-----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, AcCGRKRakPJHBRT1q/lJT4Zyzasu13KeUEWHTXO+lrOZu2NDkOKZ5iRvoQNWV3Ng iHryT9bgJLOSkDslF7j9+Q== 0000912057-99-005368.txt : 19991115 0000912057-99-005368.hdr.sgml : 19991115 ACCESSION NUMBER: 0000912057-99-005368 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUN LIFE ASSURANCE CO OF CANADA US CENTRAL INDEX KEY: 0000745544 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 042461439 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-99959 FILM NUMBER: 99750515 BUSINESS ADDRESS: STREET 1: SC 1335 ONE SUN LIFE EXECUTIVE PARK CITY: WELLESLEY HILLS STATE: MA ZIP: 02181 BUSINESS PHONE: 7814461182 MAIL ADDRESS: STREET 1: SUN LIFE EXECUTIVE PARK CITY: WELLESLEY HILLS STATE: MA ZIP: 02481 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT 0F 1934 For the Quarterly Period Ended Commission File Number 33-31711, September 30, 1999 33-41858, 333-77041, 333-45923, 333-62837, 333-11699, 002-99959 ------------ ------------ SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Exact name of registrant as specified in its charter) Delaware 04-2461439 - --------------------------------------- -------------------------------- (State or other jurisdiction of (IRS Employer I.D. No.) incorporation or organization) One Sun Life Executive Park, Wellesley Hills, MA 02481 - ------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (781) 237-6030 - ---------------------------------------------------- (Registrant's telephone number, including area code) NONE - ------------------------------------------------------------------------------- (Former name, former address, and former fiscal year, if changed since last report.) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes /X/ No /_/ (2) Yes /X/ No /_/ Registrant has no voting stock outstanding held by non-affiliates. Registrant has 5,900 shares of common stock outstanding on November 12, 1999, all of which are owned by Sun Life of Canada (U.S.) Holdings, Inc. SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.) INDEX PAGE NUMBER PART I: Financial Information Item 1: Financial Statements (Unaudited):* Statutory Statements of Admitted Assets, Liabilities and Capital Stock and Surplus September 30, 1999 and December 31, 1998 3 Statutory Statements of Operations - Nine Months Ended September 30, 1999 and September 30, 1998 4 Statutory Statements of Operations - Three Months Ended September 30, 1999 and September 30, 1998 5 Statutory Statements of Capital Stock and Surplus - Nine Months Ended September 30, 1999 and September 30, 1998 6 Statutory Statements of Cash Flows - Nine Months Ended September 30, 1999 and September 30, 1998 7 Notes to Unaudited Statutory Financial Statements 8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 24 PART II: Other Information Item 6: Exhibits and Reports on Form 8-K 27 *The Statutory Statements of Admitted Assets, Liabilities and Capital Stock and Surplus at December 31, 1998 have been taken from the audited statutory financial statements at that date. All other statements are unaudited. 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 (IN 000'S)
SEPTEMBER 30, DECEMBER 31, ADMITTED ASSETS 1999 1998 ---------------- ---------------- Bonds $ 1,263,078 $ 1,763,468 Common stocks 97,146 128,445 Mortgage loans on real estate 586,908 535,003 Properties acquired in satisfaction of debt 15,647 17,207 Investment real estate 76,832 78,021 Policy loans 42,908 41,944 Cash & short-term investments 291,935 265,226 Other invested assets 65,107 64,177 Investment income due and accrued 30,729 35,706 Federal income tax recoverable and interest thereon 4,999 1,110 Other assets 9,082 1,928 ---------------- ---------------- General account assets 2,484,371 2,932,235 Separate account assets Unitized 12,686,015 11,774,745 Non-unitized 2,193,122 2,195,641 ---------------- ---------------- TOTAL ADMITTED ASSETS $ 17,363,508 $ 16,902,621 ---------------- ---------------- ---------------- ---------------- LIABILITIES Aggregate reserve for life policies and contracts $ 1,206,869 $ 1,216,107 Supplementary contracts 2,995 1,885 Policy and contract claims 625 369 Liability for premium and other deposit funds 602,532 1,000,875 Surrender values on cancelled policies 100 5 Interest maintenance reserve 43,077 40,490 Commissions to agents due or accrued 1,456 2,615 General expenses due or accrued 9,110 5,932 Transfers from Separate Accounts due or accrued (440,620) (361,863) Taxes, licenses and fees due or accrued, excluding FIT 5,282 401 Federal income taxes due or accrued 49,697 25,019 Unearned investment income 60 23 Amounts withheld or retained by company as agent or trustee 1,426 529 Remittances and items not allocated 1,567 5,176 Asset valuation reserve 42,809 44,392 Payable to parent, subsidiaries, and affiliates 30,120 30,381 Payable for securities 4,161 428 Other liabilities 63,508 9,770 ---------------- ---------------- General account liabilities 1,624,774 2,022,534 Separate account liabilities Unitized 12,685,744 11,774,522 Non-unitized 2,193,122 2,195,641 ---------------- ---------------- TOTAL LIABILITIES 16,503,640 15,992,696 ---------------- ---------------- 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 89,613 139,669 ---------------- ---------------- Surplus 853,968 904,024 ---------------- ---------------- Total common capital stock and surplus 859,868 909,924 ---------------- ---------------- TOTAL LIABILITIES, CAPITAL STOCK AND SURPLUS $ 17,363,508 $ 16,902,621 ---------------- ---------------- ---------------- ----------------
See notes to unaudited statutory financial statements. 3 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.) STATUTORY STATEMENTS OF OPERATIONS
(IN 000'S) NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 ----------------- --------------- INCOME Premiums and annuity considerations $ 49,581 $ 203,852 Deposit-type funds 2,034,034 1,564,472 Considerations for supplementary contracts without life contingencies and dividend accumulations 2,727 1,424 Net investment income 116,209 144,129 Amortization of interest maintenance reserve 2,747 1,504 Net gain from operations from Separate Accounts Statement 0 1 Income from fees associated with investment management administration and contract guarantees from Separate Account 126,605 104,281 Other income 18,302 80,779 ----------------- --------------- Total 2,350,205 2,100,442 ----------------- --------------- BENEFITS AND EXPENSES Death benefits 2,476 17,892 Annuity benefits 115,526 113,713 Disability benefits and benefits under accident and health policies 0 0 Surrender benefits and other fund withdrawals 1,769,835 1,466,827 Interest on policy or contract funds 253 461 Payments on supplementary contracts without life contingencies and of dividend accumulations 1,745 1,946 Increase (decrease) in aggregate reserves for life and accident and health policies and contracts (9,238) 95,083 Decrease in liability for premium and other deposit funds (344,673) (369,825) Increase (decrease) in reserve for supplementary contracts without life contingencies and for dividend and coupon accumulations 1,110 (461) ----------------- --------------- Total 1,537,034 1,325,636 Commissions on premiums and annuity considerations (direct business only) 119,220 102,544 Commissions and expense allowances on reinsurance assumed 0 13,032 General insurance expenses 50,149 42,787 Insurance taxes, licenses and fees, excluding federal income taxes 6,596 5,213 Decrease in loading on and cost of collection in excess of loading on deferred and uncollected premiums 0 (331) Net transfers to Separate Accounts 592,385 500,444 ----------------- --------------- Total 2,305,384 1,989,325 ----------------- --------------- NET GAIN FROM OPERATIONS BEFORE DIVIDENDS TO POLICYHOLDERS AND FIT 44,821 111,117 Dividends to policyholders 0 31,019 ----------------- --------------- NET GAIN FROM OPERATIONS AFTER DIVIDENDS TO POLICYHOLDERS AND BEFORE FIT 44,821 80,098 Federal income tax expense (excluding tax on capital gains) 14,721 28,931 ----------------- --------------- NET GAIN FROM OPERATIONS AFTER DIVIDENDS TO POLICYHOLDERS AND FIT AND BEFORE REALIZED CAPITAL GAINS 30,100 51,167 Net realized capital gains (losses) less capital gains tax and transferred to the IMR 1,446 1,532 ----------------- --------------- NET INCOME $ 31,546 $ 52,699 ================= ===============
See notes to unaudited statutory financial statements. 4 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.) STATUTORY STATEMENTS OF OPERATIONS
(IN 000'S) THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 --------------- ---------------- INCOME Premiums and annuity considerations $ 15,460 $ 67,719 Deposit-type funds 689,796 568,447 Considerations for supplementary contracts without life contingencies and dividend accumulations 1,685 280 Net investment income 35,573 44,398 Amortization of interest maintenance reserve 932 581 Net gain from operations from Separate Accounts Statement 0 (2) Income from fees associated with investment management administration and contract guarantees from Separate Account 43,829 36,145 Other income 6,250 27,400 --------------- ---------------- Total 793,525 744,968 --------------- ---------------- BENEFITS AND EXPENSES Death benefits 1,287 2,059 Annuity benefits 40,579 40,636 Surrender benefits and other fund withdrawals 554,346 478,645 Interest on policy or contract funds 68 199 Payments on supplementary contracts 0 without life contingencies and of dividend accumulations 820 747 Increase (decrease) in aggregate reserves for life and accident and health policies and contracts (794) 36,834 Decrease in liability for premium and other deposit funds (76,993) (88,386) Increase (decrease) in reserve for supplementary contracts without life contingencies and for dividend and coupon accumulations 902 (447) --------------- ---------------- Total 520,215 470,287 Commissions on premiums and annuity considerations (direct business only) 39,452 35,929 Commissions and expense allowances on reinsurance assumed 0 4,806 General insurance expenses 18,963 13,003 Insurance taxes, licenses and fees, excluding federal income taxes 1,774 1,483 Decrease in loading on and cost of collection in excess of loading 0 on deferred and uncollected premiums 0 (98) Net transfers to Separate Accounts 215,326 174,990 --------------- ---------------- Total 795,730 700,400 --------------- ---------------- NET GAIN FROM OPERATIONS BEFORE DIVIDENDS TO POLICYHOLDERS AND FIT (2,205) 44,568 Dividends to policyholders 0 11,111 --------------- ---------------- NET GAIN FROM OPERATIONS AFTER DIVIDENDS TO POLICYHOLDERS AND BEFORE FIT (2,205) 33,457 Federal income tax expense (excluding tax on capital gains) 1,800 16,537 --------------- ---------------- NET GAIN FROM OPERATIONS AFTER DIVIDENDS TO POLICYHOLDERS AND FIT AND BEFORE REALIZED CAPITAL GAINS (4,005) 16,920 Net realized capital gains (losses) less capital gains tax and transferred to the IMR (5,799) 577 --------------- ---------------- NET INCOME $ (9,804) $ 17,497 =============== ================
See notes to unaudited statutory financial statements. 5 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
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 -------------- -------------- CAPITAL AND SURPLUS, BEGINNING OF PERIOD $ 909,924 $ 832,695 -------------- -------------- Net income 31,544 52,697 Change in net unrealized capital gains (10,167) (1,421) Change in non-admitted assets and related items 1,937 (1,544) Change in asset valuation reserve 1,583 4,246 Other changes in surplus in Separate Accounts Statement 47 48 Dividends to stockholders (75,000) (50,000) -------------- -------------- Net change in capital and surplus for the year (50,056) 4,026 -------------- -------------- CAPITAL AND SURPLUS, END OF PERIOD $ 859,868 $ 836,721 ============== ==============
See notes to unaudited statutory financial statements. 6 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
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 --------------------- --------------------- CASH PROVIDED Premiums, annuity considerations and deposit funds received $ 2,083,615 $ 1,770,069 Considerations for supplementary contracts and dividend accumulations received 2,727 1,424 Net investment income received 133,719 182,263 Other income received 144,906 82,206 --------------------- --------------------- Total receipts 2,364,967 2,035,962 --------------------- --------------------- Benefits paid (other than dividends) 1,889,232 1,599,475 Insurance expenses and taxes paid (other than federal income and capital gains taxes) 169,065 166,425 Net cash transfers to Separate Accounts 671,142 491,151 Dividends paid to policyholders 0 26,519 Federal income tax (recoveries) payments (excluding tax on capital gains) (9,956) 28,224 Other-net 253 481 --------------------- --------------------- Total payments 2,719,736 2,312,255 --------------------- --------------------- Net cash from operations (354,769) (276,293) Proceeds from long-term investments sold, matured or repaid (after deducting tax expense (benefit) on capital gain (loss) of ($10,310) for 1999, $428 for 1998) 755,697 1,075,039 Other cash provided 37,498 (50,530) --------------------- --------------------- Total cash provided 793,195 1,024,509 --------------------- --------------------- Cash Applied Cost of long-term investments acquired 286,118 919,918 Other cash applied 125,599 175,174 --------------------- --------------------- Total cash applied 411,717 1,095,092 --------------------- --------------------- Net change in cash and short-term investments 26,709 (346,876) Cash and short-term investments: Beginning of period 265,226 544,418 --------------------- --------------------- End of period $ 291,935 $ 197,542 ===================== =====================
See notes to unaudited statutory financial statements. 7 NOTES TO UNAUDITED FINANCIAL STATEMENTS (1) GENERAL In management's opinion all adjustments, which include only normal recurring adjustments, necessary for a fair presentation of the financial statements have been made. The accompanying unaudited statements should be read in conjunction with the audited financial statements for the year ended December 31, 1998. (2) TRANSACTIONS WITH AFFILIATES The Company has an agreement with its ultimate parent, Sun Life Assurance Company of Canada (`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 $ 5,823,585 and $20,415,231 for the three and nine month periods in 1999 and $ 3,538,610 and $14,802,906 for the same periods in 1998. The Company leases office space to SLOC under lease agreements with terms expiring in September, 2004 and options to extend the terms for each of twelve successive five-year terms at fair market rental not to exceed 125% of the fixed rent for the term, which is ending in 2004. Rent received by the Company under the leases for the nine-month period amounted to approximately $5,093,326. (3) INVESTMENTS IN SUBSIDIARIES The following is combined unaudited summarized financial information of the subsidiaries as of:
SEPTEMBER 30, DECEMBER 31, (000's) 1999 1998 Other assets $ 1,067,829 $ 1,315,317 Liabilities (970,683) (1,186,872) ----------- ----------- Total net assets $ 97,146 $ 128,445 ----------- ----------- ----------- ----------- NINE MONTHS ENDED SEPTEMBER 30, (000's) 1999 1998 Total revenue $ 80,112 $ 175,856 Operating expenses (82,140) (173,093) Income tax expense (60) (1,710) ----------- ----------- Net income $ (2,088) $ 1,053 ----------- ----------- ----------- -----------
8 The following is combined unaudited summarized financial information of the subsidiaries as of:
THREE MONTHS ENDED SEPTEMBER 30, (000's) 1999 1998 Total revenue $ 27,031 $ 49,704 Operating expenses (26,948) (48,704) Income tax expense (267) 85 ---------- ------------ Net income $ (184) $ 1,085 ---------- ------------ ---------- ------------
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 did not have a significant effect on the ongoing operations of the Company. Subsequent Event In October 1999, the Company completed the sale of its wholly-owned subsidiary, New London Trust F.S.B. (`NLT'), to a consortium consisting of Phoenix Home Life Mutual Insurance Company (`Phoenix') and three community banks in New Hampshire and Connecticut, for approximately $49.1 million. Phoenix is retaining the trust operations of NLT, while the assets, liabilities, and banking offices of NLT's retail banking operations have been split among Lake Sunapee Bank, fsb of Newport, NH, Mascoma Savings Bank of Lebanon, NH and Cargill Bank of Putnam, CT. This transaction is not expected to have a significant effect on the ongoing operations of the Company. 9 (4) INVESTMENT INCOME Net investment income consisted of:
NINE MONTHS ENDED SEPTEMBER 30, (000's) 1999 1998 Interest income from bonds $99,192 $128,687 Income from investment in common stocks of affiliates 6,500 3,000 Interest income from mortgage loans 38,466 41,025 Real estate investment income 11,715 11,729 Interest income from policy loans 2,571 2,115 Other (357) (264) -------- -------- Gross investment income 158,087 186,292 Interest on surplus notes and borrowed money 32,449 34,087 Investment expenses 9,429 8,076 -------- -------- $116,209 $144,129 -------- -------- -------- --------
THREE MONTHS ENDED SEPTEMBER 30, (000's) 1999 1998 Interest income from bonds $30,932 $40,609 Income from investment in common stocks of affiliates 0 0 Interest income from mortgage loans 13,068 13,140 Real estate investment income 3,927 3,848 Interest income from policy loans 1,114 723 Other 449 (506) ------- ------- Gross investment income 49,490 57,814 Interest on surplus notes and borrowed money 10,816 10,816 Investment expenses 3,101 2,600 ------- ------- $35,573 $44,398 ------- ------- ------- -------
10 (5) SEGMENT INFORMATION The Company currently offers financial products and services such as fixed and variable annuities, and life insurance on an individual basis including company-owned life insurance. 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 operating segments and to engage in other financing related activities. The Wealth Management segment markets and administers individual and group variable annuity products, individual and group fixed annuity products which include market value adjusted annuities, and other retirement benefit products. This segment was formerly referred to as the "Retirement Products and Services" segment; no changes have been made to the composition of this segment. The Protection segment markets and administers a variety of life insurance products sold to individuals and corporate owners of individual life insurance. The in-force products include whole life, universal life and variable life. This segment was formerly referred to as the "Individual Insurance" segment; no changes have been made to the composition of this segment.
(000's) Nine Months Total Total Pre-Tax Income Ended SEPTEMBER 30, Revenues Expenditures Income Taxes - ------------------- ---------- ------------ --------- ------- 1999 Wealth Management 2,316,687 2,272,892 43,795 14,479 Protection $ 25,987 $ 30,320 $ (4,333) $ (1,241) Corporate 7,531 2,172 5,359 1,483 ---------- ---------- ---------- ---------- Total $2,350,205 $2,305,384 $ 44,821 $ 14,721 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 1998 Wealth Management 1,855,652 1,805,325 50,327 16,996 Protection $ 234,548 $ 212,857 $ 21,691 $ 9,089 Corporate 10,242 2,162 8,080 2,846 ---------- ---------- ---------- ---------- Total $2,100,442 $2,020,344 $ 80,098 $ 28,931 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
11
(000's) Three Months Total Total Pre-Tax Income Ended September 30, Revenues Expenditures Income Taxes - --------------- ---------- ------------ --------- ------- 1999 Wealth Management 784,945 785,490 (545) (1,013) Protection $ 7,116 $ 10,289 $ (3,173) $ (1,011) Corporate 1,464 (49) 1,513 3,824 --------- --------- --------- --------- Total $ 793,525 $ 795,730 $ (2,205) $ 1,800 --------- --------- --------- --------- --------- --------- --------- --------- 1998 Wealth Management 661,555 643,707 17,848 8,890 Protection $ 81,982 $ 68,296 $ 13,686 $ 4,749 Corporate 1,431 (492) 1,923 2,897 --------- --------- --------- --------- Total $ 744,968 $ 711,511 $ 33,457 $ 16,537 --------- --------- --------- --------- --------- --------- --------- ---------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION - SEPTEMBER 30, 1999 CAUTIONARY STATEMENT This Form 10-Q includes forward-looking statements by the Company under the Private Securities Litigation Reform Act of 1995. These statements are not matters of historical fact but rather of current expectations relating 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. 12 RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 NET INCOME Net income decreased by $21.1 million to $31.5 million in the first nine months of 1999 as compared to the same period in 1998. The change mainly reflects lower income from operations, which decreased by $21.1 million to $30.1 million for the first nine months of 1999. 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." The decrease in income from operations reflects the following factors: - - Income from operations from the Company's Wealth Management segment decreased by $4.0 million to $29.3 million for the first nine months of 1999. (This increase is discussed in the "Wealth Management Segment" section below.) - - The Company's termination of certain reinsurance agreements with its ultimate parent in the fourth quarter of 1998 affected income from operations from the Protection segment. Active reinsurance agreements in the first nine months of 1998 had the effect of increasing income from operations by $8.5 million in that period; those still active in the first nine months of 1999 had the effect of reducing income from operations by $0.8 million in that period. Other activity in the Protection segment resulted in a decrease to income from operations of $2.4 million in the first nine months of 1999 compared to an increase of $4.0 million for the same period in 1998. (These items are discussed in the "Protection Segment" section below.) - - Income from operations from the Company's Corporate segment decreased by $1.4 million to $3.9 million for the first nine months of 1999. (This increase is discussed in the "Corporate Segment" section below.) INCOME FROM OPERATIONS BY SEGMENT The Company's income from operations reflects the operations of its three business segments: the Wealth Management segment, the Protection segment and the Corporate segment. The following table provides a summary. 13
INCOME FROM OPERATIONS * ($ IN MILLIONS) NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 % CHANGE Wealth Management $ 29.3 $ 33.3 -12.0% Protection (3.1) 12.6 -124.6% Corporate 3.9 5.3 -26.4% -------------------------------------------- $ 30.1 $ 51.2 -41.2% -------------------------------------------- --------------------------------------------
* BEFORE NET REALIZED CAPITAL GAINS OR LOSSES Wealth Management Segment The Wealth Management 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 Massachusetts Financial Services Company ('MFS'), an affiliate of the Company. Investment funds available under Futurity products are managed by several investment managers, including MFS and Sun Capital Advisers, Inc., a subsidiary of the Company. The Company distributes 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 by Sun Life of Canada (U.S.) Distributors, Inc., a subsidiary of the Company, through a dedicated wholesaler network and 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. 14 Following are the major factors affecting the Wealth Management segment results in the first nine months of 1999 as compared to the same period in the prior year. Deposit-type funds, which primarily comprised annuity deposits, increased by $469.6 million, or 30%, to $2,034.0 million in the first nine months of 1999 compared to the same period in 1998. Fixed annuity account deposits were higher by approximately $630 million in the first nine months of 1999 compared to the same period in 1998 which management believes is mainly the result of the success of the Company's introduction, during the fourth quarter of 1998, of a higher Dollar Cost Averaging (`DCA') rate and a new six-month DCA program. Under these programs, which were redesigned in late 1996, deposits are made into the fixed portion of the annuity contract and receive a bonus rate of interest for the policy year. During the year, the fixed deposit is systematically transferred to the variable portion of the contract in equal periodic installments. While fixed annuity account deposits increased, deposits directly into variable accounts declined by approximately 19% in the first nine months of 1999 compared to the same period in 1998. The Company's management believes this decline was a consequence of the heightened interest in the DCA programs in the first nine months of 1999. Sales of the Futurity line of products, introduced in February 1998, represented approximately 12% of total annuity deposits for the first nine months of 1999. The Company expects that sales for the Futurity product will continue to increase in the future, based on management's beliefs that market demand is growing for multi-manager variable annuity products, such as Futurity; that the productivity of Futurity's wholesale distribution network, established in 1998, will continue to grow; and that the marketplace will respond favorably to future introductions of new Futurity products and product enhancements. Fee income increased as a result of higher variable annuity account balances. Fee income was higher by $22.1 million, or 22%, in the first nine months of 1999 compared to the same period in 1998. 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. There has been a shift to variable account products from the general account products. As a consequence, there has been a decline in average general account invested assets and, in turn, net investment income has declined. Net investment income reflects only income earned on invested assets of the general account. In the first nine months of 1999, net investment income for the Wealth Management segment decreased by $33.4 million to $90.0 million compared to the same period in 1998. This decline in average general account assets mainly reflects the Company's decision in 1997 to no longer market group pension and GIC products and as a consequence, the scheduled liquidation of maturing GICS. It also reflects the shift in deposits in recent years from the fixed account to variable accounts. 15 Policyholder benefits (the major elements of which are surrenders and withdrawals, changes in the liability for premium and other deposit funds, and related separate account transfers) were higher by approximately $450 million in the first nine months of 1999 as compared to the same period in 1998, mainly as a result of higher variable annuity surrenders. 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. The Company expects that as the separate account block of business continues to grow and as increasing amounts are no longer subject to surrender charges, surrenders will tend to increase. The Company is implementing a conservation program with the aim of improving asset retention. Operational expenses, which include general insurance expenses and insurance taxes, licenses and fees, excluding federal income taxes, increased by $1.0 million, or 2%, in the first nine months of 1999 compared to the same period in 1998. This increase reflected costs associated with operations and technology improvements to support the growth of the Company's in-force business and costs related to the product design, implementation, and distribution of the new Futurity multi-manager annuity product. Commissions of $118.0 million were higher by $17.0 million in the third quarter of 1999 than in the same quarter in 1998, mainly as a result of higher sales. Protection Segment The Protection segment comprises two main elements, internal reinsurance and variable life products. In recent years, the Company has had various reinsurance agreements with its ultimate parent, SLOC. In some of these arrangements, SLOC has reinsured the mortality risks in excess of the Company's retention of individual life policies sold in prior years by the Company. These agreements, in the aggregate, had an immaterial effect on net income in both 1998 and 1999. In another agreement, which became effective January 1, 1991 and terminated October 1, 1998, the Company reinsured certain individual life insurance contracts issued by SLOC. This latter agreement had a significant effect on net income in the first nine months of 1998 but not in 1999. The Company's primary individual variable life insurance product is its variable universal life product marketed to the company-owned life insurance ("COLI") market. This product was introduced in late 1997. The Company's management expects its variable life business to grow and become more significant in the future. It has developed a new variable universal life product as part of the Futurity product portfolio, which it introduced in September 1999. During the first nine months of 1999, expenses involved with the development of this product had the effect of reducing income from operations for the Protection segment in comparison with the same period in 1998. 16 Corporate Segment This segment includes the capital of the Company, its investments in subsidiaries and items not otherwise attributable to either the Wealth Management or the Protection segments. For the first nine months of 1999, income from operations for this segment declined by $1.4 million to $3.9 million as compared to the same period in 1998. This decline mainly reflected lower net investment income. Investment income was lower in the third quarter of 1999 compared to the same period in 1998, because dividend payments to policyholders, of $45 million in 1998 and $70 million in April 1999, reduced the average invested asset balance in this segment. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 NET INCOME There was a net loss of $9.8 million in the third quarter of 1999 as compared to net income of $17.5 million in the same quarter in 1998. This $27.3 million change primarily reflected a decrease of $20.9 million in income from operations, to a net loss of $4.0 million for the third quarter of 1999, as discussed further below. It also reflected $5.8 million in net realized capital losses in the third quarter of 1999 as compared to $0.6 million in net realized capital gains in the same period in 1998. INCOME FROM OPERATIONS BY SEGMENT The following table provides a summary of income from operations by business segment:
INCOME FROM OPERATIONS* ($ IN MILLIONS) THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 % CHANGE Wealth Management $ 0.5 $ 9.0 -94.4% Protection (2.2) 8.9 -124.7% Corporate (2.3) (1.0) -120.0% --------------------------------------------- $ (4.0) $ 16.9 -123.7% --------------------------------------------- ---------------------------------------------
*BEFORE NET REALIZED CAPITAL GAINS OR LOSSES 17 Wealth Management Segment Following are the major factors affecting the Wealth Management segment results in the third quarter of 1999 as compared to the same period in 1998. As discussed below, most of the factors had the effect of increasing income from operations; however, increased policyholder benefit costs and lower net investment income resulted in the overall decline in income from operations in the third quarter of 1999 as compared to the same quarter in 1998. Deposit-type funds, which primarily comprise annuity deposits, increased by $121.3 million, or 21%, to $689.8 million in the third quarter of 1999 compared to the same 1998 quarter. Fixed annuity account deposits were higher by approximately $200 million in the third quarter of 1999 compared to the same 1998 quarter, mainly as a result of the success of the Dollar Cost Averaging ('DCA') programs. However, deposits directly into variable accounts declined by approximately 25% in the third quarter of 1999 compared to the same quarter in 1998. The Company's management believes this decline was a consequence of the heightened interest in the DCA programs in 1999. Sales of the Futurity line of products, introduced in February 1998, represented approximately 13% of total annuity deposits in the third quarter of 1999. Fee income increased as a result of higher variable annuity account balances. Fee income of $43.2 million was higher by $7.7 million, or 21%, in the third quarter of 1999 compared to the same quarter in 1998. The main factors driving this growth in account balances were 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. In the third quarter of 1999, net investment income for the Wealth Management segment decreased by $10.9 million to $28.1 million, or 28%, compared to the same period in 1998. This decline in average general account assets mainly reflects the Company's decision in 1997 to no longer market group pension and GIC products; it also reflects the shift in deposits in recent years from the fixed account to variable accounts. Policyholder benefits (the major elements of which are surrenders and withdrawals, changes in the liability for premium and other deposit funds, and related separate account transfers) were higher by approximately $136 million in the third quarter of 1999 as compared to the same quarter in 1998, mainly as a result of higher variable annuity surrenders. 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. The Company expects that as the separate account block of business continues to grow and as increasing amounts are no longer subject to surrender charges, surrenders will tend to increase. The Company is implementing a conservation program with the aim of improving asset retention. 18 Operational expenses, which include general insurance expenses and insurance taxes, licenses and fees, excluding federal income taxes, increased by $2.2 million to $16.6 million in the third quarter of 1999 compared to the same quarter in 1998. This increase reflected costs associated with operations and technology improvements to support the growth of the Company's in-force business and costs related to the product design, implementation, and distribution of the new Futurity multi-manager annuity product. Commissions of $39.2 million were higher by $3.5 million in the third quarter of 1999 as compared to the same quarter in 1998 as a result of higher sales. Also included in income from operations in the third quarter of 1999 were federal income tax benefits of $1.0 million as compared to federal income tax expenses of $8.9 million in the same quarter of 1998. Protection Segment The Protection segment comprises two main elements, internal reinsurance and variable life products. As noted above, the Company has had various reinsurance agreements with its ultimate parent, SLOC. Active reinsurance agreements in the third quarter of 1998 had the effect of increasing income from operations by $9.2 million in that period; those still active in the third quarter of 1999 had the effect of reducing income from operations by $0.3 million in that period. Other activity in the Protection segment resulted in a decrease to income from operations of $1.8 million in the third quarter of 1999 as compared to a decrease of $0.2 million in the third quarter of 1998. This activity related to the Company's primary individual variable life insurance product, which is a variable universal life product marketed to the company-owned life insurance ("COLI") market. This product was introduced in late 1997. The Company's management expects its variable life business to grow and become more significant in the future. It has developed a new variable universal life product as part of the Futurity product portfolio, which it introduced in September 1999. During the third quarter of 1999, expenses involved with the development of this product had the effect of reducing income from operations for the Protection segment in comparison with the same period in 1998. Corporate Segment The Corporate segment includes the capital of the Company, its investments in subsidiaries and items not otherwise attributable to either the Wealth Management or the Protection segments. In the third quarter of 1999, there were net losses from operations of $2.3 million as compared to a net loss of $1 million in the same period in 1998. This change reflected higher expenses for the segment in the third quarter of 1999 as compared to the same period in 1998. 19 FINANCIAL CONDITION & LIQUIDITY ASSETS The Company's total assets are held in either its general account or its separate accounts. General account assets are carried at book value and 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 nearly 100% of general account assets both at September 30, 1999 and December 31, 1998. Major types of invested asset holdings included bonds, mortgages, real estate and common stock. Separate accounts and their assets are carried at market value and are of two main types: - - Those assets held in a "fixed" (or "non-unitized") 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" (or "unitized") 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 the first nine months of 1999. The changes are discussed below.
ASSETS ($ IN MILLIONS) 9/30/99 12/31/98 % CHANGE General account assets $ 2,479.40 $ 2,932.20 -15.4% Fixed separate account assets 2,193.10 2,195.60 -0.1% ---------------------------------------------- 4,673.10 5,127.80 -8.9% Variable separate account assets 12,686.00 11,774.80 7.7% ---------------------------------------------- Total assets $ 17,358.50 $ 16,902.60 2.7% ---------------------------------------------- ----------------------------------------------
20 General account and fixed separate account assets, taken together, decreased by 9% in the first nine months of 1999. Variable separate account assets increased by 8% during that period. In management's view, these changes are consistent overall with broader trends seen both in the Company and in the industry in recent years, as variable accounts have shown rapid growth while fixed accounts have tended to grow more slowly or even decline. The pattern shown in the first nine months of 1999 mainly reflected strong deposits into the Company's DCA programs, which management believes is largely the result of the Company's enhancements to these programs in late 1998. It also reflected market appreciation of approximately $317.7 million for separate account assets during this period. The Company is investigating other strategies for growing general account assets. 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's 1997 decision to discontinue selling group pension and GIC contracts and to focus its marketing efforts on its combination fixed/variable annuity products had the effect of reducing general account liabilities. CAPITAL MARKETS RISK MANAGEMENT See Item 3. "Quantitative and Qualitative Disclosures About Market Risk," in this Quarterly Report on Form 10-Q for a discussion of the Company's capital markets risk management. CAPITAL RESOURCES CAPITAL ADEQUACY The National Association of Insurance Commissioners ("NAIC") adopted regulations at the end of 1993 that established minimum capitalization requirements for insurance companies, based on risk-based capital ("RBC") formulas. 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 both at September 30, 1999 and December 31, 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 21 Company manages each segment's assets based on an investment policy that it has established for that segment. Among other matters, this investment policy considers liquidity requirements and provides cash flow estimates. The Company reviews these policies quarterly. The Company's liquidity targets are intended to enable it to meet its day-to-day cash requirements. On a quarterly basis, the Company compares its total "liquifiable" assets to its total demand liabilities. Liquifiable assets comprise cash and assets that could quickly be converted to cash should the need arise. These assets include short-term investments and other current assets and investment-grade bonds. The Company's policy is to maintain a liquidity ratio in excess of 100%. Based on its ongoing liquidity analyses, the Company believes that its available liquidity is more than sufficient to meet its liquidity needs. OTHER MATTERS DEMUTUALIZATION On January 27, 1998, SLOC announced that its Board of Directors had requested that management develop a plan to demutualize, which would involve converting from a mutual structure, with ownership by policyholders, to a shareholder-owned company. The process of demutualization would provide that the ownership interest currently held by policyholders be distributed to them in the form of shares, without affecting their interests as policyholders. In June 1999, the SLOC Board of Directors approved the demutualization timetable recommended by management. On September 28, 1999, the SLOC Board of Directors approved SLOC's demutualization plan. SLOC expects to be able to complete its demutualization in the first half of the year 2000. 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 The statements in this section include "Year 2000 Readiness Disclosures" within the meaning of the Year 2000 Information and Readiness Disclosure Act. During the fourth quarter of 1996, the Company, its ultimate parent and affiliates began a comprehensive analysis of its information technology ("IT") and non-IT systems, including its hardware, software, data, data feed products, and internal and external supporting services, to address the ability of these systems to correctly process date calculations through the year 2000 and beyond. The Company created a full-time Year 2000 project team in early 1997 to manage this endeavor across the Company. This team, which 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. 22 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. Of the nearly 2000 systems used by the Company, all of its mission critical systems have been assessed, fixed where necessary, tested, and, based on those tests, are considered to be Year 2000 compliant. The Company regards Year 2000 compliance as meaning that its business systems will have passed tests that indicate they will operate accurately before, during, and after January 1, 2000 with respect to Year 2000 issues. The Company defines mission critical systems as those systems that cannot be unavailable for more than 48 hours without causing major disruption to the business. In mid-1997, the Company's Year 2000 project team contacted all key vendors to obtain their representation that the products and services provided will not have a Year 2000 issue. Where appropriate, vendor testing has been conducted. 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 business during and after the Year 2000. Non-IT applications, including building security, HVAC systems, and other such systems, as well as IT applications, have been tested. Compliant client server and mainframe environments were used to allow for testing of critical dates such as December 31, 1999, January 1, 2000, February 28, 2000, February 29, 2000 and March 1, 2000 without impact to current production. Although the Company expects to have addressed Year 2000 issues it has found with its systems before the end of 1999, there can be no assurance that these issues will not impact the Company's operations. 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 systems being affected by the Year 2000 issue. Such a scenario could result in 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 an impact on the Company's results of operations and financial position. 23 In order to mitigate the risks to the Company of material adverse operational or financial impacts from the Year 2000 problem, 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. Each business unit has identified its critical business processes, developed alternative plans of action where possible, and has conducted walkthroughs of those plans. On the corporate level, the Company has enhanced its business continuation plan by identifying minimum requirements for facilities, computing, staffing, and other factors and has developed a plan to support those requirements. As of year-end 1998, the Company expended, cumulatively, approximately $4.2 million on its Year 2000 effort. The Company expects to expend a further $1.5 million on this effort in 1999, of which approximately $ 1 million was expended in the nine month period ending September 30, 1999. SALE OF SUBSIDIARY In October 1999, the Company completed the sale of its wholly-owned subsidiary, New London Trust F.S.B. ('NLT'), to a consortium consisting of Phoenix Home Life Mutual Insurance Company ('Phoenix') and three community banks in New Hampshire and Connecticut, for approximately $49.1 million. Phoenix is retaining the trust operations of NLT, while the assets, liabilities, and banking offices of NLT's retail banking operations have been split among Lake Sunapee Bank, fsb of Newport, NH, Mascoma Savings Bank of Lebanon, NH and Cargill Bank of Putnam, CT. This transaction is not expected to have a significant effect on the ongoing operations of the Company. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This discussion covers market risks associated with investment portfolios that support the Company's general account liabilities. This discussion does not cover market risks associated with those investment portfolios that support 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. 24 TYPES OF MARKET RISKS The Company's management believes that stringent underwriting standards and practices have resulted in high-quality portfolios and have the effect of limiting credit risk. It is the Company's policy, for example, not to purchase below-investment-grade securities. Also, as a matter of investment policy, the Company assumes no foreign currency or commodity risk; nor does it assume equity price risk except to the extent that it holds real estate in its portfolios. 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 rate 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. 25 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 September 30, 1999 had a fair value of $1,147.1 million. Fixed income investments supporting these and other general account liabilities had a fair value of $2,184.1 million at that date. The Company performed a sensitivity analysis on these interest-sensitive liabilities and assets at September 30, 1999. The analysis showed that if there were an immediate increase of 100 basis points in interest rates, the fair value of the liabilities would show a net decrease of $36.6 million and the corresponding assets would show a net decrease of $84.5 million. By comparison, liabilities categorized as financial instruments and held in the Company's general account at December 31, 1998 had a fair value of $1,538.3 million. Fixed income investments supporting these and other general account liabilities had a fair value of $2,710.1 million at that date. The Company performed a sensitivity analysis on these interest-sensitive liabilities and assets at December 31, 1998. The analysis showed that if there were an immediate increase of 100 basis points in interest rates, the fair value of the liabilities would show a net decrease of $46.3 million and the corresponding assets would show a net decrease of $113.2 million. The Company produced these estimates using computer models. Since these models reflect assumptions about the future, they contain an element of uncertainty. For example, the models contain assumptions about future policyholder behavior and asset cash flows. Actual policyholder behavior and asset cash flows could differ from what the models show. As a result, the models' estimates of duration and market values may not reflect what actually will occur. The models are further limited by the fact that they do not provide for the possibility that management action could be taken to mitigate adverse results. The Company's management 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. 26 PART II: OTHER INFORMATION ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are incorporated by reference unless otherwise indicated: EXHIBIT NO. - ----------- 3 Certificate of Incorporation and by-laws (filed as Exhibit 6 to the Registration Statement on Form N-4 (Registration No. 333-37903), filed October 14, 1997. 27 FINANCIAL DATA SCHEDULE (filed herewith) 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Sun Life Assurance Company of Canada(U.S.) (Registrant) Date November 12, 1999 /s/ Robert K. Leach -------------------------------- Robert K. Leach Vice President, Finance and Product, Retirement Products and Services Date November 12, 1999 /s/ Davey S. Scoon ------------------------------- - -------- Davey S. Scoon Vice President, Finance and Treasurer EX-27 2 EXHIBIT 27
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND STATEMENT OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE YEAR TO DATE. 9-MOS DEC-31-1999 SEP-30-1999 0 1,263,078 1,291,436 97,143 586,908 92,479 2,104,715 291,935 0 0 17,363,508 1,209,864 0 725 602,194 0 0 0 5,900 853,968 17,363,508 2,086,342 118,956 1,446 144,907 2,129,419 0 175,965 46,267 14,721 31,546 0 0 0 31,546 0 0 0 0 0 0 0 0 0
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