increase in group health income was due directly to lower group accident and health reserves from more favorable long term disability claims experience, while group life earnings declined primarily from increased claims experience and higher reserves offset by higher premium income.
In order to mitigate the risks to the Company of material adverse operational or financial impacts from failure to achieve planned Year 2000 compliance, SLOC 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, SLOC 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 expended, cumulatively, approximately $222,000 on its Year 2000 effort, and it expects to incur a further $70,000 on this effort in 1999.
The Company, which is domiciled in the State of New York, prepares its financial statements in accordance with statutory accounting practices prescribed or permitted by the Insurance Department of the State of New York. Prescribed accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as New York 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 ("GAAP") for mutual life insurance companies and stock life insurance companies wholly owned by mutual life insurance companies. In April of 1993, the Financial Accounting Standards Board ("FASB") issued an interpretation (the "Interpretation") which became effective in 1996 that has 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 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 GAAP. (See Note 17 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.
Bonds are carried at cost adjusted for amortization of premium or accrual of discount. Mortgage loans acquired at a premium or discount are carried at amortized values and other mortgage loans 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 three to sixteen years.
The reserves for group life insurance, group long-term disability insurance and annuity contracts, developed by accepted actuarial methods, have been established and maintained on the basis of published mortality and morbidity tables using assumed interest rates and valuation methods that will provide reserves at least as great as those required by law and contract provisions.
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED): SEPARATE ACCOUNTS--
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 statutory financial statements. Assets held in the separate accounts are carried at market values as determined by the quoted market prices of the underlying investments.
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 payable (receivable) to (from) the general account. Transfers from separate accounts due or accrued amounted to $15,992,000 in 1998 and $7,224,000 in 1997.
2. BONDS: (CONTINUED): The amortized cost and estimated fair value of debt securities at December 31, 1998 by contractual maturity are shown below. 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.
Proceeds from sales and maturities of investments in debt securities during 1998, 1997 and 1996 were $29,068,000, $42,986,000 and $76,431,000, respectively. Gross gains of $407,000, $395,000 and $537,000 and gross losses of $2,000, $40,000 and $183,000 were realized on such sales during 1998, 1997 and 1996, respectively.
As of December 31, 1998, the Company has no restructured mortgage loans. As of December 31, 1997, the Company had restructured loans totaling $960,000 against which there were allowances for losses of $250,000.
7. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT LIABILITIES: Withdrawal characteristics of general account and separate account annuity reserves and deposits:
9. RETIREMENT PLANS: The Company participates with Sun Life (Canada) and Sun Life of Canada (U.S.) in a noncontributory defined benefit pension plan covering essentially all employees. The benefits are based on years of service and compensation.
The Company's share of the group's accrued pension cost at December 31, 1998, 1997 and 1996 was $275,000, $211,000 and $178,000, respectively. The Company's share of net periodic pension cost was $65,000, $33,000 and $81,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company also participates with Sun Life (Canada), Sun Life of Canada (U.S.) 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. Employer contributions were $30,000, $28,000 and $27,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
9. RETIREMENT 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 statutory financial statements at December 31:
9. 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.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS: The following table presents the carrying amounts and fair values of the Company's financial instruments at December 31, 1998 and 1997:
10. FAIR VALUE OF FINANCIAL INSTRUMENTS: (CONTINUED): The fair values of the Company's general account reserves and liabilities under investment-type contracts (insurance and annuity 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. 11. Statutory Investment Valuation Reserves: The asset valuation reserve ("AVR") provides a reserve for losses from investments in bonds, 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 rate risk are charged or credited to an IMR and amortized into income over the remaining contractual life of the security sold.
12. LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES: Activity in the liability for unpaid claims and claim adjustment expense is summarized below (in 000's).
13. FEDERAL INCOME TAXES: The Company files a consolidated federal income tax return with Sun Life of Canada (U.S.) and other affiliates. Federal income taxes are calculated as if the Company filed a return as a separate company. No provision is recognized for timing differences which may exist between financial statement and taxable income. Such differences include reserves, depreciation and accrual of market discount on bonds. The Company made cash payments to Sun Life of Canada (U.S.) of $2,506,000, $1,938,000 and $2,797,000 during 1998, 1997 and 1996, respectively.
14. LEASE COMMITMENTS: The Company leases two separate facilities for its annuity operations and group sales offices. Both leases commenced in March 1994. On February 24, 1999, the Company terminated its lease at the 80 Broad Street location as it intends to consolidate the functions performed at this facility with its parent company, Sun Life of Canada (U.S.) (See Note 18 for further discussion). The group sales office lease is scheduled to expire in July 1999. Consequently, the Company has no future lease commitments to report. Rent expense under these leases in 1998, 1997 and 1996 amounted to $344,000, $348,000 and $336,000, respectively.
17. 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 and GAAP are described as follows. Statutory accounting practices do not recognize the following assets or liabilities which are reflected under GAAP; deferred acquisition costs, deferred federal income taxes and statutory non admitted assets. AVR and IMR 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. Premiums for investment-type products are recognized as income for statutory purposes and as deposits to policyholders' accounts for GAAP.
As management has stated in Note 17, 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 Insurance and Annuity Company of New York 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 February 4, 1999 (except for Note 18 for which the date is March 25, 1999.)