants, or in sales literature or other promotional material approved by the Company, except with the permission of the Company. The Company agrees to respond to any request for approval within ten Business Days of receipt of such request. 4.5. The Fund will provide to the Company at least one complete copy of all registration statements, prospectuses, statements of additional information, reports, proxy statements, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Fund or its shares, 12 contemporaneously with the filing of such document with the SEC or other regulatory authorities. 4.6. The Company will provide to the Fund at least one complete copy of all registration statements, prospectuses, statements of additional information, reports, solicitations for voting instructions, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Contracts or each Account, contemporaneously with the filing of such document with the SEC or other regulatory authorities. 4.7. For purposes of this Article IV, the phrase "sales literature or other promotional material" includes, but is not limited to, advertisements (such as material published, or designed for use in, a newspaper, magazine, or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, or other public media), sales literature (I.E., any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, reprints or excerpts of any other advertisement, sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, registration statements, prospectuses, statements of additional information, shareholder reports, and proxy materials and any other material constituting sales literature or advertising under NASD rules, the 1940 Act or the 1933 Act. ARTICLE V. FEES AND EXPENSES 5.1. The Fund and Underwriter shall pay no fee or other compensation to the Company under this Agreement, except that if the Fund or any Portfolio adopts and implements 13 a plan pursuant to Rule 12b-1 to finance distribution expenses, then, subject to obtaining any required exemptive orders or other regulatory approvals, the Underwriter may make payments to the Company or to the underwriter for the Contracts if and in amounts agreed to by the Underwriter in writing. Currently, no such payments are contemplated. 5.2. All expenses incident to performance by the Fund of this Agreement shall be paid by the Fund to the extent permitted by law. All Fund shares will be duly authorized for issuance and registered in accordance with applicable federal law and to the extent deemed advisable by the Fund, in accordance with applicable state law, prior to sale. The Fund shall bear the expenses for the cost of registration and qualification of the Fund's shares, preparation and filing of the Fund's prospectus and registration statement, Fund proxy materials and reports, setting in type, printing and distributing the prospectuses, the proxy materials and reports to existing shareholders and contractowners, the preparation of all statements and notices required by any federal or state law, all taxes on the issuance or transfer of the Fund's shares, and any expenses permitted to be paid or assumed by the Fund pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act. ARTICLE VI. DIVERSIFICATION 6.1. The Fund will at all times invest money from the Contracts in such a manner as to ensure that the Contracts will be treated as variable contracts under the Internal Revenue Code and the regulations issued thereunder. Without limiting the scope of the foregoing, the Fund will comply with Section 817(h) of the Internal Revenue Code and Treasury Regulation 1.817-5, relating to the diversification requirements for variable annuity, endowment, or life insurance contracts and any amendments or other modifications to such Section or Regulations. 14 In the event of a breach of this Article VI by the Fund, it will take all reasonable steps (a) to notify the Company of such breach and (b) to adequately diversify the Fund so as to achieve compliance with the grace period afforded by Treasury Regulation 1.817-5. ARTICLE VII. POTENTIAL CONFLICTS 7.1. The Board of Trustees of the Fund (the "Fund Board") will monitor the Fund for the existence of any material irreconcilable conflict among the interests of the contractowners of all separate accounts investing in the Fund. An irreconcilable material conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by Participating Insurance Companies or by variable annuity contract and variable life insurance contractowners; or (f) a decision by an insurer to disregard the voting instructions of contractowners. The Board shall promptly inform the Company if it determines that an irreconcilable material conflict exists and the implications thereof. A majority of the Fund Board shall consist of persons who are not "interested" persons of the Fund. 7.2. The Company has reviewed a copy of the Mixed and Shared Funding Exemptive Order, and in particular, has reviewed the conditions to the requested relief set forth therein. As set forth in the Mixed and Shared Funding Exemptive Order, the Company will report any potential or existing conflicts of which it is aware to the Fund Board. The Company 15 agrees to assist the Fund Board in carrying out its responsibilities under the Mixed and Shared Funding Exemptive Order, by providing the Fund Board with all information reasonably necessary for the Fund Board to consider any issues raised. This includes, but is not limited to, an obligation by the Company to inform the Fund Board whenever contractowner voting instructions are disregarded. The Fund Board shall record in its minutes or other appropriate records, all reports received by it and all action with regard to a conflict. 7.3. If it is determined by a majority of the Fund Board, or a majority of its disinterested Directors, that an irreconcilable material conflict exists, the Company and other Participating Insurance Companies shall, at their expense and to the extent reasonably practicable (as determined by a majority of the disinterested Directors), take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, up to and including: (1) withdrawing the assets allocable to some or all of the separate accounts from the Fund or any Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another Portfolio of the Fund, or submitting the question whether such segregation should be implemented to a vote of all affected contractowners and, as appropriate, segregating the assets of any appropriate group (I.E., variable annuity contractowners or variable life insurance contractowners, of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected contractowners the option of making such a change; and (2) establishing a new registered management investment company or managed separate account. 7.4. If the Company's disregard of voting instructions could conflict with the majority of contractowner voting instructions, and the Company's judgment represents a minority position or would preclude a majority vote, the Company may be required, at the Fund's election, to withdraw the Account's investment in the Fund and terminate this 16 Agreement with respect to such Account. Any such withdrawal and termination must take place within 60 days after the Fund gives written notice to the Company that this provision is being implemented. Until the end of such 60 day period the Underwriter and Fund shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 7.5. If a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state insurance regulators, then the Company will withdraw the Account's investment in the Fund and terminate this Agreement with respect to such Account. Any such withdrawal and termination must take place within 60 days after the Fund gives written notice to the Company that this provision is being implemented. Until the end of such 60 day period the Underwriter and Fund shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority of the disinterested members of the Fund Board shall determine whether any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Fund or OpCap Advisors be required to establish a new funding medium for the Contracts. The Company shall not be required by Section 7.3 to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of contractowners materially adversely affected by the irreconcilable material conflict. 7.7. The Company shall at least annually submit to the Fund Board such reports, materials or data as the Fund Board may reasonably request so that the Fund Board may fully carry out the duties imposed upon it as delineated in the Mixed and Shared Funding Exemptive 17 Order, and said reports, materials and data shall be submitted more frequently if deemed appropriate by the Fund Board. 7.8. If and to the extent that Rule 6e-2 and Rule 6e-3 (T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Mixed and Shared Funding Exemptive Order) on terms and conditions materially different from those contained in the Mixed and Shared Funding Exemptive Order, (a) the Fund and/or the Participating Insurance Companies, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3 (T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. ARTICLE VIII. INDEMNIFICATION 8.1. INDEMNIFICATION BY THE COMPANY (a) The Company agrees to indemnify and hold harmless the Fund, the Underwriter, and each of the Fund's or the Underwriter's directors, officers, employees or agents and each person, if any, who controls or is an "associated person" of the Fund or the Underwriter within the meaning of such terms under the federal securities laws (collectively, the "indemnified parties" for purposes of this Section 8.1) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Company) or litigation (including reasonable legal and other expenses), to which the indemnified parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements: 18 (i) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the registration statement, prospectus or statement of additional information for the Contracts or contained in the Contracts or sales literature or other promotional material for the Contracts (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made; provided that this agreement to indemnify shall not apply as to any indemnified party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Company by or on behalf of the Fund for use in the registration statement, prospectus or statement of additional information for the Contracts or in the Contracts or sales literature or other promotional material for the Contracts (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or 19 (ii) arise out of or as a result of statements or representations by or on behalf of the Company (other than statements or representations contained in the Fund registration statement, Fund prospectus, Fund statement of additional information or sales literature or other promotional material of the Fund not supplied by the Company or persons under its control) or wrongful conduct of the Company or persons under its control, with respect to the sale or distribution of the Contracts or Fund shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in the Fund registration statement, Fund prospectus, statement of additional information or sales literature or other promotional material of the Fund or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, if such a statement or omission was made in reliance upon and in conformity with information furnished to the Fund by or on behalf of the Company or persons under its control; or (iv) arise as a result of any failure by the Company to provide the services and furnish the materials or to make any payments under the terms of this Agreement; or (v) arise out of any material breach of any representation and/or warranty made by the Company in this Agreement or arise out of or result from any other material breach by the Company of this Agreement; except to the extent provided in Sections 8.1(b) and 8.3 hereof. This indemnification shall be in addition to any liability which the Company may otherwise have. (b) No party shall be entitled to indemnification if such loss, claim, damage, liability or litigation is due to the willful misfeasance, bad faith, gross negligence or reckless disregard of duty by the party seeking indemnification. (c) The indemnified parties will promptly notify the Company of the commencement of any litigation or proceedings against them in connection with the issuance or sale of the Fund shares or the Contracts or the operation of the Fund. 20 8.2. INDEMNIFICATION BY THE UNDERWRITER (a) The Underwriter, on its own behalf and on behalf of the Fund, agrees to indemnify and hold harmless the Company and each of its directors, officers, employees or agents and each person, if any, who controls or is an "associated person" of the Company within the meaning of such terms under the federal securities laws (collectively, the "indemnified parties" for purposes of this Section 8.2) against any and all losses, costs, expenses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Underwriter) or litigation (including reasonable legal and other expenses) to which the indemnified parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, costs, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements: (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement, prospectus or statement of additional information for the Fund or sales literature or other promotional material of the Fund (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made; provided that this agreement to indemnify shall not apply as to any indemnified party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Underwriter or Fund by or on behalf of the Company for use in the registration statement, prospectus or statement of additional information for the Fund or in sales literature or other promotional material of the Fund (or any amendment or supplement thereto) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (ii) arise out of or as a result of statements or representations (other than statements or representations contained in the Contracts or in the Contract registration statement, the Contract prospectus, statement of additional information, or sales literature or other 21 promotional material for the Contracts or of the Fund not supplied by the Underwriter or the Fund or persons under the control of the Underwriter or the Fund respectively) or wrongful conduct of the Underwriter or the Fund or persons under the control of the Underwriter or the Fund respectively, with respect to the sale or distribution of the Contracts or Fund shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, statement of additional information or sales literature or other promotional material covering the Contracts (or any amendment thereof or supplement thereto), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement or statements therein not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon and in conformity with information furnished to the Company by or on behalf of the Underwriter or the Fund or persons under the control of the Underwriter or the Fund; or (iv) arise as a result of any failure by the Fund or the Underwriter to provide the services and furnish the materials under the terms of this Agreement (including a failure, whether unintentional or in good faith or otherwise, to (i) comply with the diversification requirements and procedures related thereto specified in Article VI of this Agreement except if such failure is a result of the Company's failure to comply with the notification procedures specified in Article VI; and (ii) to inform the Company of the correct net asset value per share of each Portfolio on a timely basis sufficient to ensure the timely execution of all purchase and redemption orders at the correct net asset value per share); or (v) arise out of or result from any material breach of any representation and/or warranty made by the Underwriter or the Fund in this Agreement or arise out of or result from any other material breach of this Agreement by the Underwriter or the Fund; except to the extent provided in Sections 8.2(b) and 8.3 hereof. This indemnification shall be in addition to any liability which the Underwriter may otherwise have. 22 (b) No party shall be entitled to indemnification if such loss, claim, damage, liability or litigation is due to the willful misfeasance, bad faith, gross negligence or reckless disregard of duty by the party seeking indemnification. (c) The indemnified parties will promptly notify the Underwriter of the commencement of any litigation or proceedings against them in connection with the issuance or sale of the Contracts or the operation of the Account. 8.3. INDEMNIFICATION PROCEDURE Any person obligated to provide indemnification under this Article VIII ("indemnifying party" for the purpose of this Section 8.3) shall not be liable under the indemnification provisions of this Article VIII with respect to any claim made against a party entitled to indemnification under this Article VIII ("indemnified party" for the purpose of this Section 8.3) unless such indemnified party shall have notified the indemnifying party in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such indemnified party (or after such party shall have received notice of such service on any designated agent), but failure to notify the indemnifying party of any such claim shall not relieve the indemnifying party from any liability which it may have to the indemnified party against whom such action is brought under the indemnification provision of this Article VIII, except to the extent that the failure to notify results in the failure of actual notice to the indemnifying party and such indemnifying party is damaged solely as a result of failure to give such notice. In case any such action is brought against the indemnified party, the indemnifying party will be entitled to participate, at its own expense, in the defense thereof. The indemnifying party also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the 23 indemnifying party to the indemnified party of the indemnifying party's election to assume the defense thereof, the indemnified party shall bear the fees and expenses of any additional counsel retained by it, and the indemnifying party will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation, unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. A successor by law of the parties to this Agreement shall be entitled to the benefits of the indemnification contained in this Article VIII. The indemnification provisions contained in this Article VIII shall survive any termination of this Agreement. 8.4. CONTRIBUTION In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in this Article VIII is due in accordance with its terms but for any reason is held to be unenforceable with respect to a party entitled to indemnification ("indemnified party" for purposes of this Section 8.4) pursuant to the terms of this Article VIII, then each party obligated to indemnify pursuant to the terms of this Article VIII shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, 24 damages, liabilities and litigations in such proportion as is appropriate to reflect the relative benefits received by the parties to this Agreement in connection with the offering of Fund shares to the Account and the acquisition, holding or sale of Fund shares by the Account, or if such allocation is not permitted by applicable law, in such proportions as are appropriate to reflect the relative net benefits referred to above but also the relative fault of the parties to this Agreement in connection with any actions that lead to such losses, claims, damages, liabilities or litigations, as well as any other relevant equitable considerations. ARTICLE IX. APPLICABLE LAW 9.1. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the State of New York. 9.2. This Agreement shall be subject to the provisions of the 1933, 1934 and 1940 Acts, and the rules and regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the SEC may grant (including, but not limited to the Mixed and Shared Funding Exemptive Order) and the terms hereof shall be interpreted and construed in accordance therewith. ARTICLE X. TERMINATION 10.1. This Agreement shall terminate: (a) at the option of any party upon one-year advance written notice to the other parties unless otherwise agreed in a separate written agreement among the parties; or 25 (b) at the option of the Company if shares of the Portfolios delineated in Schedule 2 are not reasonably available to meet the requirements of the Contracts as determined by the Company; or (c) at the option of the Fund upon institution of formal proceedings against the Company by the NASD, the SEC, the insurance commission of any state or any other regulatory body regarding the Company's duties under this Agreement or related to the sale of the Contracts, the administration of the Contracts, the operation of the Account, or the purchase of the Fund shares, which would have a material adverse effect on the Company's ability to perform its obligations under this Agreement; or (d) at the option of the Company upon institution of formal proceedings against the Fund or the Underwriter by the NASD, the SEC, or any state securities or insurance department or any other regulatory body, which would have a material adverse effect on the Fund's or the Underwriter's ability to perform its obligations under this Agreement; or (e) at the option of the Company or the Fund upon receipt of any necessary regulatory approvals and/or the vote of the contractowners having an interest in the Account (or any subaccount) to substitute the shares of another investment company for the corresponding Portfolio shares of the Fund in accordance with the terms of the Contracts for which those Portfolio shares had been selected to serve as the underlying investment media. The Company will give 30 days prior written notice to the Fund of the date of any proposed vote or other action taken to replace the Fund's shares; or (f) at the option of the Company or the Fund upon a determination by a majority of the Fund Board, or a majority of the disinterested Fund Board members, that an irreconcilable material conflict exists among the interests of (i) all contractowners of variable 26 insurance products of all separate accounts or (ii) the interests of the Participating Insurance Companies investing in the Fund as delineated in Article VII of this Agreement; or (g) at the option of the Company if the Fund ceases to qualify as a Regulated Investment Company under Subchapter M of the Internal Revenue Code, or under any successor or similar provision, or if the Company reasonably believes that the Fund may fail to so qualify; or (h) at the option of the Company if the Fund fails to meet the diversification requirements specified in Article VI hereof; or (i) at the option of any party to this Agreement, upon another party's material breach of any provision of this Agreement; or (j) at the option of the Company, if the Company determines in its sole judgment exercised in good faith, that either the Fund or the Underwriter has suffered a material adverse change in its business, operations or financial condition since the date of this Agreement or is the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Company; or (k) at the option of the Fund or Underwriter, if the Fund or Underwriter respectively, shall determine in its sole judgment exercised in good faith, that the Company has suffered a material adverse change in its business, operations or financial condition since the date of this Agreement or is the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Fund or Underwriter; or 27 (l) at the option of the Fund in the event any of the Contracts are not issued or sold in accordance with applicable federal and/or state law. Termination shall be effective immediately upon such occurrence without notice. 10.2. NOTICE REQUIREMENT (a) In the event that any termination of this Agreement is based upon the provisions of Article VII, such prior written notice shall be given in advance of the effective date of termination as required by such provisions. (b) In the event that any termination of this Agreement is based upon the provisions of Sections 10.1(b) - (d) or 10.1(g) - (i), prompt written notice of the election to terminate this Agreement for cause shall be furnished by the party terminating the Agreement to the non-terminating parties, with said termination to be effective upon receipt of such notice by the non-terminating parties. (c) In the event that any termination of this Agreement is based upon the provisions of Sections 10.1(j) or 10.1(k), prior written notice of the election to terminate this Agreement for cause shall be furnished by the party terminating this Agreement to the non-terminating parties. Such prior written notice shall be given by the party terminating this Agreement to the non-terminating parties at least 30 days before the effective date of termination. 10.3. It is understood and agreed that the right to terminate this Agreement pursuant to Section 10.1(a) may be exercised for any reason or for no reason. 10.4. EFFECT OF TERMINATION (a) Notwithstanding any termination of this Agreement pursuant to Section 10.1 of this Agreement, and subject to Section 1.3 of this Agreement, the Company may require the Fund and the Underwriter to, continue to make available additional shares of the Fund 28 for so long after the termination of this Agreement as the Company desires pursuant to the terms and conditions of this Agreement as provided in paragraph (b) below, for all Contracts in effect on the effective date of termination of this Agreement (hereinafter referred to as "Existing Contracts"). Specifically, without limitation, the owners of the Existing Contracts shall be permitted to reallocate investments in the Fund, redeem investments in the Fund and/or invest in the Fund upon the making of additional purchase payments under the Existing Contracts. The parties agree that this Section 10.4 shall not apply to any terminations under Article VII and the effect of such Article VII terminations shall be governed by Article VII of this Agreement. (b) If shares of the Fund continue to be made available after termination of this Agreement pursuant to this Section 10.4, the provisions of this Agreement shall remain in effect except for Section 10.1(a) and thereafter the Fund, the Underwriter, or the Company may terminate the Agreement, as so continued pursuant to this Section 10.4, upon written notice to the other party, such notice to be for a period that is reasonable under the circumstances but, if given by the Fund or Underwriter, need not be for more than 90 days. 10.5. Except as necessary to implement contractowner initiated or approved transactions, or as required by state insurance laws or regulations, the Company shall not redeem Fund shares attributable to the Contracts (as opposed to Fund shares attributable to the Company's assets held in the Account) and the Company shall not prevent contractowners from allocating payments to a Portfolio that was otherwise available under the Contracts, in each case until 90 days (or such shorter period of time as the parties hereto may agree upon) after the Company shall have notified the Fund or Underwriter of its intention to do so. ARTICLE XI. NOTICES 29 Any notice shall be deemed duly given only if sent by hand, evidenced by written receipt or by certified mail, return receipt requested, to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other party. All notices shall be deemed given three business days after the date received or rejected by the addressee. If to the Fund: Mr. Bernard H. Garil President OpCap Advisors 200 Liberty Street New York, NY 10281 If to the Company: Margaret Hankard Senior Associate Counsel Sun Life Assurance Company of Canada (U.S.) Copley Place, Suite 200 Boston, MA 02117 If to the Underwriter: Mr. Thomas E. Duggan Secretary OCC Distributors 200 Liberty Street New York, NY 10281 ARTICLE XII. MISCELLANEOUS 12.1. All persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund as neither the Directors, officers, agents or shareholders assume any personal liability for obligations entered into on behalf of the Fund. 30 12.2. Subject to law and regulatory authority, each party hereto shall treat as confidential all information reasonably identified as such in writing by any other party hereto (including without limitation the names and addresses of the owners of the Contracts) and, except as contemplated by this Agreement, shall not disclose, disseminate or utilize such confidential information until such time as it may come into the public domain without the express prior written consent of the affected party. 12.3. The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 12.4. This Agreement may be executed simultaneously in two or more counterparts, each of which taken together shall constitute one and the same instrument. 12.5. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 12.6. This Agreement shall not be assigned by any party hereto without the prior written consent of all the parties. 12.7. Each party hereto shall cooperate with each other party and all appropriate governmental authorities (including without limitation the SEC, the NASD and state insurance regulators) and shall permit each other and such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. 12.8. Each party represents that the execution and delivery of this Agreement and the consummation of the transactions contemplated herein have been duly authorized by all necessary corporate or trust action, as applicable, by such party and when so executed and 31 delivered this Agreement will be the valid and binding obligation of such party enforceable in accordance with its terms. 12.9. The parties to this Agreement may amend the schedules to this Agreement from time to time to reflect changes in or relating to the Contracts, the Accounts or the Portfolios of the Fund. 12.10 During ordinary business hours, the Fund and the Underwriter shall afford the Company, directly or through its authorized representatives, reasonable access to all files, books, records and other materials of the Fund or the Underwriter, as applicable, which relate, directly or indirectly, to transactions arising in connection with this Agreement and to make available appropriate personnel familiar with such items for the purpose of explaining the form and content of such items. This Section 12.10 shall survive the termination of this Agreement. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and behalf by its duly authorized representative as of the date and year first written above. COMPANY: SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) SEAL By: ------------------------------------- FUND: OCC ACCUMULATION TRUST 32 SEAL By: ------------------------------------- UNDERWRITER: OCC DISTRIBUTORS By: ------------------------------------- 33 SCHEDULE 1 Participation Agreement Among OCC Accumulation Trust, Sun Life Assurance Company of Canada (U.S.) and OCC Distributors The following separate accounts of Sun Life Assurance Company of Canada (U.S.) are permitted in accordance with the provisions of this Agreement to invest in Portfolios of the Fund shown in Schedule 2: Sun Life Assurance Company of Canada (U.S.) Variable Account F February __, 1998 SCHEDULE 2 Participation Agreement Among OCC Accumulation Trust, Sun Life Assurance Company of Canada (U.S.) and OCC Distributors The Separate Account(s) shown on Schedule 1 may invest in the following Portfolios of the OCC Accumulation Trust: Mid Cap Portfolio Equity Portfolio Small Cap Portfolio February __, 1998 EX-8.(F) 9 PART AGMT, WARBURG PINCUS 25 PGS AUX2247 PARTICIPATION AGREEMENT By and Among SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) And WARBURG, PINCUS TRUST And WARBURG PINCUS ASSET MANAGEMENT, INC. And COUNSELLORS SECURITIES INC. THIS AGREEMENT, made and entered into this ___ day of February, 1998, by and among Sun Life Assurance Company of Canada (U.S.) organized under the laws of Delaware (the "Company"), on its own behalf and on behalf of each separate account of the Company named in Schedule 1 to this Agreement as may be amended from time to time (each account referred to as the "Account"), Warburg, Pincus Trust, an open-end management investment company and business trust organized under the laws of the Commonwealth of Massachusetts (the "Fund"); Warburg Pincus Asset Management, Inc., a corporation organized under the laws of the State of Delaware (the "Adviser"); and Counsellors Securities Inc., a corporation organized under the laws of the State of New York ("CSI"). WHEREAS, the Fund engages in business as an open-end management investment company and was established for the purpose of serving as the investment vehicle for separate accounts established for variable life insurance contracts and variable annuity contracts to be offered by insurance companies that have entered into participation agreements similar to this Agreement (the "Participating Insurance Companies"), and WHEREAS, beneficial interests in the Fund are divided into several series of shares, each representing the interest in a particular managed portfolio of securities and other assets (the "Portfolios"); and WHEREAS, the Fund has received an order from the Securities and Exchange Commission (the "SEC") granting Participating Insurance Companies and variable annuity separate accounts and variable life insurance separate accounts relief from the provisions of Sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended (the "1940 Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Fund to be sold to and held by variable annuity separate accounts and variable life insurance separate accounts of both affiliated and unaffiliated Participating Insurance Companies and qualified pension and retirement plans outside of the separate account context (the "Mixed and Shared Funding Exemptive Order"). The parties to this Agreement agree that the conditions or undertakings specified in the Mixed and Shared Funding Exemptive Order and that may be imposed on the Company, the Fund, the Adviser and/or CSI by virtue of the receipt of such order by the SEC will be incorporated herein by reference, and such parties agree to comply with such conditions and undertakings to the extent applicable to each such party; and WHEREAS, the Fund is registered as an open-end management investment company under the 1940 Act and its shares are registered under the Securities Act of 1933, as amended (the "1933 Act"); and WHEREAS, the Company has registered or will register certain variable annuity contracts (the "Contracts") under the 1933 Act; and WHEREAS, the Account is a duly organized, validly existing segregated asset account, established by resolution of the Board of Directors of the Company under the insurance laws of Delaware, to set aside and invest assets attributable to the Contracts; and WHEREAS, the Company has registered the Account as a unit investment trust under the 1940 Act; and WHEREAS, CSI, the Fund's distributor, is registered as a broker-dealer with the SEC under the Securities Exchange Act of 1934 (the "1934 Act") and is a member in good standing of the National Association of Securities Dealers, Inc. (the "NASD"); and WHEREAS, to the extent permitted by applicable insurance laws and regulations, the Company intends to purchase shares of the Portfolios named in Schedule 2, as such schedule may be amended from time to time (the "Designated Portfolios"), on behalf of the Account to fund the Contracts, and the Fund is authorized to sell such shares to unit investment trusts such as the Account at net asset value; NOW, THEREFORE, in consideration of their mutual promises, the Company, the Fund, the Adviser and CSI agree as follows: ARTICLE I. SALE OF FUND SHARES 1.1. The Fund agrees to sell to the Company those shares of the Designated Portfolios that each Account orders, executing such orders on a daily basis at the net asset value next computed after receipt and acceptance by the Fund or its designee of the order for the shares of the Fund. For purposes of this Section 1.1, the Company will be the designee of the Fund for receipt of such orders from each Account and receipt by such designee will constitute receipt by the Fund; provided that the Fund receives notice of such order by 9:00 a.m. Eastern Time on the next following Business Day ("T+1"). "Business Day" will mean any day on which the New York Stock Exchange, Inc. (the "NYSE") is open for trading and on which the Fund calculates its net asset value pursuant to the rules of the SEC. 2 1.2. The Company will pay for Fund shares on T+1 in each case that an order to purchase Fund shares is made in accordance with Section 1.1 above. Payment will be in federal funds transmitted by wire. This wire transfer will be initiated by 12:00 p.m. Eastern Time. 1.3. The Fund agrees to make shares of the Designated Portfolios available indefinitely for purchase at the applicable net asset value per share by the Company and its separate accounts on those days on which the Fund calculates its Designated Portfolio net asset value pursuant to rules of the SEC and the Fund shall use its best efforts to calculate such net asset value on each day the NYSE is open for trading; provided, however, that the Fund, the Adviser or CSI may refuse to sell shares of any Portfolio to any person, or suspend or terminate the offering of shares of any Portfolio if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Fund or its Board of Directors, acting in good faith, necessary in the best interests of the shareholders of such Portfolio. 1.4. On each Business Day on which the Fund calculates its net asset value, the Company will aggregate and calculate the net purchase or redemption orders for each Account maintained by the Fund in which contract owner assets are invested. Net orders will only reflect orders that the Company has received prior to the close of regular trading on the NYSE currently 4:00 p.m., Eastern Time) on that Business Day. Orders that the Company has received after the close of regular trading on the NYSE will be treated as though received on the next Business Day. Each communication of orders by the Company will constitute a representation that such orders were received by it prior to the close of regular trading on the NYSE on the Business Day on which the purchase or redemption order is priced in accordance with Rule 22c-1 under the 1940 Act. Other procedures relating to the handling of orders will be in accordance with the prospectus and statement of additional information of the relevant Designated Portfolio or with oral or written instructions that CSI or the Fund will forward to the Company from time to time. 1.5. The Fund agrees that shares of the Fund will be sold only to Participating Insurance Companies and their separate accounts, qualified pension and retirement plans or such other persons as are permitted under applicable provisions of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and regulations promulgated thereunder, the sale to which will not impair the tax treatment currently afforded the Contracts. No shares of any Portfolio will be sold to the general public except as set forth in this Section 1.5. 1.6. The Fund agrees to redeem for cash, upon the Company's request, any full or fractional shares of the Fund held by the Company, executing such requests on a daily basis at the net asset value next computed after receipt and acceptance by the Fund or its designee of the request for redemption. For purposes of this Section 1.6, the Company will be the designee of the Fund for receipt of requests for redemption from each Account and receipt by such designee will constitute receipt by the Fund, provided the Fund receives notice of request for redemption by 10:00 a.m. 3 Eastern Time on the next following Business Day. Payment will be in federal funds transmitted by wire to the Company's account as designated by the Company in writing from time to time, on the same Business Day the Fund receives notice of the redemption order from the Company. The Fund reserves the right to delay payment of redemption proceeds, but in no event may such payment be delayed longer than the period permitted by the 1940 Act. The Fund will not bear any responsibility whatsoever for the proper disbursement or crediting of redemption proceeds; the Company alone will be responsible for such action. If notification of redemption is received after 10:00 a.m. Eastern Time, payment for redeemed shares will be made on the next following Business Day. 1.7. The Company agrees to purchase and redeem the shares of the Designated Portfolios offered by the then current prospectus of the Fund in accordance with the provisions of such prospectus. 1.8. Issuance and transfer of the Fund's shares will be by book entry only. Stock certificates will not be issued to the Company or any Account. Purchase and redemption orders for Fund shares will be recorded in an appropriate title for each Account or the appropriate subaccount of each Account. 1.9. The Fund will furnish same day notice (by telecopier, followed by written confirmation) to the Company of the declaration of any income dividends or capital gain distributions payable on each Designated Portfolio's shares. The Company hereby elects to receive all such dividends and distributions as are payable on the Designated Portfolio shares in the form of additional shares of that Designated Portfolio. The Fund will notify the Company of the number of shares so issued as payment of such dividends and distributions. The Company reserves the right to revoke this election upon reasonable prior notice to the Fund and to receive all such dividends and distributions in cash. 1.10. The Fund will make the net asset value per share for each Designated Portfolio available to the Company on a daily basis as soon as reasonably practical after the net asset value per share is calculated and will use its best efforts to make such net asset value per share available by 6:00 p.m., Eastern Time, but in no event later than 7:00 p.m., Eastern Time, each Business Day. 1.11. In the event adjustments are required to correct any error in the computation of the net asset value of the Fund's shares, the Fund or CSI will notify the Company as soon as practicable after discovering the need for those adjustments that result in an aggregate reimbursement of $150 or more to any one account maintained by a Designated Portfolio unless notified otherwise by the Company (or, if lesser, results in an adjustment of $10 or more to each contractowner's account). Any such notice will state for each day for which an error occurred the incorrect price, the correct price and, to the extent communicated to the Fund's shareholders, the reason for the price change. The Company may send this notice or a derivation thereof (so long as such derivation is approved 4 in advance by CSI or the Adviser) to contractowners whose accounts are affected by the price change. The parties will negotiate in good faith to develop a reasonable method for effecting such adjustments. ARTICLE II. REPRESENTATIONS AND WARRANTIES 2.1. The Company represents and warrants that the Contracts are or will be registered under the 1933 Act and that the Contracts will be issued and sold in compliance with all applicable federal and state laws, including applicable suitability requirements. The Company further represents and warrants that it is an insurance company duly organized and in good standing under applicable law and that it has legally and validly established each Account as a separate account under applicable state law and has registered the Account as a unit investment trust in accordance with the provisions of the 1940 Act to serve as a segregated investment account for the Contracts, and that it will maintain such registration for so long as any Contracts are outstanding. The Company will amend the registration statement under the 1933 Act for the Contracts and the registration statement under the 1940 Act for the Account from time to time as required in order to effect the continuous offering of the Contracts or as may otherwise be required by applicable law. The Company will register and qualify the Contracts for sale in accordance with the securities laws of the various states only if and to the extent deemed necessary by the Company. 2.2. The Company represents that the Contracts are currently and at the time of issuance will be treated as annuity contracts under applicable provisions of the Internal Revenue Code, and that it will maintain such treatment and that it will notify the Fund and the Adviser immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. 2.3. The Company represents and warrants that it will not purchase shares of the Designated Portfolios with assets derived from tax-qualified retirement plans except, indirectly, through Contracts purchased in connection with such plans. 2.4. The Fund represents and warrants that Fund shares of the Designated Portfolios sold pursuant to this Agreement will be registered under the 1933 Act and duly authorized for issuance in accordance with applicable law and that the Fund is and will remain registered under the 1940 Act for as long as such shares of the Designated Portfolios are outstanding. The Fund will amend the registration statement for its shares under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares or as may otherwise be required by applicable law. The Fund will register and qualify the shares of the Designated Portfolios for sale in accordance with the laws of the various states only if and to the extent deemed advisable by the Fund. 5 2.5. The Fund and Adviser represent that each Designated Portfolio is currently qualified as a Regulated Investment Company under Subchapter M of the Internal Revenue Code and that the Fund is compliant with Section 817(h) of the Internal Revenue Code and Treasury Regulation 1.817-5, as amended from time to time, relating to certain diversification requirements for variable annuity, endowment or life insurance contracts, and the Fund and Adviser will maintain such qualification (under Subchapter M or any successor or similar provision) and compliant status and that the Fund or Adviser will notify the Company immediately upon having a reasonable basis for believing that a Designated Portfolio or the Fund, as applicable, has ceased to so qualify or that it might not so qualify in the future. 2.6. The Fund and Adviser represent and warrant that in performing the services described in this Agreement, each will comply with all applicable laws, rules and regulations. The Fund, Adviser and CSI make no representation as to whether any aspect of the Fund's operations (including, but not limited to, fees and expenses and investment policies, objectives and restrictions) complies with the insurance laws and regulations of any state. The Fund, the Adviser and CSI agree that upon request they will use their best efforts to furnish the information required by state insurance laws so that the Company can obtain the authority needed to issue the Contracts in the various states. 2.7. The Fund currently does not intend to make any payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act, although it reserves the right to make such payments in the future. To the extent that it decides to finance distribution expenses pursuant to Rule 12b-1 the Fund undertakes to have its Fund Board formulate and approve any plan under Rule 12b-1 to finance distribution expenses in accordance with the 1940 Act. 2.8. The Fund represents that it is lawfully organized and validly existing under the laws of The Commonwealth of Massachusetts and that it does and will comply in all material respects with applicable provisions of the 1940 Act. 2.9. CSI represents and warrants that it will distribute the Fund shares of the Designated Portfolios in accordance with all applicable federal and state securities laws including, without limitation, the 1933 Act, the 1934 Act and the 1940 Act. 2.10. CSI and the Adviser each represents and warrants that it is and will remain duly registered under all applicable federal and state securities laws and that it will perform its obligations for the Fund in accordance in all material respects with any applicable state and federal securities laws. CSI further represents that it will maintain its membership in good standing with the National Association of Securities Dealers, Inc. 2.11. The Fund represents and warrants that all of its trustees, officers, employees, and other individuals/entities having access to the funds and/or securities of the Fund are and continue to be 6 at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Fund in an amount not less than the minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or related provisions as may be promulgated from time to time. The aforesaid bond includes coverage for larceny and embezzlement and is issued by a reputable bonding company. CSI and the Adviser represent and warrant that they are and will continue to be at all times covered by policies similar to the aforesaid bond. ARTICLE III. PROSPECTUSES AND PROXY STATEMENTS; VOTING 3.1. The Fund or CSI will provide the Company, at the Fund's or its affiliate's expense, with as many copies of the current Fund prospectus for the Designated Portfolios as the Company may reasonably request for distribution, at the Company's expense, to prospective contractowners and applicants. The Fund or CSI will provide, at the Fund's or its affiliate's expense, as many copies of said prospectus as necessary for distribution, at the Company's expense, to existing contractowners. The Fund or CSI will provide the copies of said prospectus to the Company or to its mailing agent. If requested by the Company, the Fund or CSI will provide such documentation, including a computer diskette of the Company's specification or a final copy of a current prospectus set in type at the Fund's or its affiliate's expense, and such other assistance as is reasonably necessary in order for the Company at least annually (or more frequently if the Fund prospectus is amended more frequently) to have the Fund's prospectus, the prospectus for the Contracts and the prospectuses of other mutual funds in which assets attributable to the Contracts may be invested printed together in one document (the "Multifund Prospectus"), in which case the Fund or its affiliate will bear its reasonable share of expenses as described above, allocated based on the proportionate number of pages of the Fund's and other fund's respective portions of the document. 3.2. The Fund or CSI will provide the Company, at the Fund's or its affiliate's expense, with as many copies of the statement of additional information as the Company may reasonably request for distribution, at the Company's expense, to prospective contractowners and applicants. The Fund or CSI will provide, at the Fund's or its affiliate's expense, as many copies of said statement of additional information as necessary for distribution, at the Company's expense, to any existing contractowner who requests such statement or whenever state or federal law otherwise requires that such statement be provided. The Fund or CSI will provide the copies of said statement of additional information to the Company or to its mailing agent. 3.3. To the extent that the Fund or CSI desires to change (whether by revision or supplement) any of the information contained in any form of Fund prospectus or statement of additional information provided to the Company, the Fund or its affiliate agrees to prepare and provide to the Company, at the Fund's or its affiliate's expense, as many copies of such revised prospectus and/or statement of additional information or supplement as may be legally required for distribution, at the Fund's or its affiliate's expense, to contractowners. The Company agrees to distribute copies of 7 such revised prospectus and/or statement of additional information or supplement as soon as possible following receipt thereof and will use its best efforts to make such distribution no later than five days following receipt in the event such change is legally required. To the extent that the Fund is required by law to cease selling shares of a Designated Portfolio, the Company agrees to cease offering shares of the Designated Portfolio until the Fund or CSI notifies the Company otherwise. 3.4. The Fund or CSI, at the Fund's or its affiliate's expense, will provide the Company or its mailing agent with copies of its proxy material, if any, reports to shareholders and other communications to shareholders in such quantity as the Company will reasonably require. The Company will distribute this proxy material and tabulate the votes at the Fund's or its affiliate's expense. 3.5. If and to the extent required by law the Company will: (a) solicit voting instructions from contractowners; (b) vote the shares of the Designated Portfolios held in the Account in accordance with instructions received from contractowners; and (c) vote shares of the Designated Portfolios held in the Account for which no timely instructions have been received, as well as shares it owns, in the same proportion as shares of such Designated Portfolio for which instructions have been received from the Company's contractowners; so long as and to the extent that the SEC continues to interpret the 1940 Act to require pass-through voting privileges for variable contractowners. Except as set forth above, the Company reserves the right to vote Fund shares held in any segregated asset account in its own right, to the extent permitted by law. The Company will be responsible for assuring that each of its separate accounts participating in the Fund calculates voting privileges in a manner consistent with all legal requirements, including the Mixed and Shared Funding Exemptive Order. 3.6. The Fund will comply with all provisions of the 1940 Act requiring voting by shareholders, and in particular, the Fund either will provide for annual meetings (except insofar as the SEC may interpret Section 16 of the 1940 Act not to require such meetings) or, as the Fund currently intends, will comply with Section 16(c) of the 1940 Act (although the Fund is not one of the trusts described in Section 16(c) of that Act) as well as with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in accordance with the SEC's interpretation of the requirements of Section 16(a) with respect to periodic elections of trustees and with whatever rules the SEC may promulgate with respect thereto. 8 ARTICLE IV. SALES MATERIAL AND INFORMATION 4.1. CSI will provide the Company on a timely basis with investment performance information for each Designated Portfolio in which the Company maintains an Account, including total return for the preceding calendar month and calendar quarter, the calendar year to date, and the prior one-year, five-year, and ten year (or life of the Designated Portfolio) periods. The Company may, based on the SEC mandated information supplied by CSI, prepare communications for contractowners ("Contractowner Materials"). The Company will provide copies of all Contractowner Materials concurrently with their first use for CSI's internal recordkeeping purposes. It is understood that neither CSI nor any Designated Portfolio will be responsible for errors or omissions in, or the content of, Contractowner Materials except to the extent that the error or omission resulted from information provided by or on behalf of CSI or the Designated Portfolio. Any printed information that is furnished to the Company pursuant to this Agreement other than each Designated Portfolio's prospectus or statement of additional information (or information supplemental thereto), periodic reports and proxy solicitation materials is CSI's sole responsibility and not the responsibility of any Designated Portfolio or the Fund. The Company agrees that the Portfolios, the shareholders of the Portfolios and the officers and governing Board of the Fund will have no liability or responsibility to the Company in these respects. 4.2. The Company will not give any information or make any representations or statements on behalf of the Fund or concerning the Fund in connection with the sale of the Contracts other than the information or representations contained in the registration statement, prospectus or statement of additional information for Fund shares, as such registration statement, prospectus and statement of additional information may be amended or supplemented from time to time, or in reports or proxy statements for the Fund, or in published reports for the Fund which are in the public domain or approved by the Fund or CSI for distribution, or in sales literature or other material provided by the Fund, the Adviser or by CSI, except with permission of CSI. The Company will furnish, or will cause to be furnished, to the Fund, the Adviser or CSI, each piece of sales literature or other promotional material in which the Company or its Account is named, at least ten (10) business days prior to its use. No such sales literature or other promotional material which requires the permission of CSI prior to use will be used if CSI reasonably objects to such use within five (5) business days after receipt. 4.3. The Fund, the Adviser and CSI will not give any information or make any representations or statements on behalf of the Company or concerning the Company, each Account, or the Contracts other than the information or representations contained in a registration statement, prospectus or statement of additional information for the Contracts, as such registration statement, prospectus and statement of additional information may be amended or supplemented from time to time, or in published reports for each Account or the Contracts which are in the public domain or approved by the Company for distribution to contractowners, or in sales literature or other material provided by the Company, except with permission of the Company. The Company agrees to 9 respond to any request for approval on a prompt and timely basis. The Fund, the Adviser or CSI will furnish, or will cause to be furnished, to the Company or its designee, each piece of sales literature or other promotional material in which the Company or its Account is named at least ten (10) business days prior to its use. No such material will be used if the Company reasonably objects to such use within five (5) business days after receipt of such material. 4.4. The Fund will provide to the Company at least one complete copy of all registration statements, prospectuses, statements of additions information, reports, proxy statements, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Fund or its shares, contemporaneously with the filing of such document with the SEC, the NASD or other regulatory authority. 4.5. The Company will provide to the Fund at least one complete copy of all registration statements, prospectuses, statements of additional information, reports, solicitations for voting instructions, sales literature and other promotional materials, applications for exemptions, requests for no action letters, and all amendments to any of the above, that relate to the Contracts or each Account, contemporaneously with the filing of such document with the SEC, the NASD or other regulatory authority. 4.6. For purposes of this Article IV, the phrase "sales literature or other promotional material" includes, but is not limited to, advertisements (such as material published, or designed for use in, a newspaper, magazine, or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, or other public media (e.g., on-line networks such as the Internet or other electronic messages)), sales literature (i.e., any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, reprints or excerpts of any other advertisements sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, registration statements, prospectuses, statements of additional information, shareholder reports, proxy materials and any other material constituting sales literature or advertising under the NASD rules, the 1933 Act or the 1940 Act. 4.7. The Fund and CSI hereby consent to the Company's use of the names of the Fund, each Designated Portfolio and the Adviser in connection with the marketing of the Contracts, subject to the terms of Sections 4.1 and 4.2 of this Agreement. Such consent will continue only as long as any Contracts are invested or marketed for investment in the relevant Designated Portfolio. ARTICLE V. FEES AND EXPENSES 10 5.1. The Fund, the Adviser and CSI will pay no fee or other compensation to the Company (other than as set forth in the administrative services letter agreement between CSI and the Company) except if the Fund or any Designated Portfolio adopts and implements a plan pursuant to Rule 12b-1 under the 1940 Act to finance distribution expenses, then, subject to obtaining any required exemptive orders or other regulatory approvals, the Fund may make payments to the Company or to the underwriter for the Contracts if and in such amounts agreed to by the Fund in writing. 5.2. All expenses incident to performance by the Fund of this Agreement will be paid by the Fund to the extent permitted by law. The Fund will bear the expenses for the cost of registration and qualification of the Fund's shares; preparation and filing of the Fund's prospectus, statement of additional information and registration statement, proxy materials and reports; setting in type and printing the Fund's prospectus; setting in type and printing proxy materials and reports by it to contractowners (including the costs of printing a Fund prospectus that contains an annual report); the preparation of all statements and notices required by any federal or state law; all taxes on the issuance or transfer of the Fund's shares; any expenses permitted to be paid or assumed by the Fund pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act; and all other expenses set forth in Article III of this Agreement. ARTICLE VI. DIVERSIFICATION 6.1. The Adviser will ensure that the Fund will at all times invest money from the Contracts in such a manner as to ensure that the Contracts will be treated as variable annuity contracts under the Internal Revenue Code and the regulations issued thereunder. Without limiting the scope of the foregoing, the Fund will comply with Section 817(h) of the Internal Revenue Code and Treasury Regulation 1.817-5, as amended from time to time, relating to the diversification requirements for variable annuity, endowment, or life insurance contracts and any amendments or other modifications to such Section or Regulation. In the event of a breach of this Article VI by the Fund, it will take all reasonable steps: (a) to notify the Company of such breach; and (b) to adequately diversify the Fund so as to achieve compliance within the grace period afforded by Treasury Regulation 1.817-5. ARTICLE VII. POTENTIAL CONFLICTS 7.1. The Board of Trustees of the Fund (the "Fund Board") will monitor the Fund for the existence of any irreconcilable material conflict among the interests of the contractowners of all separate accounts investing in the Fund. An irreconcilable material conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the 11 manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by Participating Insurance Companies or by variable annuity and variable life insurance contractowners; or (f) a decision by an insurer to disregard the voting instructions of contractowners. The Fund Board will promptly inform the Company if it determines that an irreconcilable material conflict exists and the implications thereof. 7.2. The Company will report any potential or existing conflicts of which it is aware to the Fund Board. The Company agrees to assist the Fund Board in carrying out its responsibilities, as delineated in the Mixed and Shared Funding Exemptive Order, by providing the Fund Board with all information reasonably necessary for the Fund Board to consider any issues raised. This includes, but is not limited to, an obligation by the Company to inform the Fund Board whenever contractowner voting instructions are to be disregarded. The Company's responsibilities hereunder will be carried out with a view only to the interest of contractowners. 7.3. If it is determined by a majority of the Fund Board, or a majority of its disinterested trustees, that an irreconcilable material conflict exists, the Company will, at its expense and to the extent reasonably practicable (as determined by a majority of the disinterested trustees), take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, up to and including: (a) withdrawing the assets allocable to some or all of the Accounts from the Fund or any Designated Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another Portfolio of the Fund, or submitting the question whether such segregation should be implemented to a vote of all affected contractowners and, as appropriate, segregating the assets of any appropriate group (i.e., variable annuity contractowners or variable life insurance contractowners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected contractowners the option of making such a change; and (b) establishing a new registered management investment company or managed separate account. 7.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard contractowner voting instructions, and the Company's judgment represents a minority position or would preclude a majority vote, the Company may be required, at the Fund's election, to withdraw the affected subaccount of the Account's investment in the Fund and terminate this Agreement with respect to such subaccount; provided, however, that such withdrawal and termination will be limited to the extent required by the foregoing irreconcilable material conflict as determined by a majority of the disinterested trustees of the Fund Board. No charge or penalty will be imposed as a result of such withdrawal. 7.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state insurance regulators, then the Company will withdraw the Account's investment in the Fund and terminate this Agreement with respect to such subaccount; provided, however, that such withdrawal and termination will be limited to the extent required by the foregoing irreconcilable material conflict as 12 determined by a majority of the disinterested directors of the Fund Board. No charge or penalty will be imposed as a result of such withdrawal. 7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority of the disinterested members of the Fund Board will determine whether any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Fund or the Adviser (or any other investment adviser to the Fund) be required to establish a new funding medium for the Contracts. The Company will not be required by Section 7.3 to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of contractowners materially affected by the irreconcilable material conflict. 7.7. The Company will at least annually submit to the Fund Board such reports, materials or data as the Fund Board may reasonably request so that the Fund Board may fully carry out the duties imposed upon it as delineated in the Mixed and Shared Funding Exemptive Order, and said reports, materials and data will be submitted more frequently if deemed appropriate by the Fund Board. 7.8. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Mixed and Shared Funding Exemptive Order) on terms and conditions materially different from those contained in the Mixed and Shared Funding Exemptive Order, then: (a) the Fund and/or the Participating Insurance Companies, as appropriate, will take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Sections 3.5, 3.6, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement will continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. ARTICLE VIII. INDEMNIFICATION 8.1. INDEMNIFICATION BY THE COMPANY (a) The Company agrees to indemnify and hold harmless the Fund, the Adviser, CSI, and each person, if any, who controls or is associated with the Fund, the Adviser or CSI within the meaning of such terms under the federal securities laws and any director, trustee, officer, partner, employee or agent of the foregoing (collectively, the "Indemnified Parties" for purposes of this Section 8.1) against any and all losses, claims, expenses, damages, liabilities (including amounts paid in settlement with the written consent of the Company) or litigation (including reasonable legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements: 13 (1) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the registration statement, prospectus or statement of additional information for the Contracts or contained in the Contracts or sales literature or other promotional material for the Contracts (or any amendment or supplement to any of the foregoing), including any prospectuses or statements of additional information of the Fund to which the Company has made any changes to the information provided to the Company, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated or necessary to make such statements not misleading in light of the circumstances in which they were made; provided that this agreement to indemnify will not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with written information furnished to the Company by the Fund, the Adviser or CSI for use in the registration statement, prospectus or statement of additional information for the Contracts or in the Contracts or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (2) arise out of or as a result of statements or representations by or on behalf of the Company or wrongful conduct of the Company or persons under its control, with respect to the sale or distribution of the Contracts or Fund shares (other than statements or representations contained in the Fund registration statement, Fund prospectus, Fund statement of additional information, sales literature or other promotional material of the Fund not supplied by the Company or persons under its control); or (3) arise out of any untrue statement or alleged untrue statement of a material fact contained in the Fund registration statement, prospectus, statement of additional information or sales literature or other promotional material of the Fund (or amendment or supplement) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make such statements not misleading in light of the circumstances in which they were made, if such a statement or omission was made in reliance upon and in conformity with information furnished to the Fund by or on behalf of the Company or persons under its control; or (4) arise as a result of any failure by the Company to provide the services and furnish the materials under the terms of this Agreement; or (5) arise out of any material breach of any representation and/or warranty made by the Company in this Agreement or arise out of or result from any other material breach by the Company of this Agreement, including, but not limited to, a failure to comply with the provisions of Section 3.3; except to the extent provided in Sections 8.1(b) and 8.3 hereof. This indemnification will be in addition to any liability that the Company otherwise may have. 14 (b) No party will be entitled to indemnification under Section 8.1(a) to the extent such loss, claim, damage, liability or litigation is due to the willful misfeasance, bad faith, or gross negligence in the performance of such party's duties under this Agreement, or by reason of such party's reckless disregard of its obligations or duties under this Agreement by the party seeking indemnification. (c) The Indemnified Parties promptly will notify the Company of the commencement of any litigation, proceedings, complaints or actions by regulatory authorities against them in connection with the issuance or sale of the Fund shares or the Contracts or the operation of the Fund. 8.2. INDEMNIFICATION BY THE ADVISER AND CSI (a) The Adviser and CSI, in each case solely to the extent relating to such party's responsibilities hereunder, agree to indemnify and hold harmless the Company and each person, if any, who controls or is associated with the Company within the meaning of such terms under the federal securities laws and any director, trustee, officer, partner, employee or agent of the foregoing (collectively, the "Indemnified Parties" for purposes of this Section 8.2) against any and all losses, claims, expenses, damages, liabilities (including amounts paid in settlement with the written consent of the Adviser) or litigation (including reasonable legal and other expenses) to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements: (1) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement, prospectus or statement of additional information for the Fund or sales literature or other promotional material of the Fund (or any amendment or supplement to any of the foregoing) or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated or necessary to make such statements not misleading in light of the circumstances in which they were made (in each case substantially as transmitted to you by the Fund or CSI), provided that this agreement to indemnify will not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Adviser, CSI or the Fund by or on behalf of the Company for use in the registration statement, prospectus or statement of additional information for the Fund or in sales literature of the Fund (or any amendment or supplement thereto) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (2) arise out of or as a result of statements or representations or wrongful conduct of the Adviser, the Fund or CSI or persons under the control of the Adviser, the Fund or 15 CSI respectively, with respect to the sale of the Fund shares (other than statements or representations contained in a registration statement, prospectus, statement of additional information, sales literature or other promotional material covering the Contracts not supplied by CSI or persons under its control); or (3) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, statement of additional information or sales literature or other promotional material covering the Contracts (or any amendment or supplement thereto), or the omission or alleged omission to state therein a material fact required to be stated or necessary to make such statement or statements not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon and in conformity with written information furnished to the Company by the Adviser, the Fund or CSI or persons under the control of the Adviser, the Fund or CSI; or (4) arise as a result of any failure by the Fund, the Adviser or CSI to provide the services and furnish the materials under the terms of this Agreement (including, without limitation, a failure, whether unintentional or in good faith or otherwise, to (i) comply with the diversification requirements and procedures related thereto specified in Article VI of this Agreement) and (ii) inform the Company of the correct net asset value per share for each Designated Portfolio by 7:00 p.m., Eastern time, on a Business Day. (5) arise out of or result from any material breach of any representation and/or warranty made by the Adviser, the Fund or CSI in this Agreement, or arise out of or result from any other material breach of this Agreement by the Adviser the Fund or CSI; except to the extent provided in Sections 8.2(b) and 8.3 hereof. These indemnifications will be in addition to any liability that the Fund, Adviser or CSI otherwise may have. (b) No party will be entitled to indemnification under Section 8.2(a) to the extent such loss, claim, damage, liability or litigation is due to the willful misfeasance, bad faith, or gross negligence in the performance of such party's duties under this Agreement, or by reason of such party's reckless disregard of its obligations or duties under this Agreement by the party seeking indemnification. (c) The Indemnified Parties will promptly notify the Adviser, the Fund and CSI of the commencement of any litigation, proceedings, complaints or actions by regulatory authorities against them in connection with the issuance or sale of the Contracts or the operation of the account. 8.3. INDEMNIFICATION PROCEDURE 16 Any person obligated to provide indemnification under this Article VIII ("Indemnifying Party" for the purpose of this Section 8.3) will not be liable under the indemnification provisions of this Article VIII with respect to any claim made against a party entitled to indemnification under this Article VIII ("Indemnified Party" for the purpose of this Section 8.3) unless such Indemnified Party will have notified the Indemnifying Party in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim will have been served upon such Indemnified Party (or after such party will have received notice of such service on any designated agent), but failure to notify the Indemnifying Party of any such claim will not relieve the Indemnifying Party from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of the indemnification provision of this Article VIII, except to the extent that the failure to notify results in the failure of actual notice to the Indemnifying Party and such Indemnifying Party is damaged solely as a result of failure to give such notice. In case any such action is brought against the Indemnified Party, the Indemnifying Party will be entitled to participate, at its own expense, in the defense thereof. The Indemnifying Party also will be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Indemnifying Party to the Indemnified Party of the Indemnifying Party's election to assume the defense thereof, the Indemnified Party will bear the fees and expenses of any additional counsel retained by it, and the Indemnifying Party will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation, unless: (a) the Indemnifying Party and the Indemnified Party will have mutually agreed to the retention of such counsel; or (b) the named parties to any such proceeding (including any impleaded parties) include both the Indemnifying Party and the Indemnified Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The Indemnifying Party will not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there is a final judgment for the plaintiff, the Indemnifying Party agrees to indemnify the Indemnified Party from and against any loss or liability by reason of such settlement or judgment. A successor by law of the parties to this Agreement will be entitled to the benefits of the indemnification contained in this Article VIII. The indemnification provisions contained in this Article VIII will survive any termination of this Agreement. ARTICLE IX. APPLICABLE LAW 9.1. This Agreement will be construed and the provisions hereof interpreted under and in accordance with the laws of the State of New York, without regard to conflicts of laws provisions. 9.2. This Agreement will be subject to the provisions of the 1933 Act, the 1934 Act and the 1940 Act, and the rules and regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the SEC may grant (including, but not limited to, the Mixed 17 and Shared Funding Exemptive Order) and the terms hereof will be interpreted and construed in accordance therewith. ARTICLE X. TERMINATION 10.1. This Agreement will terminate: (a) at the option of any party, with or without cause, with respect to some or all of the Designated Portfolios, upon one year's advance written notice to the other parties; or (b) at the option of the Company, upon receipt of the Company's written notice by the other parties, with respect to any Designated Portfolio if shares of the Designated Portfolio are not reasonably available to meet the requirements of the Contracts as determined in good faith by the Company; or (c) at the option of the Company, upon receipt of the Company's written notice by the other parties, with respect to any Designated Portfolio in the event any of the Designated Portfolio's shares are not registered, issued or sold in accordance with applicable state and/or Federal law or such law precludes the use of such shares as the underlying investment media of the Contracts issued or to be issued by Company; or (d) at the option of the Fund, upon receipt of the Fund's written notice by the other parties, upon institution of formal proceedings against the Company by the NASD, the SEC, the insurance commission of any state or any other regulatory body regarding the Company's duties under this Agreement or related to the sale of the Contracts, the administration of the Contracts, the operation of the Account, or the purchase of the Fund shares, provided that the Fund determines in its sole judgment, exercised in good faith, that any such proceeding would have a material adverse effect on the Company's ability to perform its obligations under this Agreement; or (e) at the option of the Company, upon receipt of the Company's written notice by the other parties, upon institution of formal proceedings against the Fund, Adviser or CSI by the NASD, the SEC, or any state securities or insurance department or any other regulatory body, provided that the Company determines in its sole judgment, exercised in good faith, that any such proceeding would have a material adverse effect on the Fund's, Adviser's or CSI's ability to perform its obligations under this Agreement; or (f) at the option of the Company, upon receipt of the Company's written notice by the other parties, with respect to any Designated Portfolio if the Designated Portfolio ceases to qualify as a Regulated Investment Company under Subchapter M of the Internal Revenue Code, or under 18 any successor or similar provision, or if the Company reasonably and in good faith believes that the Designated Portfolio may fail to so qualify; or (g) at the option of the Company, upon receipt of the Company's written notice by the other parties, with respect to any Designated Portfolio if the Designated Portfolio fails to meet the diversification requirements specified in Article VI hereof or if the Company reasonably and in good faith believes the Designated Portfolio may fail to meet such requirements; or (h) at the option of any party to this Agreement, upon written notice to the other parties, upon another party's material breach of any provision of this Agreement which material breach is not cured within thirty (30) days of said notice; or (i) at the option of the Company, if the Company determines in its sole judgment exercised in good faith, that either the Fund, the Adviser or CSI has suffered a material adverse change in its business, operations or financial condition since the date of this Agreement or is the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Company, such termination to be effective sixty (60) days' after receipt by the other parties of written notice of the election to terminate; or (j) at the option of the Fund or CSI, if the Fund or CSI respectively, determines in its sole judgment exercised in good faith, that the Company has suffered a material adverse change in its business, operations or financial condition since the date of this Agreement or is the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Fund or the Adviser, such termination to be effective sixty (60) days' after receipt by the other parties of written notice of the election to terminate; or (k) at the option of the Company or the Fund upon receipt of any necessary regulatory approvals and/or the vote of the contractowners having an interest in the Account (or any subaccount) to substitute the shares of another investment company for the corresponding Designated Portfolio shares of the Fund in accordance with the terms of the Contracts for which those Designated Portfolio shares had been selected to serve as the underlying investment media. The Company will give sixty (60) days' prior written notice to the Fund of the date of any proposed vote or other action taken to replace the Fund's shares; or (l) at the option of the Company or the Fund upon a determination by a majority of the Fund Board, or a majority of the disinterested Fund Board members, that an irreconcilable material conflict exists among the interests of: (1) all contractowners of variable insurance products of all separate accounts; or (2) the interests of the Participating Insurance Companies investing in the Fund as set forth in Article VII of this Agreement; or 19 (m) at the option of the Fund in the event any of the Contracts are not issued or sold in accordance with applicable federal and/or state law. Termination will be effective immediately upon such occurrence without notice. 10.2. NOTICE REQUIREMENT Except as specified in Section 10.1(m), no termination of this Agreement will be effective unless and until the party terminating this Agreement gives prior written notice to all other parties of its intent to terminate, which notice will set forth the basis for the termination. 10.3. EFFECT OF TERMINATION In the event of any termination of this Agreement other than pursuant to subsection (d), (j), (k), (l) or (m) of Section 10.1, the Fund and CSI will, at the option of the Company, continue to make available additional shares of the Fund pursuant to the terms and conditions of this Agreement, for all Contracts in effect on the effective date of termination of this Agreement ( hereinafter referred to as "Existing Contracts.") . Specifically, without limitation, the owners of the Existing Contracts will be permitted to reallocate investments in the Designated Portfolios (as in effect on such date), redeem investments in the Designated Portfolios and/or invest in the Designated Portfolios upon the making of additional purchase payments under the Existing Contracts. 10.4. SURVIVING PROVISIONS Notwithstanding any termination of this Agreement, each party's obligations under Article VIII to indemnify other parties will survive and not be affected by any termination of this Agreement. In addition, each party's obligations under Section 12.6 will survive and not be affected by any termination of this Agreement. Finally, with respect to Existing Contracts, all provisions of this Agreement also will survive and not be affected by any termination of this Agreement. ARTICLE XI. NOTICES 11.1. Any notice will be deemed duly given when sent by registered or certified mail to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other parties. If to the Company: If to the Fund, the Adviser and/or CSI: One Copley Place 466 Lexington Avenue Suite 100 10th Floor 20 Boston, MA 02116 New York, NY 10017 Attn: Margaret Hankard Attn: Eugene P. Grace Senior Associate Counsel Senior Vice President ARTICLE XII. MISCELLANEOUS 12.1. The Fund, the Adviser and CSI acknowledge that the identities of the customers of the Company or any of its affiliates (collectively the "Company Protected Parties" for purposes of this Section 12.1), information maintained regarding those customers, and all computer programs and procedures or other information developed or used by the Company Protected Parties or any of their employees or agents in connection with the Company's performance of its duties under this Agreement are the valuable property of the Company Protected Parties. The Fund, the Adviser and CSI agree that if they come into possession of any list or compilation of the identities of or other information about the Company Protected Parties' customers, or any other information or property of the Company Protected Parties, other than such information as is publicly available or as may be independently developed or compiled by the Fund, the Adviser or CSI from information supplied to them by the Company Protected Parties' customers who also maintain accounts directly with the Fund, the Adviser or CSI, the Fund, the Adviser and CSI will hold such information or property in confidence and refrain from using, disclosing or distributing any of such information or other property except: (a) with the Company's prior written consent; (b) as required by law or judicial process; or (c) as may be necessary in the ordinary course of business or operations. The Company acknowledges that the identities of the customers of the Fund, the Adviser, CSI or any of their affiliates (collectively the "Adviser Protected Parties" for purposes of this Section 12.1), information maintained regarding those customers, and all computer programs and procedures or other information developed or used by the Adviser Protected Parties or any of their employees or agents in connection with the Fund's, the Adviser's or CSI's performance of their respective duties under this Agreement are the valuable property of the Adviser Protected Parties. The Company agrees that if it comes into possession of any list or compilation of the identities of or other information about the Adviser Protected Parties' customers, or any other information or property of the Adviser Protected Parties, other than such information as is publicly available or as may be independently developed or compiled by the Company from information supplied to them by the Adviser Protected Parties' customers who also maintain accounts directly with the Company, the Company will hold such information or property in confidence and refrain from using, disclosing or distributing any of such information or other property except: (a) with the Fund's, the Adviser's or CSI's prior written consent; (b) as required by law or judicial process; or (c) as may be necessary in the ordinary course of business or operations.. Each party acknowledges that any breach of the agreements in this Section 12.1 would result in immediate and irreparable harm to the other parties for which there would be no adequate remedy at law and agree that in the event of such a breach, the other parties will be entitled to equitable relief by way of temporary and permanent injunctions, as well as such other relief as any court of competent jurisdiction deems appropriate. 21 12.2. The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 12.3. This Agreement may be executed simultaneously in two or more counterparts, each of which taken together will constitute one and the same instrument. 12.4. If any provision of this Agreement will be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement will not be affected thereby. 12.5. This Agreement will not be assigned by any party hereto without the prior written consent of all the parties. 12.6. Each party to this Agreement will maintain all records required by law, including records detailing the services it provides. Such records will be preserved, maintained and made available to the extent required by law and in accordance with the 1940 Act and the rules thereunder. Each party to this Agreement will cooperate with each other party and all appropriate governmental authorities (including without limitation the SEC, the NASD and state insurance regulators) and will permit each other, directly and through such party's authorized representatives, and such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. Upon request by the Fund or CSI, the Company agrees to grant the Fund or CSI reasonable access to all files, books and records pertaining to the performance of services under this Agreement. The Fund agrees that the Company will have the right to inspect, audit and copy all files, books and records pertaining to the performance of services under this Agreement. Each party also agrees to promptly notify the other parties if it experiences any difficulty in maintaining the records in an accurate and complete manner. This provision will survive termination of this Agreement. 12.7. Each party represents that the execution and delivery of this Agreement and the consummation of the transactions contemplated herein have been duly authorized by all necessary corporate or board action, as applicable, by such party and when so executed and delivered this Agreement will be the valid and binding obligation of such party enforceable in accordance with its terms. 12.8. The parties to this Agreement acknowledge and agree that all liabilities of the Fund arising, directly or indirectly, under this agreement, will be satisfied solely out of the assets of the Fund and that no trustee, officer, agent or holder of shares of beneficial interest of the Fund will be personally liable for any such liabilities. No Portfolio or series of the Fund will be liable for the obligations or liabilities of any other Portfolio or series. 22 12.9. The parties to this Agreement may amend, upon mutual agreement, the schedules to this Agreement from time to time to reflect changes in or relating to the Contracts, the Accounts or the Designated Portfolios of the Fund or other applicable terms of this Agreement. 12.10. The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and behalf by its duly authorized representative as of the date specified above. SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- WARBURG, PINCUS TRUST By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- WARBURG PINCUS ASSET MANAGEMENT, INC. By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- COUNSELLORS SECURITIES INC. By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- 23 Schedule 1 PARTICIPATION AGREEMENT By and Among SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) And WARBURG, PINCUS TRUST And WARBURG PINCUS ASSET MANAGEMENT, INC. And COUNSELLORS SECURITIES INC. The following separate accounts of Sun Life Assurance Company of Canada (U.S.) are permitted in accordance with the provisions of this Agreement to invest in Designated Portfolios of the Fund shown in Schedule 2: Sun Life of Canada (U.S.) Variable Account F 24 Schedule 2 PARTICIPATION AGREEMENT By and Among SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) And WARBURG, PINCUS TRUST And WARBURG PINCUS ASSET MANAGEMENT, INC. And COUNSELLORS SECURITIES INC. The Separate Account(s) shown on Schedule 1 may invest in the following Designated Portfolios of the Warburg, Pincus Trust: International Equity Portfolio Post-Venture Capital Portfolio Emerging Markets Portfolio Small Company Growth Portfolio 25 EX-10 10 IND AUDITORS CONSENT EXHIBIT 10 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Post-Effective Amendment No. 13 to Registration Statement No. 33-41628 of Sun Life of Canada (U.S.) Variable Account F on Form N-4 of our report date February 4, 1999 accompanying the financial statements of Sun Life of Canada (U.S.) Variable Account F appearing in the Statement of Additional Information, which is part of such Registration Statement, to the use of our report dated February 5, 1999 accompanying the statutory financial statements of Sun Life Assurance Company of Canada (U.S.) appearing in the Prospectus, which is part of such Registration Statement, and to the incorporation by reference of our reports dated February 5, 1999 appearing in the Annual Report on Form 10-K of Sun Life Assurance Company of Canada (U.S.) for the year ended December 31, 1998. We also consent to the references to us under the headings "Condensed Financial Information - Accumulation Units Values" and "Accountants" in such Prospectus and under the heading "Accountants" in such Statement of Additional Information. DELOITTE & TOUCHE LLP Boston, Massachusetts April 23, 1999 -----END PRIVACY-ENHANCED MESSAGE-----