See Note 1 to financial statements for the effect of the reinsurance agreements on net income
The Registrant's bond holdings consist of a diversified portfolio of both public and private issues. It is the Registrant's policy to acquire only investment grade securities. Private placements are rated internally with reference to the National Association of Insurance Commissioners ("NAIC") designation issued by the NAIC Securities Valuation Office. The overall quality of the Registrant's bond portfolio remains high. At December 31, 1995, 2.3% of the Registrant's holdings of bonds were rated below investment grade (i.e. below NAIC rating "1" or "2"). Net unrealized gains on below investment grade bonds were $2,133,727 at December 31, 1995. Bond write downs resulting from intrinsic impairments amounted to $3,500,000 during 1995.
The Registrant holds real estate primarily because such investments historically have offered better yields over the long-term than fixed income investments. Real estate investments are used to enhance the yield of products with long-term liability durations. Properties for which market value is lower than cost adjusted for depreciation (book value) are reported at market value. During 1995, the change in the difference between the market value and book value for properties reported at market value was $3,583,000.
In 1994, the Registrant entered into a leveraged lease agreement under which a fleet of rail cars was leased for a term of 9.75 years. The investment is classified as other invested assets in the attached balance sheet.
Income from operations before surplus note interest, equity in income of subsidiaries and federal income taxes increased by $33,947,000 from $12,499,000 in 1994 to $46,446,000 in 1995. Reinsurance agreements with the parent had the effect of decreasing net income by $31,327,000 in 1994 as compared to increasing net income by $9,637,000 in 1995. The increase in net income associated with the reinsurance agreements is due to the lack of surplus strain associated with the assumption of new contracts issued. No contracts issued in 1994 or thereafter have been assumed by the Registrant. It is the acquisition costs of new contract issues which caused the loss from the reinsurance agreements in prior years. Prior to reinsurance, net income from operations decreased by $7,017,000 from $43,826,000 in 1994 to $36,809,000 in 1995. Realized losses on investments and amortization of the interest maintenance reserve decreased by $2,315,000 primarily due to fewer writedowns in the group pension product line. Operating expenses increased by $5,261,000 from $32,231,000 in 1994 to $37,492,000 in 1995, reflecting increased expenses allocated from the parent and increased salaries due to additional staffing. The remaining decrease in net income in 1995 as compared to 1994 of approximately $4,071,000 reflects the strain associated with the Registrant's market value adjusted annuity product, partially offset by profits associated with the maturing block of individual and group fixed annuities.
Total income decreased by approximately $73,330,000 from $1,535,039,000 in 1994 to $1,461,709,000 in 1995. Revenues from reinsurance transactions decreased by $4,307,000 reflecting the assumed block of business being closed as of December 31, 1993. Premiums and annuity considerations on a pre-reinsurance basis decreased by $7,728,000 reflecting decreased group pension lottery sales of $22,084,000 offset by increased annuitizations of $14,356,000. Fixed annuity deposits decreased by $26,091,000 as interest rates remained at low levels. Sales of group pension guaranteed investment contracts increased by $49,229,000 reflecting the transfer of the parent's agents' pension fund from the parent to the Registrant. Net transfers from the separate accounts decreased by $80,758,000 reflecting the decline in interest rates. Pre-reinsurance net investment income increased by $2,219,000 reflecting an increase in the Registrant's invested asset base. Realized losses and amortization of the interest maintenance reserve decreased by $2,315,000. Other income decreased by $16,711,000 from $33,377,000 in 1994 to $16,666,000 reflecting a decrease in the surplus transfer from the separate accounts. Mortality and expense risk charges increased by $8,616,000 as a result of market appreciation in the separate accounts.
Benefits and expenses decreased by approximately $107,277,000 from $1,522,540,000 in 1994 to $1,415,263,000 in 1995. Reinsurance had the effect of decreasing benefits and expenses by $45,272,000, primarily from lower commissions due to no assumption of new contract issues. Prior to reinsurance, benefits and expenses decreased by approximately $62,004,000. The change in the liability for annuity and other deposit funds increased by $83,094,000 as a result of fewer maturities of contracts for which the guarantee periods have expired, and increased sales of group pension guaranteed investment contracts described above. The change in reserves decreased by $16,694,000 reflecting the decrease in group pension lottery sales. Annuity and other deposit fund withdrawals decreased by $8,424,000 reflecting fewer maturities. Transfers to the non-unitized separate account decreased by $124,285,000 from $455,688,000 in 1994 to $331,403,000 reflecting fewer sales and transfers from unitized separate accounts of individually marketed fixed annuities as a result of the decline in interest rates. Operating expenses increased by $5,261,000 reflecting the increased expenses described above.
result of improved interest rates and product enhancements. This was offset by decreased sales of group pension deposit contracts of $271,913,000, reflecting management's decision to limit sales due to the volatility of interest rates and changes in the competitive marketplace. Realized losses on investments decreased, reflecting fewer mortgage writedowns in 1994. Mortality and expense risk charges increased, reflecting the increase in separate account net assets.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (Wholly-owned subsidiary of Sun Life Assurance Company of Canada) STATEMENTS OF OPERATIONS
Sun Life Assurance Company of Canada (U.S.) (the Company) is incorporated as a life insurance company and is currently engaged in the sale of individual fixed and variable annuities, group fixed and variable annuities and group pension contracts. The Company also underwrites a block of individual life insurance business through a reinsurance contract with its parent. Sun Life Assurance Company of Canada (the parent company) is a mutual life insurance company. The Company, which is domiciled in the State of Delaware, prepares its financial statements in accordance with statutory accounting practices prescribed or permitted by the State of Delaware Insurance Department. Statutory accounting practices are considered to be generally accepted accounting principles for mutual insurance companies and subsidiaries of mutuals. Prescribed accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as 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. Preparation of the financial statements requires management to make certain estimates and assumptions.
The Company has agreements with the parent company which provide that the parent company will reinsure the mortality risks of the individual life insurance contracts sold by the Company. Under these agreements basic death benefits and supplementary benefits are reinsured on a yearly renewable term basis and coinsurance basis, respectively. Reinsurance transactions under these agreements had the effect of decreasing income from operations by approximately $2,184,000, $2,138,000, and $1,046,000, for the years ended December 31, 1995, 1994 and 1993, respectively.
Effective January 1, 1991, the Company entered into an agreement with the parent company under which 100% of certain fixed annuity contracts issued by the Company were reinsured. Effective December 31, 1993 this agreement was terminated. This agreement had the effect of decreasing income from operations by approximately $9,930,000 in 1993.
The life reinsurance assumed agreement requires the reinsurer to withhold funds in amounts equal to the reserves assumed.
The following are summarized pro-forma results of operations of the Company for the years ended December 31, 1995, 1994 and 1993 before the effect of reinsurance transactions with the parent company.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Deposits to all separate accounts are reported as increases in separate account liabilities and are not reported as revenues. Mortality and expense risk charges and surrender fees incurred by the separate accounts are included in income of the Company.
Any difference between the assets and liabilities of the separate accounts is treated as payable to or receivable from the general account of the Company. Amounts payable to the general account of the Company were $148,675,000 in 1995 and $132,496,000 in 1994.
Net income reported in the Company's statutory Annual Statement differs from net income reported in these financial statements. Dividends from subsidiaries are included in income and undistributed income (losses) of subsidiaries are included as gains (losses) in unassigned surplus in the statutory Annual Statement. Both the dividends and the undistributed income (losses) are included in net income in these financial statements.
Certain reclassifications have been made in the 1993 and 1994 financial statements to conform to the classifications used in 1995.
MFS, a registered investment adviser, serves as investment adviser to the mutual funds in the MFS family of funds and certain mutual funds and separate accounts established by the Company, and the MFS Asset Management Group provides investment advice to substantial private clients.
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED): New York. Sunesco is a registered investment adviser and broker-dealer. MCIC is a life insurance company which issues only individual disability income policies. Sun Capital, a registered investment adviser, Sunfinco, and Sunbesco are currently inactive.
During 1995, 1994 and 1993, the Company contributed capital in the following amounts to its subsidiaries:
Summarized combined financial information of the Company's subsidiaries as of December 31, 1995, 1994 and 1993 and for the years then ended, follows:
3. STOCK, SURPLUS NOTES, CONTRIBUTIONS AND NOTE RECEIVABLE: The Company has issued surplus notes to its parent of $335,000,000 during the years 1982 through 1993 at interest rates between 7.25% and 10%. The Company subsequently repaid all principal and interest associated with these surplus notes on January 16, 1996. On December 19, 1995 the Company issued surplus notes totalling $315,000,000 to an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and 7.25%. Of these notes, $157,500,000 will mature in the year 2007, and $157,500,000 will mature in the year 2015. Interest on these notes is payable semi-annually. Principal and interest on surplus notes are payable only to the extent that the Company meets specified requirements as regards free surplus exclusive of the principal amount and accrued interest, if any, on these notes; and, in the case of principal repayments, with the consent of the Delaware Insurance Commissioner. Interest payments require the consent of the Delaware Insurance Commissioner after December 31, 1993. Payment of principal and interest on the notes issued in 1995 also requires the consent of the Canadian Office of the Superintendent of Financial Institutions. The Company expensed $31,813,000, $31,150,000 and $26,075,000 in respect of interest on surplus notes for the years 1995, 1994 and 1993, respectively. On December 19, 1995, the parent borrowed $120,000,000 at 5.6 % through a short term note from the Company maturing on January 16, 1996. The note, which is classified under short-term bonds at December 31, 1995, was repaid in full by the parent at maturity.
4. BONDS: The amortized cost and estimated market value of investments in debt securities are as follows:
4. BONDS (CONTINUED): The amortized cost and estimated market value of bonds at December 31, 1995 and 1994 are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
6. MORTGAGE LOANS: The Company invests in commercial first mortgage loans throughout the United States. The Company monitors the condition of the mortgage loans in its portfolio. In those cases where mortgages have been restructured, appropriate provisions have been made. In those cases where, in management's judgement, the mortgage loans' values are impaired, appropriate losses are recorded.
The Company has restructured mortgage loans totalling $49,846,000, against which there are provisions of $8,799,000 at December 31, 1995.
The Company has made commitments of mortgage loans on real estate into the future. The outstanding commitments for these mortgages amount to $13,100,000 at December 31, 1995.
9. DERIVATIVES: The Company uses derivative instruments for interest risk management purposes, including hedges against specific interest rate risk and to minimize the Company's exposure to fluctuations in interest rates. The Company's use of derivatives has included U.S. Treasury futures, conventional interest rate swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that qualify as hedges are deferred until the earliest of the completion of the hedging transaction, determination that the transaction will no longer take place, or determination that the hedge is no longer effective. Upon completion of the hedge, gains or losses are deferred in IMR and amortized over the remaining life of the hedged assets. At December 31, 1995, there were no futures contracts outstanding.
10. LEVERAGED LEASES: The Company is a lessor in a leveraged lease agreement entered into on October 21, 1994 under which equipment having an estimated economic life of 25-40 years was leased for a term of 9.75 years. The Company's equity investment represented 22.9% of the purchase price of the equipment. The balance of the purchase price was furnished by third party long-term debt financing, secured by the equipment and non-recourse to the Company. At the end of the lease term, the Master Lessee may exercise a fixed price purchase option to purchase the equipment.
The net investment is classified as other invested assets in the accompanying balance sheets.
11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT LIABILITIES: Withdrawal characteristics of general account and separate account annuity reserves and deposits:
The components of the 1995 and 1994 pension cost for the pension plan were:
The Company's share of the group's accrued pension cost at December 31, 1995 and 1994 was $420,000 and $417,000, respectively. The Company's share of net periodic pension cost was $3,000 and $417,000, respectively.
The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.5% and 4.5%, respectively. The expected long-term rate of return on assets was 7.5%.
NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
12. RETIREMENT PLANS (CONTINUED): The Company also participates with its parent 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 $185,000, $152,000 and $124,000 for the years ended December 31, 1995, 1994, and 1993, respectively.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 106, "Employers Accounting for Post-retirement Benefits other than Pensions". SFAS No. 106 requires the Company to accrue the estimated cost of retiree benefit payments during the years the employee provides services. SFAS No. 106 allows recognition of the cumulative effect of the liability in the year of adoption or the amortization of the obligation over a period of up to 20 years. The Company has elected to recognize this obligation of approximately $400,000 over a period of ten years. The Company's cash flows are not affected by implementation of this standard, but implementation decreased net income by $142,000, $114,000, and $120,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company's post-retirement health care plans currently are not funded.
The following table sets forth the plan's funded status, reconciled with amounts recognized in the Company's balance sheet:
The discount rate used in determining the accumulated post-retirement benefit obligation was 7.5% in 1995 and 8% in 1994, and the assumed health care cost trend rate was 12.0% graded to 6% over 10 years after which it remains constant.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS: The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1995 and 1994:
The fair values of the Company's general account reserves and liabilities 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. Those contracts that are deemed to have short term guarantees have a carrying amount equal to the estimated market value.
16. FEDERAL INCOME TAXES: The Company and its subsidiaries file a consolidated federal income tax return. Federal income taxes are calculated for the consolidated group based upon amounts determined to be payable as a result of operations within the current year. No provision is recognized for timing differences which may exist between financial statement and taxable income. Such timing differences include reserves, depreciation and accrual of market discount on bonds. Cash payments for federal income taxes were approximately $12,429,000, $43,200,000 and $25,000,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
18. NEW ACCOUNTING PRONOUNCEMENT: 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 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
Beginning in 1996, the Company will file financial statements prepared in accordance with all applicable pronouncements that define generally accepted accounting principles for all enterprises.