SLNY does not own any properties. SLNY leases office space for its sales personnel located in New York City. The lease is scheduled to terminate in 2004. During 2001 and 2002, KBL leased office space in Purchase, New York. This lease was terminated on December 31, 2002, after completion of the merger with SLNY.
Pursuant to Instruction I(2)(a) to Form 10-K, the Company elects to omit the Management's Discussion and Analysis of Financial Condition and Results of Operations. Below is an analysis of the results of operations explaining material changes in the Statement of Operations between the years ended December 31, 2003 and December 31, 2002.
Heightened competition, particularly in terms of price, product features, and distribution capability, which could constrain SLNY's growth and profitability.
Acquisition costs relate to the issuance of fixed and variable annuities and life insurance products are deferred and amortized, generally in proportion to the ratio of annual gross profits to the estimated total gross profits over the lives of the contracts. Estimated gross profits are reviewed periodically and adjusted retrospectively when SLNY revises its estimates. Estimated gross profits include assumptions related to investment spread, mortality, lapse, expense, and asset growth rates. Although realization of deferred policy acquisition costs ("DAC") is not assured, SLNY believes that all of these costs will be realized. The amount of DAC considered realizable, however, could be reduced if the estimates of gross profits or total revenues discussed above are reduced.
The difference between actual and estimated amounts and changes in any of the assumptions that serve to increase or decrease the estimated future gross profits will cause the amortization of DAC to decrease or increase, respectively, in the current period. This will cause fluctuation in earnings from period to period. During the year ended December 31, 2003, SLNY revised its gross profit estimates used in the DAC amortization calculation resulting in a $14.8 million increase to DAC amortization in the current year. In the prior year, this analysis resulted in an increase of $4.6 million.
In the normal course of business, SLNY enters into transactions involving various types of financial instruments. These instruments involve credit risk and may also be subject to risk of loss due to interest rate fluctuation. SLNY monitors each financial instrument individually and, when appropriate, obtains collateral or other security to minimize losses. SLNY values its publicly traded fixed maturities using market prices or dealer quotes. For privately placed fixed maturities, fair values are estimated by taking into account prices for publicly traded securities of similar credit risk, maturity, repayment and liquidity characteristics. 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.
Once these assumptions are made for a given group of policies they will not be changed over the life of the policies unless SLNY recognizes a loss on the entire line of business. SLNY periodically reviews its policies for loss recognition based upon management's best estimates. From time to time SLNY may recognize a loss on certain lines of business.
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 value of some of its fixed maturities after determining that not all of the unrealized losses were temporary in nature. During 2003 and 2002, $0.3 million and $0.2 million, respectively, of the prior years' losses were recovered through disposition and are included in realized gains. SLNY has discontinued the accrual of income on several of its holdings for issuers that are in default. The termination of accrual accounting on these holdings reduced income by $198,000, $98,000 and $75,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", requires goodwill to be subject to an assessment of impairment on an annual basis, or more frequently if circumstances indicate that a possible impairment has occurred. SLNY performs its annual assessment of goodwill for impairment during the second quarter. The general level of interest rates, equity markets and overall economic conditions all have an impact on this assessment.
SLNY had a net income (loss) of $0.08 million and ($3.1) million for the years ended December 31, 2003 and 2002, respectively. The increase in net income is primarily attributed to improvement in the Wealth Management Segment, offset by a decline in the Group Protection Segment.
The Wealth Management Segment focuses on the savings and retirement needs of individuals preparing for retirement or who have already retired. It primarily markets to affluent consumers, selling individual and group fixed and variable annuities. Its major product lines are fixed and variable annuities. In certain variable annuities, contractholders have the choice of allocating payments either to a fixed account, which provides a guaranteed rate of return, or to variable accounts. Withdrawals from certain fixed accounts are subject to market value adjustment. In the variable accounts, the contractholder can choose from a range of investment options and styles. The return depends upon investment performance of the options selected. The Wealth Management Segment had a pretax loss of ($4.0) million and ($11.2) million for the years ended December 31, 2003 and 2002, respectively.
The $30.5 million increase in revenues was primarily attributed to increases in investment income and realized gains on the sale of bonds. The $23.3 million increase in expenditures was due to an increase in interest credited to contractholders and an increase in DAC amortization, which was due to an unlocking adjustment.
The Group Protection Segment markets and administers group life insurance, stop loss insurance and long-term disability products. These products are sold to employers that provide group benefits for their employees. Pretax income was $0.9 million and $4.6 million for the years ended December 31, 2003 and 2002, respectively.
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 following table provides a summary of operations for the Corporate Segment for the years ended December 31 (in 000's):
For a more detailed discussion of SLNY's interest rate risk management policies, practices and procedures, see "Interest rate risk management" discussion in the "Quantitative and Qualitative Disclosures about Market Risk" section below (Item 7A).
SLNY manages its exposure to credit risk through internal analyses of a given investment. SLNY's corporate bond staff applies a wide range of qualitative input and quantitative tools in assessing an issuer's credit risk. The credit analysts apply industry and financial knowledge to assess an issuer's ability to succeed within a broader economic framework. SLNY's analysts work with legal staff and portfolio management to assess transaction structure and risks to promote appropriate covenant protection as well as investment diversification and asset allocation. SLNY relies on its credit team's ability to analyze a wide range of public and private bond issues and structures and to acquire the investments needed to profitably fund SLNY's liability requirements.
SLNY regularly reviews its bond portfolios relative to any change in specific issuer performance, external and internal ratings, industry conditions, financial ratios and changes in investment value. Such analysis is undertaken to determine that the integrity of SLNY's investments remains sound and to review for other-than-temporary impairments.
The pricing of SLNY's products includes provisions for expected default losses over the long term. This expectation is reassessed on a regular basis to determine the adequacy of the provision. However, actual losses may prove to be above or below the expected loss rate. The overall economic environment will also impact the market value of the portfolio through both interest rate changes and the response of credit spreads to changes in the business cycle. SLNY's credit function and capital base generally permit it to pursue a buy and hold strategy that balances assets and liabilities with the intent of withstanding near-term swings in the broader economy.
The composition of the investments in SLNY's general account portfolio was as follows at December 31 (in 000's):
As of December 31, 2003, the portfolio carried $60.9 million in gross unrealized gains relative to $11.6 million in unrealized losses. The $49.2 million net unrealized gains as of December 31, 2003 is a $6.9 million improvement over the $42.3 million in net unrealized gains at December 31, 2002, reflecting improvement in corporate bond spreads, particularly in lower-rated issues and industries that suffered last year. As a percent of fair value, the largest contributor of net unrealized losses was the Transportation sector, driven by ongoing restructuring in the airline sub-sector. A brief discussion concerning the sectors of SLNY's fixed securities holdings is as follows:
The Basic Industry sector is composed of the chemicals, metals, paper and forest products industries. Broadly, these industries supply commodity products for use as an end product or as input for higher value-added goods. Demand typically fluctuates with the strength of the economy. Some sub-sectors have seen recent strength in commodity pricing which has coincided with the improving economy. In 2003, the metals sub-sector has most enjoyed the benefits of pricing gains while papers and chemicals have lagged. With oil and gas prices continuing to hover near recent record levels, chemical companies could suffer from higher raw material prices going forward. Many paper and forest product companies are under pressure to reduce debt levels. A more robust economy is expected to help most industry participants, though spreads for many issuers may have already factored in the anticipated economic rebound. Regardless, SLNY's portfolio is generally comprised of companies with specialty niches or dominant industry positions that may allow them to withstand market weakness and avoid significant market-value deterioration.
The Communications sector is made up of media-cable, media-non cable, telecom-wireless, and telecom-wireline. After a difficult 2002, especially in telecommunications, the sector rebounded in 2003 in terms of operating performance, credit quality, ratings and bond prices. Indeed, these four sub-sectors were among the best performing corporate sectors in 2003. SLNY's overall strategy has been to overweight companies with stronger balance sheets and higher levels of free cash flow, such as: the regional Bell operating companies and rural local exchange carriers; wireless companies with better competitive positions; diversified telecommunication and media companies; and the expanding and more recession-resistant cable sector. Although the telecommunications sub-sector remains subject to negative operating trends resulting from increased competition and technological substitution, and certain companies have begun to place more emphasis on actions that could benefit shareholders at the expense of bondholders, SLNY believes that credit quality should be relatively stable due to strong free cash flows, further boosted by anticipated improvements in the economy. SLNY presently intends to hold stressed but performing investments in this sector through recovery.
Consumer Cyclicals is a large and diverse section comprised of the automotive, entertainment, gaming, home construction, service and textile sub-sectors. Despite strong unit sales volume, the automotive sub-sector continues to experience weak fundamentals as a result of increasing competition. Following a weak first quarter in 2003, the entertainment and gaming sub-sectors exhibited improved results in the second and third quarter supported by more positive consumer sentiment and travel spending. The homebuilding industry continues to perform well, benefiting from the historically low interest rate environment. SLNY continues to closely watch sector performance and has positioned its portfolio to focus on industry leaders.
The Consumer Noncyclical sector is comprised of consumer products, food and beverage, healthcare, pharmaceutical and supermarket companies. SLNY's primary exposure in this sector is in supermarkets. Supermarket operating performance continues to be impacted from a change in the competitive structure of the industry. Consumers have turned away from traditional grocers and towards non-traditional food retailers such as supercenters and membership clubs. In fact, membership clubs and supercenters have captured almost one-third of the traditional grocery business. Despite this structural change, free cash flow supports investment quality in the supermarket sub-sector. Throughout 2003 SLNY increased its holdings in consumer products, food and beverage, healthcare and pharmaceuticals. SLNY's analysis suggests that the broad sector will continue to be a good relative performer under most economic scenarios.
The Finance sector encompasses banks, independent and noncaptive finance companies, insurance companies, broker-dealers and real estate investment trusts ("REITs"). With few exceptions, bonds in this broad sector continued to perform well in the fourth quarter of 2003. Bank earnings were stronger, mostly owing to continued strong consumer loan demand, lower provisioning for credit losses and increased investment banking activities. In addition, net interest margins stabilized, reversing its negative trend over several prior quarters. Credit quality measures - delinquencies, non-performing assets and charge-offs also had another strong quarter in both the commercial and consumer sectors. Finance companies continued to be positively impacted by the low interest rates environment and improved credit quality. Broker-dealers posted a strong fourth quarter, as revenues from fixed income trading/sales remained healthy, while equity trading/sales benefited from an improved stock market. Broker-dealers also reported increased mergers and acquisitions activity and continued to keep costs under control. Life insurers posted improved earnings as the industry benefited from lower investment losses and improvement in the equity markets, which resulted in increased assets under management and improved variable product sales. However, life insurance companies continue to face challenges due to the low interest rate environment. Property and Casualty insurers reported strong results from a positive pricing environment in both personal and commercial lines and from low catastrophe experience in the fourth quarter. REIT performance has been strong due to the defensive nature of the underlying assets, as well as conservative credit covenants and policies.
The Technology sector is comprised of computer hardware manufacturers, makers of mainframe, client/server and personal computers, as well as computer software and services manufacturers. Fundamentals in the Technology sector have been improving. However, sector analysts have indicated that there is no near term catalyst that could restore sales back to the levels seen in the late 1990s, when strong demand driven by the technological advancement of personal computers, cell phones and telecom equipment often outpaced supply growth. Currently, excess supply continues to undermine pricing. There was a modest improvement in information technology ("IT") spending during 2003. Helped by an improving economy, IT spending is expected to increase throughout 2004, after several years of depressed demand. SLNY remains comfortable with its limited issuer and industry exposure in this sector.
The Transportation sector includes airlines, railroads, trucking and shipping companies. After a couple of years of weak operating performance, the airline sub-sector rebounded smartly in 2003. Market sentiment improved dramatically throughout the year as increased traffic combined with stronger liquidity profiles at most of the major airlines. Also, the Chapter 11 risk for the major non-bankrupt carriers, including American Airlines, waned in 2003. Despite the vast improvement in airline operating performance, the industry remains challenged low cost carriers, overcapacity and high operating costs. SLNY generally lends to the airline industry on a secured basis. Thus, recovery values are based on the supporting collateral. SLNY continues to work towards recovery of stressed investments in the airline sub-sector and its analysis indicates that current carrying values are adequately supported by recovery prospects.
: The asset-backed securities ("ABS") and mortgage-backed ("MBS") Securities sector is comprised of structured finance securities backed by pools of loans or other obligations. The underlying loans, which may include residential mortgage loans, automobile loans, credit card loans, aircraft leases, and other obligations are generally grouped by loan purpose for securitization. For example, a single ABS could be backed by automobile loans, while another could be backed by credit card loans. Collateral debt obligations ("CDO") are a separate type of ABS generally backed by pools of investment-grade corporate, high yield, bank loan on asset-backed securities in cash or synthetic form. Due to subordination, overcollateralization, and other credit enhancements, senior ABS usually have an investment-grade rating, and are often rated AAA. However, the level of credit enhancement may deteriorate over time as a result of loan delinquencies and defaults within the structure. The majority of the SLNY's write-downs in this sector in 2003 were due to ABS backed by franchise loans and aircraft leases, where the level of subordination was insufficient to protect against a severe decline in the value of the underlying collateral. Several CDO holdings also contributed to write-downs as defaults on securities backing the CDOs were higher than originally estimated, causing the value of the CDOs to drop. SLNY continues to actively manage these securities. Our analysis indicates that carrying values of stressed ABS and CDO holdings are supported by underlying collateral valuations.
As of December 31, 2003 and 2002, the majority of SLNY's fixed maturity investments were investment grade, with 96.3% and 98.0%, respectively, of fixed maturity securities classified as Category 1 and 2 by the SVO. SLNY's below investment grade bonds were 3.7% and 2.0% of fixed maturity investments and 3.6% and 2.0% of total invested assets as of December 31, 2003 and 2002, respectively. The fair value of investments in SVO categories 3-6 increased by $36.9 million since December 31, 2002, as bond sales, particularly in Category 6, were offset by improvements in fair value of SLNY's below-investment-grade holdings.
The following table provides the SVO ratings for SLNY's bond portfolio along with an equivalent S&P rating agency designation at December 31(in 000's):
The composition by credit quality of the securities with gross unrealized losses in SLNY's fixed maturity securities portfolio was as follows at December 31 (in 000's):
Sun Life Insurance and Annuity Company of New York ("Sun NY Predecessor") and Keyport Benefit Life Insurance Company ("KBL") were merged on December 31, 2002, with Sun NY Predecessor as the surviving company ("SLNY"). As part of the merger, SLNY issued 4,001 additional shares of common stock in exchange for all the assets and liabilities of KBL. Total book value of assets acquired and liabilities assumed by SLNY were $1,869.3 million and $1,652.8 million, respectively, at December 31, 2002. These financial statements give effect to this transaction as of November 1, 2001.
On October 9, 2002, Sun Life Insurance and Annuity Company of New York ("Sun NY Predecessor"), which was a wholly-owned subsidiary of Sun Life Assurance Company of Canada (U.S.) ("Sun Life U.S."), and Keyport Benefit Life Insurance Company ("KBL"), which was a wholly-owned subsidiary of Keyport Life Insurance Company ("Keyport"), an affiliate, filed an Agreement and Plan of Merger ("Merger Agreement") with the New York State Insurance Department. On December 31, 2002 at 5:00 p.m., Sun NY Predecessor and KBL completed the merger. Pursuant to the Merger Agreement, KBL merged with and into Sun NY Predecessor, with Sun NY Predecessor as the surviving company ("SLNY"), and SLNY issued 4,001 additional shares of common stock to Keyport in exchange for the assets and liabilities of KBL. As a result of the additional common stock issuance, SLNY became a subsidiary of both Keyport and Sun Life U.S., with Keyport owning 67% of the common stock of SLNY.
The merger was accounted for under Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." Under SFAS No. 141, transfers of net assets and exchanges of shares between entities under common control are recorded at their carrying amounts at the date of transfer. The financial statements of prior periods have been restated to give effect to the merger as of November 1, 2001, the date on which the predecessor companies came under common control.
SLNY is licensed and authorized to write all the business that was previously being written by KBL and SLNY. The merger had no effect on the existing rights and benefits of policyholders or contract holders of either company. Keyport, KBL, Sun Life U.S., Sun NY Predecessor, and SLNY were at all times relevant to the merger indirect wholly-owned subsidiaries of Sun Life Assurance Company of Canada ("SLOC"). SLOC is an indirect wholly-owned subsidiary of Sun Life Financial Inc. ("SLF"), a reporting company under the Securities Exchange Act of 1934.
On December 31, 2003, Keyport was merged into Sun Life U.S. with Sun Life U.S being the surviving company. Consequently, SLNY is a wholly-owned subsidiary of Sun Life U.S.
Cash and cash equivalents include cash, commercial paper, money market investments, and short term bank participations. All such investments have been purchased with maturities of three months or less and are considered cash equivalents for purposes of reporting cash flows.
SLNY accounts for its investments in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." At the time of purchase, fixed maturity securities are classified based on intent, as either held-to-maturity or available-for-sale. In order for the securities to be classified as held-to-maturity, SLNY must have positive intent and ability to hold the securities to maturity. Securities held-to-maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts. Securities that do not meet this criteria are classified as available-for-sale. Available-for-sale securities are carried at estimated fair value with changes in unrealized gains or losses reported as a separate component of other comprehensive income. Fair values for publicly traded securities are obtained from external market quotations. For privately placed fixed maturities, fair values are estimated by taking into account prices for publicly traded securities of similar credit risk, maturities, repayment and liquidity characteristics. SLNY does not engage in trading activities. All of SLNY's fixed maturity securities are classified as available-for-sale. All security transactions are recorded on a trade-date basis.
SLNY's accounting policy for impairment requires recognition of an other-than-temporary impairment charge on a security if it is determined that SLNY is unable to recover all amounts due under the contractual obligations of the security. Once an impairment charge has been recorded, SLNY continues to review the other-than-temporarily impaired security for additional impairment, if necessary.
Mortgage loans are stated at unpaid principal balances, net of provisions for estimated losses. Mortgage loans acquired at a premium or discount are carried at amortized values, net of provisions for estimated losses. Loans include commercial first mortgage loans and are diversified by property type and geographic area throughout the United States. Mortgage loans are collateralized by the related properties and generally are no more than 75% of the properties' value at the time that the original loan is made.
Realized gains and losses on the sales of investments are recognized in operations at the date of sale and are determined using the specific cost identification method. When an impairment of a specific investment or a group of investments is determined to be other-than-temporary, a realized investment loss is recorded. Changes in the provision for estimated losses on mortgage loans are included in net realized investment gains and losses.
Income on investments is recorded on the accrual basis. Investments are placed in a non-accrual status when management believes that the borrower's financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of principal and interest is doubtful. When an investment is placed in non-accrual status, all interest previously accrued is reversed against current period interest income. Interest accruals are resumed on such investments only when they are brought fully current with respect to principal and interest, have performed on a sustained basis for a reasonable period of time, and when, in the judgement of management, the investments are estimated to be fully collectible as to both principal and interest.
Acquisition costs consist of commissions, underwriting and other costs that vary with and are primarily related to the production of new business. Acquisition costs related to investment-type contracts, primarily deferred annuity and guaranteed investment contracts, are deferred and amortized with interest in proportion to the present value of estimated gross profits to be realized over the estimated lives of the contracts. Estimated gross profits are composed of net investment income, net realized investment gains and losses, life and variable annuity fees, surrender charges and direct variable administrative expenses. This amortization is reviewed quarterly and adjusted retrospectively by a cumulative charge or credit to current operations when SLNY revises the actual profits and its estimate of future gross profits to be realized from investment-type contracts, including realized and unrealized gains and losses from investments.
Although realization of deferred policy acquisition cost ("DAC") is not assured, SLNY believes it is more likely than not that all of these costs will be realized. The amount of DAC considered realizable, however, could be reduced in the near term if the estimates of gross profits discussed above are reduced.
Future contract and policy benefits are liabilities for traditional life, disability, stop loss and annuity products. Such liabilities are established in amounts adequate to meet the estimated future obligations of policies in force. The liabilities associated with traditional life insurance, annuity and disability insurance products 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.
Operating expenses primarily represent allocated compensation and general and administrative expenses. 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.
SLNY will file a stand-alone federal income tax return for 2003. Taxes are computed under SFAS No. 109, "Accounting for Income Taxes." Deferred income taxes are generally recognized when assets and liabilities have different values for financial statement and tax reporting purposes, and for other temporary taxable and deductible differences as defined by SFAS No. 109. These differences result primarily from policy reserves, policy acquisition expenses and unrealized gains or losses on investments.
SLNY has established separate accounts applicable to various classes of contracts providing for variable benefits and they are generally not subject to liabilities that arise from any other business of SLNY. Separate account assets are subject to general account claims only to the extent the value of such assets exceeds the separate account liabilities. Contracts for which funds are invested in separate accounts include individual qualified and non-qualified variable annuity contracts. Assets and liabilities of the separate accounts, representing net deposits and accumulated net investment earnings, less fees, held primarily for the benefit of contractholders, are shown as separate captions in the financial statements. Assets held in the separate accounts are carried at market value and the investment risk of such securities is retained by the policyholder.
Effective December 31, 2003, SLNY adopted the disclosure requirements of Emerging Issues Task Force ("EITF") Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". As such, disclosures are required for unrealized losses on fixed maturity and equity securities accounted for under SFAS No. 115, "Accounting for Certain Investment in Debt and Equity Securities" that are classified as either available-for-sale or held-to-maturity. The disclosure requirements include quantitative information regarding the aggregate amount of unrealized losses and the associated fair value of the investments in an unrealized loss position, segregated into time periods for which the investments have been in an unrealized loss position. The consensus also requires certain qualitative disclosures about the unrealized holdings in order to provide additional information that SLNY considered in concluding that the unrealized losses were not other-than-temporary. For further discussion, see disclosures in Note 4.
Goodwill represents the difference between the purchase price paid and the fair value of the net assets acquired in connection with the acquisition of KBL (through the acquisition of Keyport) on October 31, 2001 by SLF, a Canadian holding company and parent of SLOC.
In 2002, SLNY completed its valuation of certain assets acquired and liabilities assumed. The revisions increased goodwill by $2.5 million, increased deferred tax asset by $1.9 million, decreased other liabilities by $47,000 and decreased investments by $4.5 million.
In 2002, SLNY received $14.9 million of additional capital contributions from Sun Life U.S. and $30.1 million of additional capital contributions from Keyport.
During 2003, SLNY paid $0.1 million in commission fees to MFS/Sun Life Financial Distributors, Inc.
Gross gains of $14.0 million, $5.9 million and $3.3 million, and gross losses of $2.6 million, $8.5 million and $2.9 million were realized on the voluntary sale of fixed maturities for the years ended December 31, 2003, 2002 and 2001, respectively.
Fixed maturities with an amortized cost of approximately $0.4 million and $1.0 million at December 31, 2003 and 2002, respectively, were on deposit with governmental authorities as required by law.
SLNY invests in commercial first mortgage loans throughout the United States. Investments are diversified by property type and geographic area. Mortgage loans are collateralized by the related properties and generally are no more than 75% of the properties' value at the time that the original loan is made.
Net investment income consisted of the following for the years ended December 31 (in 000's):
The fair values of SLNY's contractholder deposits under investment-type contracts (insurance, annuity and pension contracts that do not involve mortality or morbidity risks) are estimated using discounted cash flow analyses or surrender values based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for all contracts being valued. Those contracts that are deemed to have short-term guarantees have a carrying amount equal to the estimated market value.
Under this agreement, certain death benefits are reinsured on a yearly renewable term basis. The agreement provides that SLOC will reinsure the mortality risks in excess of $50,000 per claim for group life contracts ceded by SLNY.
The reinsurance block was closed for new business effective December 31, 2003.
SLNY has an agreement with an unrelated company whereby the unrelated company reimburses SLNY for benefits, expenses and interest credits for Focus V and Galaxy V fixed annuities issued in 2000 if the asset pools backing the liability are insufficient.
SLNY participates in a non-contributory defined benefit pension plan that is sponsored by Sun Life U.S., which is directly liable for the related obligations. Benefits under all plans are based on years of service and employees' average compensation. SLNY is allocated a portion of the pension plan expenses. The allocated expenses were $41,000, $14,000 and $13,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
SLNY will file a stand-alone federal tax return for the year ended December 31, 2003. In 2007 and periods thereafter, SLNY will file a consolidated tax return with Sun Life Assurance Company of Canada - U.S. Operations Holdings, Inc. For periods prior to 2003, SLNY filed federal income tax as part of the consolidated tax return. However, federal income taxes were calculated as if SLNY was filing a separate federal income tax return. A summary of the components of federal income tax expense in the statements of income for the years ended December 31, was as follows (in 000's):
SLNY made no tax payments in 2003. For prior periods, payments were made under certain tax sharing agreements that required each company to calculate its liability as if it filed a separate return. Sun NY Predecessor had cash payments to Sun Life U.S. for federal income taxes of approximately $2.7 million for the year ended December 31, 2002 and had cash received of approximately $2.0 million for the year ended December 31, 2003. Similarly, KBL paid approximately $0.6 million to Keyport for federal income taxes for the year ended December 31, 2002 and received approximately $1.0 million from Keyport for the year ended December 31, 2003. At December 31, 2003, SLNY had $13.9 million of net operating loss carryforwards which will expire, if unused, in 2017.
SLNY's federal income tax returns are routinely audited by the Internal Revenue Service ("IRS"), and provisions are made in the financial statements in anticipation of the results of these audits. Sun NY Predecessor and KBL are currently under audit by the IRS for the years 1998 through 2000 and 1999 through October 31, 2001, respectively. In SLNY's opinion, adequate tax liabilities have been established for all years and any adjustments that might be required for the years under audit will not have a material effect on SLNY's financial statements. However, the amounts of these tax liabilities could be revised in the future if estimates of SLNY's ultimate liability are revised.
Activity in the liability for unpaid claims and claims adjustment expenses related to the stop loss, group life and group disability products is summarized below (in 000's):
SLNY regularly updates its estimates of liabilities for unpaid claims and claims adjustments expenses as new information becomes available and further events occur which may impact the resolution of unsettled claims for its group disability line of business. Changes in prior estimates are recorded in results of operations in the year such changes are determined to be needed.
The individual insurance products offered by the Individual Protection Segment are conversions from the group life products. On October 21, 2003, SLNY announced that it received approval to sell Variable Universal Life ("VUL") insurance products to customers in New York State.
SLNY's statutory surplus and net income (loss) were as follows (in 000's):
SLNY's ability to pay dividends are subject to certain statutory restrictions. The State of New York has enacted laws governing the payment of dividends to stockholders by domestic insurers. New York law permits a domestic stock life insurance company to distribute a dividend to its shareholders without prior notice to the New York Superintendent of Insurance where the aggregate amount of such dividend in any calendar year does not exceed the lesser of: (i) ten percent of its surplus to policyholders as of the immediately preceding calendar year; or (ii) its net gain from operations for the immediately preceding calendar year, not including realized capital gains. No dividends were paid by SLNY during 2003, 2002 or 2001.
SLNY's variable annuity contracts and variable life insurance policies are subject to various levels of regulation under federal securities laws administered by the Securities and Exchange Commission (the "SEC") and under certain state securities laws. On or about October 30, 2003, SLNY received a request from the SEC for information regarding its policies, practices and procedures with respect to subaccount "market timing," its policies, practices and procedures with respect to receiving and processing exchange orders from contract owners, and its oversight of such activities in SLNY's separate accounts. SLNY responded to this request and an additional related request. On March 4, 2004, the Boston District Office of the SEC notified SLNY that it intended to commence an examination of SLNY and certain of its affiliates pursuant to Section 31(b) of the Investment Company Act of 1940 and the Securities Exchange Act of 1934 relating to these and certain other subjects. SLNY is cooperating in the examination.
In addition, the SEC and other regulators have conducted or are conducting investigations and examinations of certain of SLNY's affiliates relating to various issues, including market timing and late trading of mutual funds and variable insurance products, directed brokerage, revenue-sharing and other arrangements with distributors.
SLNY is not aware of any contingent liabilities arising from litigation, income taxes and other matters that could have a material effect upon the financial condition or results of operations or cash flow of SLNY.
In the normal course of business, SLNY has entered into agreements that include indemnities in favor of third parties, such as engagement letters with advisors and consultants, outsourcing agreements, underwriting and agency agreements, information technology agreements, distribution agreements and service agreements. SLNY has also agreed to indemnify its directors and certain of its officers and employees in accordance with SLNY's by-laws. Due to the nature of these indemnification agreements, it is not possible to estimate SLNY's potential liability.
Total rental expense for the years ended December 31, 2003, 2002 and 2001 was $1.1 million, $1.1 million and $0.5 million, respectively.
We have audited the accompanying balance sheet of Sun Life Insurance and Annuity Company of New York as of December 31, 2003 and 2002, and the related statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
As described in Note 1 to the financial statements, on December 31, 2002, Sun Life Insurance and Annuity Company of New York merged with Keyport Benefit Life Insurance Company. The Companies became affiliates on November 1, 2001 as a result of the acquisition of Keyport Benefit Life Insurance Company's parent by Sun Life Insurance and Annuity Company of New York's ultimate parent. The merger of Sun Life Insurance and Annuity Company of New York and Keyport Benefit Life Insurance Company was accounted for at historical cost as required by Statement of Financial Accounting Standards No. 141 "Business Combinations" for transfers of assets among affiliates. The balance sheet of Sun Life Insurance and Annuity Company of New York as of December 31, 2001 and the related statements of income, stockholders' equity, comprehensive income and cash flows for the year then ended have been restated to give effect to the merger as of November 1, 2001.
(A Wholly Owned Subsidiary of Sun Life Assurance Company of Canada (U.S.))