The Private Securities Litigation Reform Act of 1995 defines forward-looking statements as statements not based on historical fact and provides a safe harbor for such statements. This discussion includes forward-looking statements by SLNY. These statements relate to such topics as volume growth, market share, 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 financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), which require SLNY to make estimates and assumptions. SLNY believes that of its significant accounting policies the following may involve a higher degree of judgment and complexity.
The liabilities associated with individual life insurance, group life and disability insurance products and stop loss are computed using the net level premium method based on assumptions about future investment yields, mortality, morbidity and persistency. The assumptions used are based upon SLNY's experience and industry standards.
SLNY's accounting policy for impairment requires recognition of an other-than-temporary impairment write-down on a security if it is determined that SLNY is unable to recover all amounts due under the contractual obligation of the security. Once an impairment charge has been recorded, SLNY continues to review the other-than-temporarily impaired securities for additional impairment.
The following provides a summary of operations by segment for the years ended December 31 (in 000's):
Investment income for the year ended December 31, 2003 increased by $9.4 million, compared to 2002. The increase in investment income was due to an increase in the average bond and mortgage loan balances. Bonds and mortgage loans were $243.2 million and $57.1 million, respectively, higher at December 31, 2003 compared to December 31, 2002. Net realized gains on the sale of bonds increased by $18.1 million, as compared to 2002. The 2002 results included a $3.9 million charge for other-than-temporary impairment losses on bonds.
The following table provides a summary of operations for the Group Protection Segment for the years ended December 31 (in 000's):
Total expenditures in 2003 increased by $10.1 million in comparison to 2002. The expense increase is due in part to higher commission payments of $1.5 million due to an increase in premiums and higher operating expenses of $0.8 million due to an increase in the volume of business. Incurred claims increased by $7.4 million due to the growing insurance block of business, particularly stop loss, and a deterioration in long-term disability experience.
The following table provides a summary of operations for the Individual Protection Segment for the years ended December 31 (in 000's):
The Individual Protection Segment products offered by SLNY are conversions from its group life products. Pretax income was approximately $160,000 and $72,000 for the years ended December 31, 2003 and 2002, respectively.
The increase in pretax income during the year ended December 31, 2003 primarily related to an increase in premiums from group to individual life product conversions of approximately $472,000, offset by a decrease in net investment income of $21,000 and increases in death benefits, reserves and premium taxes of approximately $124,000, $233,000 and $9,000, respectively.
The Corporate Segment includes the unallocated capital of SLNY and items not otherwise attributable to the other segments. Pretax income within the Corporate Segment was $2.6 million and $1.7 million for the years ended December 31, 2003 and 2002, respectively.
The increase of $0.9 million in 2003 was mainly due to increased net investment income of approximately $1.6 million and decreased realized gains of approximately $0.3 million. The increase in investment income resulted from capital contributions during the latter part of 2002.
Total stockholders' equity of SLNY at December 31, 2003 and 2002 was $291.6 million and $292.1 million, respectively. No dividends were paid during 2003 or 2002. SLNY's management considers its capital resources to be adequate.
SLNY held $1.90 billion and $1.60 billion in invested assets at December 31, 2003 and 2002, respectively. SLNY pursues a high-quality, well-diversified portfolio strategy that is appropriate for its general fund obligations. The investment function is a critical component of SLNY's business given the role invested assets play in supporting SLNY's product lines and the impact of investment results on profitability.
Capital Goods is a large, diverse industrial sector encompassing the aerospace and defense, building material, construction machinery, diversified manufacturing and environmental sectors. Aerospace continues to be negatively affected by geopolitical concerns and a challenged airline industry. Defense, on the other hand, is benefiting from recent military and increased budgets for homeland defense. Building materials continue to suffer from reduced commercial construction. Construction machinery and agricultural equipment has seen improvement in demand globally, and this sub-sector has seen improved balance sheets and operational efficiencies these firms are well positioned for a market recovery. In the environmental service sub-sector, poor economic conditions have adversely affected volume and revenue growth, yet companies in this sub-sector continue to apply free cash flow to improve their financial flexibility. While the capital goods sub-sectors have had varying operating histories, SLNY is comfortable with its issuer concentration and prospects.
The Securities Valuation Office ("SVO") of the National Association of Insurance Commissioners evaluates all public and private bonds purchased as investments by insurance companies. The SVO assigns one of six investment categories to each security it reviews. Category 1 is the highest quality rating, and Category 6 is the lowest. Categories 1 and 2 are the equivalent of investment grade debt as defined by rating agencies such as Standard & Poor's ("S&P") and Moody's (i.e., BBB-/Baa3 or
At December 31, 2003, $8.2 million or 70.2%, of gross unrealized losses were on securities rated investment grade. In general, unrealized losses on investment grade securities reflect changes in interest rates or changes in credit spreads since the securities were acquired and these losses are generally considered to be temporary in nature. Additionally, losses associated with SVO Category 1 reflect the decline in value of highly rated, but stressed ABS. SLNY's policy is to subject any security with a gross unrealized loss of greater than 20% to a comprehensive asset review process. Securities at any level of the SVO rating scale would be subject to such review should a drop in market valuation or any other event signal a potential problem.
SLNY has a comprehensive process in place to identify potential problem securities that could have an impairment that is other-than-temporary. At the end of each quarter, all securities with a market value that has been below 80% of amortized cost for more than six months are reviewed. An analysis is undertaken to determine whether this decline in market value is other-than-temporary. SLNY's process focuses on issuer operating performance as well as overall industry and market conditions. Any deterioration in operating performance is assessed relative to the impact on issuer financial ratios, including leverage and coverage measures specific to an industry and relative to any investment covenants. Additionally, SLNY's analysis assesses each issuer's ability to service its debts in a timely fashion, the length of time the security has been trading below 80% of amortized cost, rating agency actions, and any other key developments. SLNY has a Credit Committee that includes members from its Investment, Finance and Actuarial functions. The Credit Committee meets and reviews the results of SLNY's impairment analysis on a quarterly basis.
Securities that have been triggered for the asset review process may be determined to be impaired or placed on a watchlist for monitoring. Should it be determined that a security is impaired, SLNY may sell the security and realize a loss or hold the security following an appropriate adjustment in carrying value.
SLNY incurred write-downs of fixed maturities totaling $0.8 million and $4.6 million for other-than-temporary impairment for the years ended December 31, 2003 and 2002, respectively. The write-downs taken in 2003 reflected impairments primarily relating to the Utilities sector and ABS backed by franchise loans and aircraft leases. Realized losses on the voluntary disposal of fixed maturity securities totaled $2.6 million and $8.5 million for the years ended December 31, 2003 and 2002, respectively.
The carrying value of fixed maturity securities with unrealized losses by maturity date was as follows at December 31 (in 000's):
SLNY's mortgage holdings amounted to $108.0 million and $50.9 million at December 31, 2003 and 2002, respectively, representing 5.7% and 3.2%, respectively, of total invested assets. All of SLNY's mortgage holdings at December 31, 2003 were in good standing.
Adjustments to reconcile net income (loss) to net cash provided by
SLNY is engaged in the sale of fixed and variable annuity contracts, group life, variable universal life, stop loss and group disability insurance contracts. These contracts are sold by insurance agents, some of whom are registered representatives of national and regional stock brokerage firms and brokers. On October 21, 2003, SLNY announced that it was introducing a portfolio of Variable Universal Life ("VUL") insurance products to customers in New York State.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The most significant estimates are those used in determining deferred policy acquisition costs ("DAC"), the fair value of financial instruments, other-than-temporary impairments of investment, and the liabilities for future policyholder benefits.
In the normal course of business, SLNY may enter into transactions involving various types of financial instruments, including cash and cash equivalents, fixed maturity securities, mortgage loans, equity securities, debt, loan commitments and financial guarantees. These instruments involve credit risk and also may be subject to risk of loss due to interest rate fluctuation. SLNY evaluates and monitors each financial instrument individually and, when appropriate, obtains collateral or other security to minimize losses.
Policy loans are carried at the amount of the outstanding principal balance. The loans are collateralized by the respective insurance policy and do not exceed the excess of the net cash surrender value of the policy.
Property, equipment, and leasehold improvements, which are included in other assets, are stated at cost, less accumulated depreciation and amortization. Depreciation is provided using the straight-line or accelerated method over the estimated useful lives of the related assets, which generally range from 3 to 10 years. Amortization of leasehold improvements is provided using the straight-line method over the lesser of the term of the lease or the estimated useful life of the improvements.
Contractholder deposit funds consist of policy values that accrue to the holders of investment-related products, such as deferred annuities and guaranteed investment contracts. The liabilities consist of net deposits and interest credited less administrative charges. The liability is before the deduction of any applicable surrender charges.
Premiums for traditional individual life and annuity products are considered revenue when due. Premiums related to group disability insurance and stop loss are recognized as revenue pro-rata over the contract period. The unexpired portion of these premiums is recorded as unearned premiums. Revenue from investment-related products includes charges for cost of insurance (mortality), initiation and administration of the policy, and surrender charges. Revenue is recognized when the charges are assessed, except that any portion of an assessment that relates to services to be provided in future years is deferred and recognized over the period during which the services are provided.
Other than DAC, benefits and expenses related to traditional life, annuity, and disability contracts, including group policies and stop loss, are recognized when incurred in a manner designed to match them with related premium revenue and spread income to be recognized over the expected policy lives. For investment-type contracts, benefits include death benefits in excess of account values, which are recognized as incurred.
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity to be classified as liabilities. SFAS No. 150 was effective July 1, 2003 for SLNY. The adoption of SFAS No. 150 did not have a material effect on SLNY's financial position or results of operations.
On March 14, 2003, the American Institute of Certified Public Accountants ("AICPA") issued a proposed Statement of Position ("SOP"), "Accounting by Insurance Enterprises for Deferred Acquisition Costs on Internal Replacements Other Than Those Specifically Described in FASB Statement No. 97." This proposed SOP provides guidance on accounting by insurance companies for DAC on internal replacements other than those specifically described in SFAS No. 97. This proposed SOP is effective for fiscal years beginning after December 15, 2004. SLNY is in the process of evaluating the provisions of this proposed SOP and its impact on SLNY's financial position and results of operations.
In March 2003, the Accounting Standards Executive Committee ("AcSEC") approved SOP 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Long Duration Contracts and for Separate Accounts." This SOP provides guidance on accounting and reporting by insurance companies for certain non-traditional, long-duration contracts and for separate accounts. This SOP is effective for fiscal years beginning after December 15, 2003. SLNY is in the process of evaluating the provisions of this SOP and its impact on SLNY's financial position and results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No. 46"). In December 2003, the FASB issued a revised version of FIN 46 ("FIN 46R"), which incorporates a number of modifications and changes made to the original version. FIN 46R replaces the previously issued FIN 46 and, subject to certain special provisions, is effective no later than the first reporting period that ends after December 15, 2003 for entities considered to be special-purpose entities and no later than the end of the first reporting period that ends after March 15, 2004 for all other variable interest entities ("VIEs"). Early adoption is permitted. SLNY adopted FIN No. 46 and FIN 46R in the fourth quarter of 2003. The adoption of FIN No. 46 and FIN 46R did not have a material effect on SLNY's financial position or results of operations.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed by SLNY as of November 1, 2001 (in thousands):
Goodwill is accounted for in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". Effective January 1, 2002, goodwill is no longer amortized and is tested for impairment on an annual basis. SLNY completed the required impairment tests of goodwill and indefinite-lived intangible assets prior to reporting for the second quarter of 2003 and concluded that these assets are not impaired. SLNY used the actuarial appraisal method, with assumptions and discount rates reflective of current market conditions and determined that the fair value of SLNY was at least equal to the carrying value. SLNY also compared the results of that valuation to a range of values based on historical multiples, and found them to be consistent with the results of the actuarial appraisal method. Goodwill is allocated to the Wealth Management Segment.
SLNY has agreements with Sun Life U.S. and certain affiliates, under which SLNY receives, as requested, certain investment and administrative services on a cost reimbursement basis. Expenses under these agreements amounted to approximately $5.2 million, $4.4 million and $3.8 million for the years ended December 31, 2003, 2002 and 2001, respectively. Management believes intercompany expenses are calculated on a reasonable basis, however, these amounts may not necessarily be indicative of the costs that would be incurred if SLNY operated on a stand-alone basis.
In 2001, KBL received $66.0 million of additional capital contributions from Keyport.
SLNY had $4.0 million and $30.6 million due to related parties at December 31, 2003 and 2002, respectively, and $4.4 million and $0.6 million due from related parties at December 31, 2003 and 2002, respectively.
During 2003 and 2002, the Company paid $3.1 million and $1.2 million, respectively, in commission fees to Independent Financial Marketing Group, Inc.
As more fully described in Note 8, SLNY has been involved in several reinsurance transactions with SLOC.
As more fully described in Note 9, SLNY participates in a pension plan and other post-retirement benefits sponsored by Sun Life U.S.
As of December 31, 2003, 96.2% of SLNY's fixed maturities were investment grade. Investment grade securities are those that are rated "BBB" or better by nationally recognized rating agencies. During 2003, 2002 and 2001, SLNY incurred realized losses totaling $0.8 million, $4.6 million and $0.6 million, respectively, for other-than-temporary impairment of certain fixed maturities after determining that not all of the unrealized losses were temporary in nature. During 2003, $0.3 million of the prior years' losses were recovered through disposition and are included in realized gains. During 2002, $0.2 million of the 2001 losses were recovered through disposition and were included in realized gains. During 2001, $0.6 million of the 2000 losses were recovered through disposition and were included in realized gains.
The gross unrealized losses and fair value of investments, which have been deemed to be temporarily impaired, aggregated by investment category, number of securities and length of time that securities have been in an unrealized loss position at December 31, 2003 is as follows:
SLNY has made commitments of mortgage loans on real estate and other loans into the future. The outstanding commitments for these mortgages amounted to $18.6 million and $0.7 million at December 31, 2003 and 2002, respectively.
SLNY has an agreement with SLOC whereby SLOC reinsured morbidity risks of a block of SLNY's group long-term disability contracts. The block is closed for new business.
SLNY participates in a plan sponsored by Sun Life U.S. that provides certain health, dental and life insurance benefits ("post-retirement benefits") for retired employees and dependents. Substantially all employees of the participating companies may become eligible for these benefits if they reach normal retirement age, or retire early upon satisfying an alternate age plus service condition. Life insurance benefits are generally set at a fixed amount. SLNY is allocated a portion of these post-retirement benefit plans expenses. The allocated expenses were $4,000, $11,000 and $10,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
Federal income taxes attributable to the operations are different from the amounts determined by multiplying income before federal income taxes by the expected federal income tax rate of 35%. SLNY's effective rate differed from the federal income tax rate as follows (in 000's):
The net deferred income tax liability represents the tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. The components of SLNY's deferred tax assets and liabilities as of December 31 were as follows (in 000's):
SLNY conducts business principally in three 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. Each segment was defined consistent with the way results are evaluated by the chief operating decision-maker. As a result of the merger at December 31, 2002, KBL's results are included with the Wealth Management Segment. Net investment income is allocated based on segmented assets by line of business. SLNY does not materially depend on one or a few customers, brokers or agents for a significant portion of its operations.
The Wealth Management Segment markets and administers individual and group fixed and variable annuity products.
The Group Protection Segment markets and administers group life insurance, stop loss insurance, long-term disability and short-term disability products. These products are sold to employers that provide group benefits for their employees.
SLNY is required to file quarterly and annual statements with the Insurance Department of the State of New York prepared on a statutory accounting basis prescribed or permitted by the State of New York. Statutory net income and capital stock and surplus differ from net income and stockholder's equity reported in accordance with GAAP for stock life insurance companies primarily because, under statutory basis accounting, policy acquisition costs are expensed when incurred, reserves are based on different assumptions, investments are valued differently, post-retirement benefit costs are based on different assumptions and reflect a different method of adoption, and income tax expense reflects only taxes paid or currently payable.
SLNY leases various facilities and equipment under non-cancelable operating leases with terms of up to 10 years. As of December 31, 2003, minimum future lease payments under such leases are as follows (in 000's):
In our opinion, such financial statements present fairly, in all material respects, the financial position of Sun Life Insurance and Annuity Company of New York as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
The balance sheet of Sun Life Insurance and Annuity Company of New York as of December 31, 2001 presents the combination of the financial statements of Sun Life Insurance and Annuity Company of New York (predecessor basis) and Keyport Benefit Life Insurance Company. Such individual financial statements were audited before the applicable effects of the changes described in the preceding paragraph. Our report on the predecessor balance sheet of Sun Life Insurance and Annuity Company of New York expressed an unqualified opinion as to the conformity with accounting principles generally accepted in the United States of America. The balance sheet of Keyport Benefit Life Insurance Company as of December 31, 2001 was audited by other auditors and their report on the financial statements expressed an adverse opinion as to the conformity with accounting principles generally accepted in the United States of America and an unqualified opinion as to the conformity with statutory accounting principles. We have audited the adjustments that were applied to restate the 2001 balance sheet of Keyport Benefit Life Insurance Company to reflect the effects of the changes for the adoption of accounting principles generally accepted in the United States of America and the adjustments to give effect to the merger as described in Note 1. In our opinion, such adjustments are appropriate and have been properly applied.