The Registrant occupies office space owned by it and leased to its parent, Sun Life Assurance Company of Canada, and certain unrelated parties for lease terms not exceeding five years.
Significant attention has been given to insurance companies' exposure to mortgage loans secured by real estate. The Registrant had a mortgage portfolio of $1,066,911,000 at December 31, 1995, representing 25.3% of cash and invested assets. At December 31, 1994, mortgage loans represented 28.9% of cash and invested assets. The Registrant underwrites commercial mortgages with a maximum loan to value ratio of 75%. The Registrant as a rule invests only in properties that are almost fully leased. The portfolio is diversified by region and by property type. The level of arrears in the portfolio is substantially below the industry average. At December 31, 1995, 0.77% of the Registrant's portfolio was 60 days or more in arrears, compared to the most recent industry delinquency ratio published by the American Council of Life Insurance of 2.35%. The expense in the year for the provision for losses and for losses on foreclosures was $4,133,000.
In the normal course of business, the Registrant makes commitments to purchase investments at a future date. As of December 31, 1995 the Registrant had outstanding mortgage commitments of $13,100,000 which will be funded during 1996.
The majority of the Registrant's liabilities consist of reserves for life insurance and annuity contracts and deposit funds.
Total capital stock and surplus of the Registrant was $792,452,000 at December 31, 1995. The Registrant issued surplus notes during 1995 totalling $315,000,000 to an affiliate, Sun Canada Financial Co. The Registrant repaid $335,000,000 of surplus notes to its parent in 1996. During 1994, the Registrant reduced its carrying value of MCIC, a wholly-owned subsidiary, by $18,397,000, the unamortized amount of goodwill. The reduction was accounted for as a direct charge to surplus. The Registrant's management considers its surplus position to be adequate.
Total revenues decreased by $ 481,502,000 from $2,016,541,000 in 1993 to $1,535,039,000 in 1994. Revenues from reinsurance transactions decreased by $690,973,000, from $959,536,000 in 1993 to $268,563,000 in 1994. 1993 revenues include the termination of the reinsurance agreement under which the Registrant reinsured with its parent 100% of certain fixed annuity contracts. Before the impact of the reinsurance agreements, total revenues increased by $209,471,000 in 1994. Sales of individually marketed fixed annuities increased by $389,745,000 as a
Benefits and expenses decreased by $504,819,000 from $2,027,359,000 in 1993 to $1,522,540,000 in 1994. Reinsurance had the effect of increasing benefits and expenses by $299,890,000 in 1994 as compared to $1,014,103,000 in 1993. As noted above, the 1993 results include the termination of the reinsurance agreement with the parent under which 100% of certain fixed annuity contracts were reinsured. Before the impact of reinsurance, benefits increased by $209,394,000. Before reinsurance, the liability for annuity and other deposit funds and actuarial reserves decreased as a result of lower sales of group pension deposit contracts and increased surrender activity. Annuity and other deposit fund withdrawals increased as a result of increased surrenders of fixed annuities for which interest rate guarantee periods have expired. Transfers to the non-unitized separate account increased reflecting the increase in fixed annuity sales described above. Prior to reinsurance, commissions increased by $35,497,000 reflecting increased sales of individual combination fixed/variable annuity contracts. General expenses increased due to an increase in the amount allocated from the parent under the service agreement, and costs of selling and administration associated with the increased sales and inforce block of individually marketed fixed/variable annuity contracts. Federal income tax expense increased as net operating loss carry forwards were utilized in 1993.
Management believes that the Registrant's sources of liquidity are more than adequate to meet its anticipated needs.
In April, 1993, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 40, "Applicability of Generally Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises." Under this new interpretation, annual financial statements of mutual life insurance enterprises for fiscal years beginning after December 15, 1992, shall provide a brief description that financial statements prepared on the basis of statutory accounting practices will no longer be described as prepared in conformity with generally accepted accounting principles. In January, 1995, Statement of Financial Accounting Standards No. 120 (SFAS No. 120) "Accounting and Reporting by Mutual Life Insurance Enterprises for Certain Long Duration Participating Contracts" was issued. SFAS No. 120 delays the effective date of Interpretation No. 40 until fiscal years beginning after December 15, 1995.
Beginning in 1996, the Registrant will file financial statements prepared in accordance with all applicable pronouncements that define generally accepted accounting principles for all enterprises.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-owned subsidiary of Sun Life Assurance Company of Canada) BALANCE SHEETS
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-owned subsidiary of Sun Life Assurance Company of Canada) STATEMENTS OF CAPITAL STOCK AND SURPLUS
NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
Assets in the balance sheets are stated at values prescribed or permitted to be reported by state regulatory authorities. Bonds are carried at cost adjusted for amortization of premium or accrual of discount. Investments in subsidiaries are carried on the equity basis. 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 or appraised value, adjusted for accumulated depreciation, less encumbrances. Depreciation of buildings and improvements is calculated using the straight line method over the estimated useful life of the property. For life and annuity contracts, premiums are recognized as revenues over the premium paying period, whereas commissions and other costs applicable to the acquisition of new business are charged to operations as incurred. Furniture and equipment acquisitions are capitalized but treated as nonadmitted assets. Furniture and equipment depreciation is calculated on a straight line basis over the useful life of the assets.
The Company has an agreement with its parent company which provides that the parent company will furnish, as requested, personnel as well as certain services and facilities on a cost reimbursement basis. Expenses under this agreement amounted to approximately $20,293,000 in 1995, $18,452,000 in 1994, and $13,883,000 in 1993.
The Company has an agreement with an unrelated company which provides reinsurance of certain individual life insurance contracts on a modified coinsurance basis and under which all deficiency reserves related to these contracts are reinsured. Reinsurance transactions under this agreement had the effect of decreasing income from operations by $1,599,000 in 1995, increasing income from operations by $1,854,000 in 1994 and decreasing income from operations by $390,000 in 1993.
The Company has established a non-unitized separate account for amounts allocated to the fixed portion of certain combination fixed/variable deferred annuity contracts. The assets of this account are available to fund general account liabilities and general account assets are available to fund liabilities of this account.
2. INVESTMENTS IN SUBSIDIARIES: The Company owns all of the outstanding shares of Massachusetts Financial Services Company (MFS), Sun Life Insurance and Annuity Company of New York (Sun Life (N.Y.)), Sun Investment Services Company (Sunesco), Sun Benefit Services Company, Inc. (Sunbesco), Massachusetts Casualty Insurance Company (MCIC), New London Trust, F.S.B. (NLT), Sun Capital Advisers, Inc. (Sun Capital), and Sun Life Finance Corporation (Sunfinco).
Effective January 1, 1994, NLT acquired all of the outstanding shares of Danielson Federal Savings and Loan Association of Danielson, Connecticut. These two banks have been merged into a newly formed federally chartered savings bank now called New London Trust, F.S.B.
Clarendon Insurance Agency, Inc., a wholly-owned subsidiary of MFS, serves as the distributor of certain variable contracts issued by the Company and Sun Life (N.Y.). Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity contracts and group life and disability insurance contracts in the state of
In 1994, the Company reduced its carrying value of MCIC by $18,397,000, the unamortized amount of goodwill. The reduction was accounted for as a direct charge to surplus.
Long-term bonds at December 31, 1995 and 1994 included $20,000,000 of bonds issued to the Company by a subsidiary company, MFS, during 1987. These bonds will mature in 2000.
Bonds included above with an amortized cost of approximately $2,059,000 and $1,561,000 at December 31, 1995 and 1994, respectively, were on deposit with governmental authorities as required by law.
At year end 1995, the Company had outstanding mortgage-backed securities (MBS) forward commitments amounting to a par value of $137,675,000 to be funded through the sale of certain short-term securities shown above.
5. SECURITIES LENDING: The Company has a securities lending program operated on its behalf by the Company's primary custodian, Chemical Bank of New York. The custodian has indemnified the Company against losses arising from this program. The total par value of securities out on loan was $250,729,000 at December 31, 1995.
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 interest maintenance reserve and amortized into income over the remaining contractual life of the security sold. The realized capital gains and losses credited or charged to the interest maintenance reserve were a credit of $12,714,000 in 1995, a charge of $14,070,000 in 1994 and a credit of $40,993,000 in 1993. All gains and losses are net of applicable taxes.
12. RETIREMENT PLANS: The Company participates with its parent company in a non-contributory defined benefit pension plan covering essentially all employees. The benefits are based on years of service and compensation.
12. RETIREMENT PLANS (CONTINUED): The funding policy for the pension plan is to contribute an amount which at least satisfies the minimum amount required by ERISA. The Company is charged for its share of the pension cost based upon its covered participants. Pension plan assets consist principally of a variable accumulation fund contract held in a separate account of the parent company.
On January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 87, which is in accordance with generally accepted accounting principles.
The following table sets forth the funded status for the pension plan (for the parent, Sun Life (U.S.), Sun Life (N.Y.) and Sunesco) at December 31, 1995 and 1994:
13. OTHER POST-RETIREMENT BENEFIT PLANS: In addition to pension benefits the Company provides certain health, dental, and life insurance benefits ("post-retirement benefits") for retired employees and dependents. Substantially all employees may become eligible for these benefits if they reach normal retirement age while working for the Company, or retire early upon satisfying an alternate age plus service condition. Life insurance benefits are generally set at a fixed amount.
13. OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED): The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the post-retirement benefit obligation as of December 31, 1995 by $149,000 and the estimated service and interest cost components of the net periodic post-retirement benefit cost for 1995 by $29,000.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED): 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.
15. STATUTORY INVESTMENT VALUATION RESERVES: The asset valuation reserve (AVR) provides a reserve for losses from investments in bonds, stocks, mortgage loans, real-estate and other invested assets with related increases or decreases being recorded directly to surplus.
Realized capital gains and losses on bonds and mortgages which relate to changes in levels of interest rate risk are charged or credited to an interest maintenance reserve (IMR) and amortized into income over the remaining contractual life of the security sold.
17. RISK-BASED CAPITAL: Effective December 31, 1993 the NAIC adopted risk-based capital requirements for life insurance companies. The risk-based capital requirements provide a method for measuring the minimum acceptable amount of adjusted capital that a life insurer should have, as determined under statutory accounting practices, taking into account the risk characteristics of its investments and products. The Company has met the minimum risk-based capital requirements for 1995 and 1994.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
18. NEW ACCOUNTING PRONOUNCEMENT (CONTINUED): No. 120 (SFAS No. 120) "Accounting and Reporting by Mutual Life Insurance Enterprises for Certain Long Duration Participating Contracts" was issued. SFAS No. 120 delays the effective date of interpretation No. 40 until fiscal years beginning after December 15, 1995.
TO THE BOARD OF DIRECTORS AND STOCKHOLDER SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) WELLESLEY HILLS, MASSACHUSETTS
We have audited the accompanying balance sheets of Sun Life Assurance Company of Canada (U.S.) (a wholly-owned subsidiary of Sun Life Assurance Company of Canada) as of December 31, 1995 and 1994, and the related statements of operations, capital stock and surplus, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.