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EX-31.1 - SUN LIFE ASSURANCE CO OF CANADA USexhibit311.htm
EX-32.1 - SUN LIFE ASSURANCE CO OF CANADA USexhibit321.htm
EX-31.2 - SUN LIFE ASSURANCE CO OF CANADA USexhibit312.htm
EX-32.2 - SUN LIFE ASSURANCE CO OF CANADA USexhibit322.htm

 
 

 




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT 0F 1934

For the quarterly period ended
September 30, 2009
Commission File Numbers: 2-99959, 33-29851, 33-31711, 33-41858, 33-43008, 33-58853, 333-11699, 333-77041, 333-62837, 333-45923, 333-88069, 333-39306, 333-46566, 333-82816, 333-82824, 333-111636, 333-130699, 333-130703, 333-130704, 333-133684, 333-133685, 333-133686, 333-39034, 333-144903-01, 333-144908-01, 333-144911-01, 333-144912-01, 333-155716, 333-155726, 333-155791, 333-155792, 333-155793, 333-155797, 333-156303, 333-156304, 333-156308, 333-160605, 333-160606, and 333-160607

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Exact name of registrant as specified in its charter)

Delaware
04-2461439
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)

One Sun Life Executive Park, Wellesley Hills, MA
02481
(Address of principal executive offices)
(Zip Code)

(781) 237-6030
(Registrant’s telephone number, including area code)

NONE
(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  þ Yes   ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 ¨ Yes   ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨
 
Accelerated filer ¨
Non-accelerated filer  þ
(Do not check if a smaller reporting company)
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes  þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.
Registrant has 6,437 shares of common stock outstanding on November 12, 2009, all of which are owned by Sun Life of Canada (U.S.) Holdings, Inc.

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PERMITTED BYGENERAL INSTRUCTION H.




 
 

 





SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2009

TABLE OF CONTENTS

 
Page

PART I -
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements:
 
     
 
Condensed Consolidated Statements of Operations for the nine-month periods ended
September 30, 2009 and 2008 (Unaudited)
 
3
     
 
Condensed Consolidated Statements of Operations for the three-month periods ended
September 30, 2009 and 2008 (Unaudited)
 
4
     
 
Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31,
2008 (Unaudited)
 
5
     
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the nine and three-
month periods ended September 30, 2009 and 2008 (Unaudited)
 
6
     
 
Condensed Consolidated Statements of Stockholder’s Equity for the nine-month periods ended
September 30, 2009 and 2008 (Unaudited)
 
7
     
 
Condensed Consolidated Statements of Cash Flows for the nine-month periods ended
September 30, 2009 and 2008 (Unaudited)
 
8
     
 
Notes to the Unaudited Condensed Consolidated Financial Statements
10
     
Item 2.
Management's Discussion and Analysis of Financial Position and Results of Operations
76
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
93
     
Item 4T.
Controls and Procedures
93

PART II -
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
93
     
Item 1A.
Risk Factors
93
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
94
     
Item 3.
Defaults Upon Senior Securities
94
     
Item 4.
Submission of Matters to a Vote of Security Holders
94
     
Item 5.
Other Information
94
     
Item 6.
Exhibits
94


 
2

 


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)

For the nine-month periods ended September 30,

   
Unaudited
   
 
2009
   
 
2008
           
Revenues
         
           
Premiums and annuity considerations
$
101,012
 
$
   90,561 
Net investment income (loss) (1)
 
2,357,999
   
(860,928)
Net derivative loss (2)
 
(2,856)
   
(273,048)
Net realized investment losses, excluding impairment losses on 
available-for-sale securities
 
(8,401)
   
(293,494)
Other-than-temporary impairment losses (3)
 
(4,834)
   
(18,264)
Fee and other income
 
302,742
   
379,999 
           
Total revenues
 
2,745,662
   
(975,174)
           
Benefits and Expenses
         
           
Interest credited
 
317,555
   
                   417,148 
Interest expense
 
52,010
   
                     86,133 
Policyowner benefits
 
118,060
   
                   231,655 
Amortization of deferred policy acquisition costs
   and value of business and customer renewals acquired (4)
 
515,179
   
(592,967)
Other operating expenses
 
183,572
   
                  223,671 
           
Total benefits and expenses
 
1,186,376
   
365,640
           
Income (loss) before income tax expense (benefit)
 
1,559,286
   
(1,340,814)
           
Income tax expense (benefit)
 
450,689
   
(405,343)
           
Net income (loss)
$
1,108,597
 
$
(935,471)

 
(1)Net investment income (loss) includes an increase (decrease) in market value of trading fixed maturity securities of $2,044.9 million and $(1,676.0) million for the nine-month periods ended September 30, 2009 and 2008, respectively.
 
(2)  Net derivative loss for the nine-month period ended September 30, 2008 includes $166.1 million of income related to the Company’s adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures,” which was previously issued as Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” which is further discussed in Note 4.
 
(3)The $4.8 million other-than-temporary impairment (“OTTI”) losses for the nine-month period ended September 30, 2009 represent solely credit losses.  The Company incurred no non-credit OTTI losses during the nine-month period ended September 30, 2009 and as such no non-credit OTTI losses were recognized in other comprehensive loss for the period.
 
(4)Amortization of deferred policy acquisition costs and value of business and customer renewals acquired for the nine-month period ended September 30, 2008 includes $3.2 million of expenses related to the Company’s adoption of FASB ASC Topic 820, which is further discussed in Note 4.


The accompanying notes are an integral part of the condensed consolidated financial statements.


 
3

 





SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)

For the three-month periods ended September 30,

   
Unaudited
   
2009
   
2008
           
Revenues
         
           
Premiums and annuity considerations
$
35,517
 
$
30,189 
Net investment income (loss) (1)
 
1,214,599
   
(573,704)
Net derivative loss
 
(304,446)
   
(259,175)
Net realized investment losses, excluding impairment losses on
available-for-sale securities
 
 
(5,564)
   
(296,784)
Other-than-temporary impairment losses (2)
 
-
   
(18,264)
Fee and other income
 
204,479
   
124,326 
           
Total revenues
 
1,144,585
   
(993,412)
           
Benefits and Expenses
         
           
Interest credited
 
75,570
   
133,145 
Interest expense
 
12,841
   
29,585 
Policyowner benefits
 
23,533
   
103,490 
Amortization of deferred policy acquisition costs
    and value of business and customer renewals acquired
 
146,291
   
(298,058)
Other operating expenses
 
82,737
   
62,269 
           
Total benefits and expenses
 
340,972
   
30,431 
           
Income (loss) before income tax expense (benefit)
 
803,613
   
(1,023,843)
           
Income tax expense (benefit)
 
185,940
   
(274,506)
           
Net income (loss)
$
617,673
 
$
(749,337)


 
(1)Net investment income (loss) includes an increase (decrease) in market value of trading fixed maturity securities of $1,067.0 million and $(871.9) million for the three-month periods ended September 30, 2009 and 2008, respectively.
 
(2) The Company incurred no OTTI losses during the three-month period ended September 30, 2009.



The accompanying notes are an integral part of the condensed consolidated financial statements.










 
4

 





SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

   
Unaudited
ASSETS
September 30, 2009
 
December 31, 2008
Investments
         
Available-for-sale fixed maturities at fair value (amortized cost of
   $1,185,813 and $782,861 at 2009 and 2008, respectively)
$
1,238,122
 
$
674,020 
Trading fixed maturities at fair value (amortized cost of $13,893,696
   and $14,909,429 at 2009 and 2008, respectively)
 
12,781,378
   
11,762,146 
Mortgage loans
 
1,975,462
   
2,083,003 
Derivative instruments – receivable
 
337,494
   
727,103 
Limited partnerships
 
50,236
   
78,289 
Real estate
 
200,059
   
201,470 
Policy loans
 
719,428
   
729,407 
Other invested assets
 
40,522
   
211,431 
Cash and cash equivalents
 
3,022,206
   
1,624,149 
Total investments and cash
 
20,364,907
   
18,091,018 
           
Accrued investment income
 
233,656
   
282,564 
Deferred policy acquisition costs
 
2,707,154
   
2,862,401 
Value of business and customer renewals acquired
 
166,590
   
179,825 
Net deferred tax asset
 
364,232
   
856,845 
Goodwill
 
7,299
   
7,299 
Receivable for investments sold
 
25,373
   
7,548 
Reinsurance receivable
 
3,244,848
   
3,076,615 
Other assets
 
241,714
   
222,840 
Separate account assets
 
22,472,326
   
20,531,724 
           
Total assets
$
49,828,099
 
$
46,118,679 
           
LIABILITIES
         
           
Contractholder deposit funds and other policy liabilities
$
17,778,143
 
$
17,545,721 
Future contract and policy benefits
 
932,355
   
1,014,688 
Payable for investments purchased
 
91,306
   
363,513 
Accrued expenses and taxes
 
156,749
   
118,671 
Debt payable to affiliates
 
2,098,000
   
1,998,000 
Reinsurance payable
 
2,104,187
   
1,650,821 
Derivative instruments – payable
 
778,123
   
1,494,341 
Other liabilities
 
644,078
   
605,945 
Separate account liabilities
 
22,472,326
   
20,531,724 
           
Total liabilities
 
47,055,267
   
45,323,424
           
Commitments and contingencies – Note 8
         
           
STOCKHOLDER’S EQUITY
         
           
Common stock, $1,000 par value – 10,000 shares authorized;
   6,437 shares issued and outstanding in 2009 and 2008
$
6,437
 
$
6,437 
Additional paid-in capital
 
3,621,022
   
2,872,242 
Accumulated other comprehensive loss
 
(18,822)
   
(129,884)
Accumulated deficit
 
(835,805)
   
(1,953,540)
           
Total stockholder’s equity
 
2,772,832
   
795,255 
           
Total liabilities and stockholder’s equity
$
49,828,099
 
$
46,118,679 

The accompanying notes are an integral part of the condensed consolidated financial statements.


 
5

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)

For the nine-month periods ended September 30,

 
 
Unaudited
   
 
2009
   
 
2008
           
Net income (loss)
$
1,108,597
 
$
(935,471)
           
Other comprehensive income (loss):
         
           
Change in unrealized holding gains (losses) on available-
   for-sale securities, net of tax and policyholder amounts (1)
 
119,266
   
(88,638)
Reclassification adjustment for OTTI losses, net of tax (5)
 
   
Reclassification adjustments of net realized investment losses
   into net income (loss), net of tax (2)
 
934
   
                 9,255
           
Other comprehensive income (loss)
 
120,200
   
(79,383)
           
Comprehensive income (loss)
$
1,228,797
 
$
(1,014,854)

(1)  
Net of tax of $(64.2) million and $47.7 million for the nine-month periods ended September 30, 2009 and 2008, respectively.
(2)  
Net of tax of $(0.5) million and $(5.0) million for the nine-month periods ended September 30, 2009 and 2008, respectively.


For the three-month periods ended September 30,

 
Unaudited
   
 
2009
   
 
2008
           
Net income (loss)
$
617,673
 
$
(749,337)
           
Other comprehensive income (loss):
         
           
Change in unrealized holding gains (losses) on available-
   for-sale securities, net of tax and policyholder amounts (3)
 
67,984
   
(60,837)
Reclassification adjustment for OTTI losses, net of tax (5)
 
   
Reclassification adjustments of net realized investment (gains)
   losses into net income (loss), net of tax (4)
 
(1,027)
   
            10,767
           
Other comprehensive income (loss)
 
66,957
   
(50,070)
           
Comprehensive income (loss)
$
684,630
 
$
(799,407)

(3)  
Net of tax of $(36.6) million and $32.8 million for the three-month periods ended September 30, 2009 and 2008, respectively.
(4)  
Net of tax of $0.5 million and $(5.8) million for the three-month periods ended September 30, 2009 and 2008, respectively.
(5)  
Represents the reclassification adjustment for other-than-temporarily impaired fixed maturity available-for-sale securities for which a portion of the loss was recognized in the condensed consolidated statements of operations.



The accompanying notes are an integral part of the condensed consolidated financial statements.


 
6

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
(in thousands)

For the nine-month periods ended September 30, 2009 and 2008

Unaudited

 
Common
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss (3)
 
Retained
Earnings
(Accumulated
Deficit)
 
Total
Stockholder’s
Equity
                             
Balance at December 31, 2007
$
6,437
 
$
2,146,436
 
$
(92,403)
 
$
369,677 
 
$
2,430,147 
                             
Cumulative effect of accounting
changes related to the adoption
of FASB ASC Topics 715 and
825, net of tax(1)
             
88,033
   
(88,376)
   
(343)
Net loss
                   
(935,471)
   
(935,471)
Tax benefit from stock options
       
806
               
             806
Capital contribution from Parent
       
300,000
               
       300,000
Other comprehensive loss
             
(79,383)
         
(79,383)
                             
Balance at September 30, 2008
$
6,437
 
$
2,447,242
 
$
(83,753)
 
$
(654,170)
 
$
   1,715,756
                             
                             
Balance at December 31, 2008
$
6,437
 
$
2,872,242
 
$
(129,884)
 
$
(1,953,540)
 
$
795,255 
                             
Cumulative effect of accounting
   changes related to the adoption
   of FASB ASC Topic 320, net
   of tax (2) (3)
             
(9,138)
   
9,138
   
Net income
                   
1,108,597
   
1,108,597
Tax benefit from stock options
       
128
               
128
Capital contribution from Parent
       
748,652
               
748,652
Other comprehensive income
             
120,200
         
120,200
                             
Balance at September 30, 2009
$
6,437
 
$
3,621,022
 
$
(18,822)
 
$
(835,805)
 
$
2,772,832


(1)  
Portions of FASB ASC Topic 715, “Compensation–Retirement Benefits,” were previously issued as SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”  Portions of FASB ASC 825, “Financial Instruments” were previously issued as SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.”
(2)  
Portions of FASB ASC Topic 320, “Investments- Debt and Equity Securities” were previously issued as FASB Staff Position (“FSP”) Nos. 115-2 and 124-2, “Recognition and Presentation of Other-than-Temporary Impairments.”
(3)  
As of September 30, 2009, the total amount of after tax non-credit OTTI losses recorded in the Company’s accumulated other comprehensive loss was $9.1 million.



The accompanying notes are an integral part of the condensed consolidated financial statements.




 
7

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the nine-month periods ended September 30,

       
Unaudited
       
 
2009
 
 
2008
Cash Flows From Operating Activities:
         
Net income (loss)
$
1,108,597 
 
$
(935,471)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
         
 
Net amortization of premiums on investments
 
6,104 
   
17,864 
 
 Amortization of deferred policy acquisition costs and value of
 
515,179 
   
(592,967)
business and customer renewals acquired
 
Depreciation and amortization
 
4,283 
   
4,952 
 
Net (gain) loss on derivatives
 
(99,101)
   
223,269 
 
Net realized losses and OTTI credit losses on available-for-sale
   investments
 
13,235 
   
13,409 
 
Changes in fair value of trading investments
 
(2,044,885)
   
1,676,039 
 
Net realized losses on trading investments
 
268,111 
   
324,849 
 
Undistributed loss on private equity limited partnerships
 
11,477 
   
4,919 
 
Interest credited to contractholder deposits
 
317,555 
   
417,148 
 
Deferred federal income taxes
 
427,890 
   
(350,715)
Changes in assets and liabilities:
         
 
Additions to deferred policy acquisition costs and value of business
         
 
and customer renewals acquired
 
(305,494)
   
(273,189)
 
Accrued investment income
 
48,908 
   
43,466 
 
Net change in reinsurance receivable/payable
 
272,942 
   
(676)
 
Future contract and policy benefits
 
(82,333)
   
58,615 
 
Other, net
 
(74,269)
   
135,974 
           
Net cash provided by operating activities
$
388,199
 
$
767,486 
               
Cash Flows From Investing Activities:
         
Sales, maturities and repayments of:
         
 
Available-for-sale fixed maturities
$
40,106 
 
$
89,425 
 
Trading fixed maturities
 
1,203,168 
   
1,512,383 
 
Mortgage loans
 
108,465 
   
260,845 
 
Real estate
 
   
1,160 
 
Other invested assets
 
(124,105)
   
258,973 
Purchases of:
         
 
Available-for-sale fixed maturities
 
(337,123)
   
(68,127)
 
Trading fixed maturities
 
(471,133)
   
(1,815,487)
 
Mortgage loans
 
(12,059)
   
(53,246)
 
Real estate
 
(1,551)
   
(4,164)
 
Other invested assets
 
(97,923)
   
(79,977)
Net change in other investments
 
(100,476)
   
(260,196)
Net change in policy loans
 
9,979 
   
(7,806)
               
Net cash provided by (used in) investing activities
$
217,348 
 
$
(166,217)

Continued on next page


 
8

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)

For the nine-month periods ended September 30,

 
Unaudited
 
 
2009
 
 
2008
           
Cash Flows From Financing Activities:
         
Additions to contractholder deposit funds
$
2,302,067 
 
$
1,745,079 
Withdrawals from contractholder deposit funds
 
(2,313,659)
   
(2,713,058)
Capital contribution from Parent
 
748,652 
   
300,000 
Debt proceeds
 
100,000 
   
175,000 
Other, net
 
(44,550)
   
(29,760)
           
Net cash provided by (used in) financing activities
 
792,510 
   
       (522,739)
           
Net change in cash and cash equivalents
 
1,398,057 
   
78,530 
           
Cash and cash equivalents, beginning of period
 
1,624,149 
   
1,169,701 
           
           
Cash and cash equivalents, end of period
$
3,022,206
 
$
1,248,231 
           




















The accompanying notes are an integral part of the condensed consolidated financial statements.






 
9

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
1. DESCRIPTION OF BUSINESS

GENERAL

Sun Life Assurance Company of Canada (U.S.) (the “Company”) and its subsidiaries are engaged in the sale of individual and group variable life insurance, individual universal life insurance, individual and group fixed and variable annuities, funding agreements, group life, group disability, group dental and group stop loss insurance.  These products are distributed through individual insurance agents, financial planners, insurance brokers and broker-dealers to both the tax qualified and non-tax-qualified markets.  The Company is authorized to transact business in 49 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands.  In addition, the Company’s wholly-owned subsidiary, Sun Life Insurance and Annuity Company of New York (“SLNY”), is authorized to transact business in the State of New York.

The Company is a stock life insurance company incorporated under the laws of Delaware.  The Company is a direct wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc. (the “Parent”).  The Company is also an indirect wholly-owned subsidiary of Sun Life Financial Inc. (“SLF”), a reporting company under the Securities Exchange Act of 1934.  SLF and its subsidiaries are collectively referred to herein as “Sun Life Financial.”

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for stock life insurance companies and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.  Operating results for the nine-month period ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.  These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
 
The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  As of September 30, 2009, the Company directly or indirectly owned all of the outstanding shares or members interest of SLNY, a New York life insurance company which issues individual fixed and variable annuity contracts, group life, group disability, group dental and stop loss insurance, and individual life insurance in New York; Independence Life and Annuity Company (“INDY”), a Rhode Island life insurance company that sold variable and whole life insurance products; Sun Life Financial (U.S.) Reinsurance Company (“Sun Life Vermont”), a Vermont special purpose financial captive insurance company; Clarendon Insurance Agency, Inc., a registered broker-dealer; SLF Private Placement Investment Company I, LLC; Sun Parkaire Landing LLC; 7101 France Avenue Manager, LLC; Sun MetroNorth, LLC; SLNY Private Placement Investment Company I, LLC; and SL Investment DELRE Holdings 2009-1, LLC (“DELRE Holdings”).




 
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SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. DESCRIPTION OF BUSINESS (CONTINUED)

BASIS OF PRESENTATION (continued)

On September 6, 2006 the Company entered into an agreement with Credit and Repackaged Securities Limited Series 2006-10 Trust (the “CARS Trust”).  Pursuant to this agreement, the Company purchased a funded note, which is referenced through a credit default swap to the credit performance of a portfolio of corporate reference entities.  The Company entered into this credit structure for yield enhancement.  As the sole beneficiary of the CARS Trust, the Company is required to consolidate this trust under FASB ASC Topic 810, “Consolidation,” formerly required by FASB Interpretation No. (“FIN”) 46, “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, ‘Consolidated Financial Statements’ (Revised December 2003)” (“FIN 46(R)”).  As a result of the consolidation, the Company has recorded in its condensed consolidated balance sheets a credit default swap held by the CARS Trust.  At issue, the swap had a seven-year term, maturing in 2013.  Under the terms of the swap, the CARS Trust will be required to make payments to the swap counterparty upon the occurrence of a credit event, with respect to any reference entity, that is in excess of the threshold amount specified in the swap agreement.  At September 30, 2009 and December 31, 2008, the CARS Trust has not had to make any payments under the terms of the swap because the sum of all credit events has not exceeded the threshold amount.  As of September 30, 2009 and December 31, 2008, the fair value of the credit default swap was $(47.9) million and $(42.1) million, respectively.  Under the terms of the credit derivative, the maximum future payments the CARS Trust could be required to make is $55.0 million.  In the event the CARS Trust was required to make any payments under the swap, the underlying assets held by the trust would be liquidated to fund the payment.  If the disposition of these assets is insufficient to fund the payment calculated, then under the terms of the agreement, the cash settlement amount would be capped at the amount of the proceeds from the sale of the underlying assets.  As of September 30, 2009 and December 31, 2008, the fair value of the assets held as collateral by the CARS Trust was $48.6 million and $42.3 million, respectively.

The Company had a greater than or equal to 20%, but less than 50%, interest in seven variable interest entities (“VIEs”) at September 30, 2009.  The Company is a creditor in four trusts and three limited liability companies.  The Company’s maximum exposure to loss related to all of these VIEs is the investments’ carrying value, which was $37.1 million and $36.5 million at September 30, 2009 and December 31, 2008, respectively.  The investments in these VIEs mature between October 2009 and January 2028.  Because the Company will not absorb a majority of the VIEs’ expected losses or receive a majority of the expected returns, the Company is not required to consolidate these VIEs, in accordance with FASB ASC Topic 810.

In order to determine whether the Company is, or is not, the primary beneficiary of a VIE, the Company performs an assessment of the level of each party’s participation in controlling the entity by means other than a voting interest, which includes assumptions about the sufficiency of an equity investment at risk, the essential characteristics of a controlling financial interest, and the significance of voting rights in relation to economic interests.  If the Company is exposed to the majority of the expected losses, the majority of the expected residual returns, or both, associated with a VIE then the Company is the VIE’s primary beneficiary and must consolidate the entity.

The VIEs are generally financed with equity through the establishment of a trust by a trustee.  The carrying amount of the VIEs for which the Company has significant influence is included in trading fixed maturities on the condensed consolidated balance sheets.

All material intercompany transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.




 
11

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. DESCRIPTION OF BUSINESS (CONTINUED)

USE OF ESTIMATES

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.  The most significant estimates are those used in determining the fair value of financial instruments, goodwill, deferred policy acquisition costs (“DAC”), value of business acquired (“VOBA”), value of customer renewals acquired (“VOCRA”), liabilities for future contract and policyholder benefits, other-than-temporary impairments of investments and valuation allowance on deferred tax assets.  Actual results could differ from those estimates.

ACCOUNTING PRONOUNCEMENTS

New and Adopted Accounting Pronouncements

In June 2009, the FASB issued FASB ASC Topic 105, “Generally Accepted Accounting Principles,” which was previously issued as SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.”  This guidance establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP.  FASB ASC Topic 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The Company adopted FASB ASC Topic 105 on September 30, 2009 and has updated its referencing for all accounting standards in this Form 10-Q.

The Company has adopted certain provisions of FASB ASC Topic 855, “Subsequent Events,” which were originally issued in May 2009 as SFAS No. 165, “Subsequent Events.”  This topic requires evaluation of subsequent events through the date that the financial statements are issued or are available to be issued.  FASB ASC Topic 855 sets forth the period under which the reporting entity should evaluate the subsequent events to be recognized or disclosed, the circumstances under which the reporting entity should recognize the events or transactions that occur after the balance sheets date, and the disclosures that the reporting entity should make about the subsequent events.  This guidance is effective for interim reporting periods ending after June 15, 2009.  Events that have occurred subsequent to September 30, 2009 have been evaluated by the Company’s management in accordance with FASB ASC Topic 855 through November 12, 2009.

The Company has adopted certain provisions of FASB ASC Topic 820, which were originally issued in April 2009 as FSP No. FAS 157-4, “Determining the Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.”  This issuance provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased in relation to normal market activity for the asset or liability, as well as guidance on identifying circumstances that indicate a transaction is not orderly.  FASB ASC Topic 820 also requires annual and interim disclosure of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any during the period, and definitions of each major category for equity and debt securities, as described in FASB ASC Topic 320.  The Company adopted the above-noted aspects of FASB ASC Topic 820 on April 1, 2009; such adoption did not have a material impact on the Company’s condensed consolidated financial statements.


 
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SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. DESCRIPTION OF BUSINESS (CONTINUED)

New and Adopted Accounting Pronouncements (continued)

The Company has adopted certain provisions of FASB ASC Topic 320, which were originally issued in April 2009 as FSP Nos. FAS 115-2 and 124-2.  This guidance amends the guidance for OTTI of debt securities and changes the presentation of OTTI in the financial statements.   If the Company intends to sell, or if it is more likely than not that it will be required to sell, an impaired security prior to recovery of its cost basis, the security is to be considered other-than-temporarily impaired and the full amount of impairment must be charged to earnings.  Otherwise, losses on securities which are other-than-temporarily impaired are separated into two categories, the portion of loss which is considered credit loss (“credit loss”) and the portion of loss which is due to other factors (“non-credit loss”).  The credit loss portion is charged to earnings, while the non-credit loss is charged to other comprehensive income (loss).  When an unrealized loss on a fixed maturity is considered temporary, the Company continues to record the unrealized loss in other comprehensive income (loss) and not in earnings.  This guidance also expands and increases the frequency of existing disclosures about OTTI of debt and equity securities.  The Company adopted the above-noted aspects of FASB ASC Topic 320 on April 1, 2009.  Upon adoption, a cumulative effect adjustment, net of taxes, of $9.1 million was recorded to increase accumulated other comprehensive loss with a corresponding decrease to accumulated deficit for the non-credit component of previously impaired securities that the Company neither intends to sell, nor is it more likely than not that the Company will be required to sell, before recovery of amortized cost.  The enhanced disclosures required by FASB ASC Topic 320 are included in Note 5.

The Company has adopted certain provisions of FASB ASC Topic 825 which were originally issued in April 2009 as FSP No. FAS 107-1 and Accounting Principles Board Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments.”  The guidance requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies, as well as in annual financial statements, effective for interim reporting periods ending after June 15, 2009.  The adoption of the above-noted aspects of FASB ASC Topic 825 in the quarter ended June 30, 2009 did not have an impact on the Company’s consolidated financial position or results of operations.  The required disclosures are included in Note 6.

The Company has adopted certain provisions of FASB ASC Topic 944, “Financial Services–Insurance,” which were originally issued in May 2008as SFAS No. 163, “Accounting for Financial Guarantee Insurance Contract–an interpretation of FASB Statement No. 60.”  The scope of this interpretation is limited to financial guarantee insurance (and reinsurance) contracts issued by insurance enterprises.  This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for certain disclosures about the insurance enterprise’s risk management activities.  Except for certain disclosures, earlier application is not permitted.  The Company does not have any contracts with guarantees within the scope of this guidance.  The adoption of this portion of FASB ASC Topic 944 on January 1, 2009 did not have an impact on the Company’s condensed consolidated financial statements.



 
13

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. DESCRIPTION OF BUSINESS (CONTINUED)

ACCOUNTING PRONOUNCEMENTS (CONTINUED)

New and Adopted Accounting Pronouncements (continued)

The Company has adopted certain provisions of FASB ASC Topic 815, “Derivatives and Hedging,” which were originally issued in March 2008 as SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.”  This guidance amends and expands disclosures about an entity’s derivative and hedging activities with the intent to provide users of financial statements with an enhanced understanding of (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  The above-noted aspects of FASB ASC Topic 815 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged.  The Company adopted this guidance on January 1, 2009.  The new disclosures are included in Note 5.

The Company has adopted certain provisions of FASB ASC Topic 810, which were originally issued in December 2007 as SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.”  Noncontrolling interest refers to the minority interest portion of the equity of a subsidiary that is not attributable directly or indirectly to a parent.  This guidance establishes accounting and reporting standards that require for-profit entities that prepare consolidated financial statements to (a) present noncontrolling interests as a component of equity, separate from the parent’s equity, (b) separately present the amount of consolidated net income attributable to noncontrolling interests in the statement of operations, (c) consistently account for changes in a parent’s ownership interests in a subsidiary in which the parent entity has a controlling financial interest as equity transactions, (d) require an entity to measure at fair value its remaining interest in a subsidiary that is deconsolidated, and (e) require an entity to provide sufficient disclosures that identify and clearly distinguish between interests of the parent and interests of noncontrolling owners.  The above-noted aspects of FASB ASC Topic 810 apply to all for-profit entities that prepare consolidated financial statements, and affect those for-profit entities that have outstanding noncontrolling interests in one or more subsidiaries or that deconsolidate a subsidiary.  This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with earlier adoption prohibited.  The Company does not have any noncontrolling interests within the scope of this guidance.  Accordingly, the adoption of these aspects of FASB ASC Topic 810 on January 1, 2009 did not have an impact on the Company’s condensed consolidated financial statements.


 
14

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. DESCRIPTION OF BUSINESS (CONTINUED)

ACCOUNTING PRONOUNCEMENTS (CONTINUED)

New and Adopted Accounting Pronouncements (continued)

The Company has adopted certain provisions of FASB ASC Topic 805, “Business Combinations,” which were originally issued in December 2007 as SFAS No. 141 (revised 2007), “Business Combinations.”  This guidance establishes the principles and requirements for how the acquirer in a business combination (a) measures and recognizes the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquired entity, (b) measures and recognizes positive goodwill acquired or a gain from bargain purchase (negative goodwill), and (c) determines the disclosure information that is useful to users of financial statements in evaluating the nature and financial effects of the business combination.  Some of the significant requirements of FASB ASC Topic 805 include the following:

 
 
Most of the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquired entity shall be measured at their acquisition-date fair values;
       
 
 
Acquisition-related costs incurred by the acquirer shall be expensed in the periods in which the costs are incurred;
       
 
 
Goodwill shall be measured as the excess of the consideration transferred, including the fair value of any contingent consideration, plus the fair value of any noncontrolling interest in the acquired entity, over the fair values of the acquired identifiable net assets;
       
 
 
Contractual pre-acquisition contingencies are to be recognized at their acquisition date fair values and noncontractual pre-acquisition contingencies are to be recognized at their acquisition date fair values only if it is more likely than not that the contingency gives rise to an asset or liability; and
       
 
 
Contingent consideration shall be recognized at the acquisition date.

FASB ASC Topic 805 is effective for, and shall be applied prospectively to, business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with earlier adoption prohibited.  Assets and liabilities that arose from business combinations with acquisition dates prior to the effective date of this guidance shall not be adjusted upon adoption of these elements of FASB ASC Topic 805, with certain exceptions for acquired deferred tax assets and acquired income tax positions.  The Company adopted the above-noted aspects of FASB ASC Topic 805 on January 1, 2009 and will apply this guidance to future business combinations.

 
15

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. DESCRIPTION OF BUSINESS (CONTINUED)

ACCOUNTING PRONOUNCEMENTS (CONTINUED)

Accounting Standards Not Yet Adopted

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “Fair Value Measurements and Disclosures (Topic 820)–Measuring Liabilities at Fair Value.”  This update amends FASB ASC Topic 820 and provides clarification regarding the valuation techniques required to be used to measure the fair value of liabilities where quoted prices in active markets for identical liabilities are not available.  In addition, this update clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability.  ASU No. 2009-05 is effective for the first reporting period, including interim periods, beginning after issuance.  The Company adopted this update on October 1, 2009.  The adoption of ASU No. 2009-05 did not have a material impact on the Company’s condensed consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166 “Accounting for Transfers of Financial Assets.”  This statement amends FASB ASC Topic 860, “Transfers and Servicing,” portions of which were previously issued as SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”  SFAS No. 166 amends and expands disclosures about the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets.  SFAS No. 166 amends the derecognition accounting and disclosure guidance relating to SFAS No. 140 and eliminates the exemption from consolidation for qualifying special purpose entities (“QSPEs”); it also requires a transferor to evaluate all existing QSPEs to determine whether they must be consolidated in accordance with SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).”  SFAS No. 166 is effective for financial asset transfers occurring in fiscal years and interim periods beginning after November 15, 2009, and will become part of the FASB ASC at that time.  The Company is currently evaluating the impact, if any, that SFAS No. 166 will have on the disclosures included in the Company’s condensed consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, which amends the consolidation guidance of FIN 46(R) and will become part of FASB ASC 810.  The amendments to the consolidation guidance affect all entities currently within the scope of FIN 46(R), as well as QSPEs, as the concept of these entities was eliminated in SFAS No. 166.  SFAS No. 167 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2009, and will become part of the FASB ASC at that time.  As of the quarter ended September 30, 2009, the Company is currently evaluating the impact, if any, that SFAS No. 167 will have on the Company’s condensed consolidated financial statements.



 
 


 
16

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES

Below is a summary of affiliated transactions for those affiliates that are not included in these financial statements.

Related Party Reinsurance Transactions

As more fully described in Note 7, the Company is party to several reinsurance transactions with Sun Life Assurance Company of Canada (“SLOC”) and other affiliates.

On February 11, 2009, the Company received regulatory approval and entered into a reinsurance agreement with Sun Life Reinsurance (Barbados) No. 3 Corp. (“BarbCo 3”), an affiliate, to cede all of the risks associated with certain in-force corporate and bank-owned variable universal life, and private placement variable universal life policies on a combination coinsurance, coinsurance with funds withheld and a modified coinsurance basis.  Future new business will also be ceded under this agreement.

BarbCo 3 paid an initial ceding commission to the Company of $41.5 million and the Company recorded a reinsurance payable and related reinsurance receivable at the inception of the transaction of $370.7 million and $329.2 million, respectively.  At September 30, 2009, the reinsurance payable and reinsurance receivable related to this agreement were $373.2 million and $344.9 million, respectively.  See Note 7 for further information regarding the impact of this agreement on the Company’s financial statements.

Effective December 31, 2007, SLNY entered into a reinsurance agreement with SLOC under which SLOC will fund a portion of the statutory reserves required by New York Regulation 147, which is substantially similar to Actuarial Guideline 38 (“AXXX reserves”), as adopted by the National Association of Insurance Commissioners (the “NAIC”), attributable to certain individual universal life (“UL”) policies sold by SLNY.  Under this agreement, SLNY ceded, and SLOC assumed, on a funds withheld 90% coinsurance basis, certain in-force policies at December 31, 2007.  Future new business also will be reinsured under this agreement.

Sun Life Vermont, a subsidiary of the Company, entered into a reinsurance agreement with SLOC, effective November 8, 2007, under which Sun Life Vermont assumed the risks of certain UL policies issued by SLOC through December 31, 2008.  This agreement is described more fully in Note 7.


 
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SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Capital Transactions

During the nine-month period ended September 30, 2009 and the year ended December 31, 2008, the Company received capital contributions totaling $748.7 million and $725.0 million, respectively, from the Parent.  The cash contributions were recorded as additional paid-in capital and were made to ensure that the Company continues to exceed certain capital requirements prescribed by the NAIC.  The NAIC has established regulations that provide minimum capitalization requirements based on risk-based capital formulas for life insurance companies.  The risk-based capital formulas for life insurance companies establishes capital requirements relating to insurance, business, asset and interest rate risks, including equity, interest rate and expense recovery risks associated with variable annuities that contain death benefits or certain living benefits.

The Company did not make any dividend payments during the nine-month periods ending September 30, 2009 and 2008.

Debt Transactions

On November 8, 2007, a long-term financing arrangement was established with a financial institution (the “Lender”) that enables Sun Life Vermont to fund a portion of its obligations under the reinsurance agreement with SLOC.  Under this arrangement, at inception of the agreement, Sun Life Vermont issued a floating rate surplus note of $1 billion (“the Surplus Note”) to a special-purpose entity, Structured Asset Repackage Company, 2007- SUNAXXX LLC (“SUNAXXX”), affiliated with the Lender.  During the nine-month period ended September 30, 2009, Sun Life Vermont issued two additional notes totaling $100.0 million to SUNAXXX.  At September 30, 2009 and December 31, 2008, the value of the Surplus Note was $1.2 billion and $1.1 billion, respectively.  Pursuant to an agreement between the Lender and the Company’s indirect parent, Sun Life Assurance Company of Canada – U.S. Operations Holding, Inc. (“U.S. Ops Holdings”), U.S. Ops Holdings bears the ultimate obligation to repay the Lender and, as such, consolidates SUNAXXX in accordance with FASB ASC Topic 810.  Sun Life Vermont has agreed to reimburse U.S. Ops Holdings for certain costs incurred in connection with the issuance of the Surplus Note.  Sun Life Vermont incurred interest expense of $4.6 million and $18.0 million for the three and nine-month periods ended September 30, 2009, respectively, and $10.1 million and $33.5 million for the three and nine-month periods ended September 30, 2008, respectively.

In 2002, the Company issued two promissory notes totaling $460 million to Sun Life (Hungary) Group Financing Limited Company (“Sun Life (Hungary) LLC”).  The proceeds of the notes were used to purchase fixed rate government and corporate bonds.  On May 24, 2007, the Company redeemed one of the notes with a principal balance of $380 million and paid $388.7 million to Sun Life (Hungary) LLC, including $8.7 million in accrued interest.  On December 29, 2008, the Company redeemed $62.0 million of the $80 million remaining note and paid $64.3 million, including $2.3 million in accrued interest, to Sun Life (Hungary) LLC.  At September 30, 2009 and December 31, 2008, the Company had $18.0 million, respectively, in promissory notes issued to Sun Life (Hungary) LLC.  The Company pays interest semi-annually to Sun Life (Hungary) LLC.  Related to these promissory notes, the Company incurred interest expense of $0.3 and $0.8 million for the three and nine-month periods ended September 30, 2009, respectively, and $1.1 million and $3.4 million for the three and nine-month periods ended September 30, 2008, respectively.

On July 17, 2008, the Company issued a $60 million promissory note to Sun Life (Hungary) LLC which would mature on September 27, 2011.  The Company paid interest quarterly to Sun Life (Hungary) LLC. Total interest incurred was $0.5 million for the three and nine-month periods ended September 30, 2008.  The Company used the proceeds of the note for general corporate purposes.  On December 29, 2008, the Company redeemed the note and paid $60.8 million to Sun Life (Hungary) LLC, including $0.8 million in accrued interest.


 
18

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Debt Transactions (continued)

At September 30, 2009 and December 31, 2008, the Company had $565.0 million of surplus notes issued to Sun Life Financial (U.S.) Finance, Inc.  The Company expensed $10.6 million and $31.9 million for interest on these surplus notes for the three and nine-month periods ended September 30, 2009 and 2008, respectively.

Institutional Investments Contracts

On September 12, 2006, the Company issued two floating rate funding agreements totaling $900 million to Sun Life Financial Global Funding III, L.L.C. (“LLC III”).  On April 7, 2008, the Company issued an additional floating rate funding agreement totaling $5.8 million to LLC III. Total interest credited for these funding agreements was $2.2 million and $9.8 million for the three and nine-month periods ended September 30, 2009, respectively, and $7.3 million and $26.3 million for the three and nine-month periods ended September 30, 2008, respectively.  The Company also issued a $100 million floating rate demand note payable to LLC III on September 19, 2006.  For interest on this demand note, the Company expensed $0.2 million and $1.1 million for the three and nine-month periods ended September 30, 2009, respectively, and $0.8 million and $2.9 million for the three and nine-month periods ended September 30, 2008, respectively.

The Company has entered into an interest rate swap agreement with LLC III with an aggregate notional amount of $900 million that effectively converts the floating rate payment obligations under the funding agreements to fixed rate obligations.

On May 17, 2006, the Company issued a floating rate funding agreement of $900 million to Sun Life Financial Global Funding II, L.L.C. (“LLC II”).  On April 7, 2008, the Company issued an additional floating rate funding agreement totaling $7.5 million to LLC II.  Total interest credited for these funding agreements was $2.0 million and $9.2 million for the three and nine-month periods ended September 30, 2009, respectively, and $7.0 million and $25.7 million for the three and nine-month periods ended September 30, 2008, respectively.  The Company also issued a $100 million floating rate demand note payable to LLC II on May 24, 2006.  For interest on this demand note, the Company expensed $0.2 million and $1.0 million for the three and nine-month periods ended September 30, 2009, respectively, and $0.8 million and $2.9 million for the three and nine-month periods ended September 30, 2008, respectively.

The Company has entered into an interest rate swap agreement with LLC II with an aggregate notional amount of $900 million that effectively converts the floating rate payment obligations under the funding agreements to fixed rate obligations.

On June 3, 2005 and June 29, 2005, the Company issued two floating rate funding agreements with a combined total of $900 million to Sun Life Financial Global Funding, L.L.C. (“LLC”).  On April 7, 2008, the Company issued an additional floating rate funding agreement totaling $10.0 million to LLC.  Total interest credited for these funding agreements was $2.2 million and $9.9 million for the three and nine-month periods ended September 30, 2009, respectively, and $7.2 million and $26.3 million for the three and nine-month periods ended September 30, 2008, respectively.  The Company also issued a $100.0 million floating rate demand note payable to LLC on June 10, 2005.  For interest on this demand note, the Company expensed $0.2 million and $1.1 million for the three and nine-month periods ended September 30, 2009, respectively, and $0.8 million and $2.9 million for the three and nine-month periods ended September 30, 2008, respectively.

The Company has entered into an interest rate swap agreement with LLC with an aggregate notional amount of $900 million that effectively converts the floating rate payment obligations under the funding agreements to fixed rate obligations and expires in July 2011 concurrently with the related note.



 
19

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Administrative service agreements, rent and other

The Company and certain of its subsidiaries have administrative services agreements with SLOC which provide that SLOC will furnish, as requested, certain services and facilities on a cost-reimbursement basis. Expenses under these agreements amounted to approximately $1.8 million and $6.4 million for the three and nine-month periods ended September 30, 2009, respectively, and $2.0 million and $6.4 million for the three and nine-month periods ended September 30, 2008, respectively.

In accordance with an administrative service agreement between the Company and SLOC, the Company provides personnel and certain services to SLOC, as requested.  Reimbursements under this agreement, which are recorded as a reduction of other operating expenses, were approximately $91.9 million and $243.2 million for the three and nine-month periods ended September 30, 2009, respectively, and $76.5 million and $237.4 million for the three and nine-month periods ended September 30, 2008, respectively.

The Company has an administrative service agreement with Sun Life Information Services Canada, Inc. (“SLISC”), under which SLISC provides administrative and support services to the Company in connection with the Company’s insurance and annuity businesses.  Expenses under this agreement amounted to approximately $3.7 million and $11.5 million for the three and nine-month periods ended September 30, 2009, respectively, and $4.0 million and $13.8 million for the three and nine-month periods ended September 30, 2008, respectively.

The Company has a service agreement with Sun Life Information Services Ireland Limited (“SLISIL”), under which SLISIL provides various insurance related and information systems services to the Company.  Expenses under this agreement amounted to approximately $2.4 million and $17.9 million for the three and nine-month periods ended September 30, 2009, respectively, and $3.8 million and $19.6 million for the three and nine-month periods ended September 30, 2008, respectively.

The Company has an administrative services agreement with U.S. Ops Holdings, under which the Company provides administrative and investor services with respect to certain open-end management investment companies for which an affiliate, Massachusetts Financial Services Company (“MFS”), serves as the investment adviser, and which are offered to certain of the Company’s separate accounts established in connection with the variable annuity contracts issued by the Company. Amounts received under this agreement amounted to approximately $3.2 million and $8.9 million for the three and nine-month periods ended September 30, 2009, respectively, and $4.4 million and $14.1 million for the three and nine-month periods ended September 30, 2008, respectively.

The Company has an administrative services agreement with Sun Capital Advisers LLC (“SCA”), a registered investment adviser, under which the Company provides administrative services with respect to certain open-end management investment companies for which SCA serves as the investment adviser, and which are offered to certain of the Company’s separate accounts established in connection with the variable contracts issued by the Company.  Amounts received under this agreement amounted to approximately $2.2 million and $4.3 million for the three and nine-month periods ended September 30, 2009, respectively, and $0.5 million and $1.6 million for the three and nine-month periods ended September 30, 2008, respectively.  The Company paid $5.0 million and $13.4 million during the three and nine-month periods ended September 30, 2009, respectively, and $3.7 million and $14.3 million during the three and nine-month periods ended September 30, 2008, respectively, in investment management services fees to SCA.




 
20

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Administrative service agreements, rent and other (continued)

The Company paid $14.3 million and $35.5 million during the three and nine-month periods ended September 30, 2009, respectively, and $6.9 million and $18.3 million during the three and nine-month periods ended September 30, 2008, respectively, in distribution fees to Sun Life Financial Distributors, Inc. (“SLFD”).

The Company leases office space to SLOC under lease agreements with terms expiring on December 31, 2009 and options to extend the terms for each of twelve successive five-year terms at fair market rental value, not to exceed 125% of the fixed rent for the term which is then ending.  Under these leases, the Company received rent of $2.2 million and $7.6 million for the three and nine-month periods ended September 30, 2009, respectively, and $2.7 million and $7.9 million for the three and nine-month periods ended September 30, 2008, respectively.  Rental income is reported as a component of net investment income on the condensed consolidated statements of operations.

During the nine-month period ended September 30, 2009, the Company sold certain limited partnership investments to SLOC with a book value of $16.9 million and a market value of $22.4 million.  The Company recorded a gain on the sales of $5.5 million for the nine-month period ended September 30, 2009.

During the three and nine-month period ended September 30, 2008, the Company sold mortgages to SLOC with a book values of $20.5 million and $150.2 million and a market values of $20.7 million and $150.2 million, respectively.

During the nine-month period ended September 30, 2009, the Company purchased $395.7 million of available-for-sale fixed-rate bonds from Sun Life Investments LLC at fair value.  The Company paid cash for the bonds.

In 2004, the employees of the Company became participants in a restricted share unit (“RSU”) plan with its indirect parent, SLF.  Under this plan, participants are granted units that are equivalent to one common share of SLF stock and have a fair market value of a common share of SLF stock on the date of grant.  RSUs earn dividend equivalents in the form of additional RSUs at the same rate as the dividends on common shares of SLF stock.  The redemption value, upon vesting, is the fair market value of an equal number of common shares of SLF stock.  The Company incurred expenses related to RSUs of approximately $2.6 million and $5.9 million for the three and nine-month periods ended September 30, 2009, respectively, and $1.5 million and $4.4 million for the three and nine-month periods ended September 30, 2008, respectively.



 
21

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Administrative service agreements, rent and other (continued)

In 2007, SLNY entered into a series of agreements with Sun Life and Health Insurance Company (U.S.) (“SLHIC”), an affiliate, through which the New York issued business of SLHIC was transferred to SLNY (the “SLHIC to SLNY asset transfer”).  As part of these agreements, SLNY received certain intangible assets totaling $31.3 million.  These assets included the value of distribution, VOBA, and VOCRA.  The value of distribution of $7.5 million is being amortized on a straight-line basis over its projected economic life of 25 years.  VOBA of $7.6 million is subject to amortization based upon expected premium income over the period from acquisition to the first customer renewal, generally not more than two years.  VOCRA of $16.2 million is subject to amortization based upon expected premium income over the projected life of the in-force business acquired, which is 20 years.  The Company recorded amortization and interest for these intangible assets for the periods identified as follows (in 000’s):

 
Nine-month periods ended
 
Three-month periods ended
 
 
September 30,
 
September 30,
 
September 30,
 
September 30,
 
 
2009
 
2008
 
2009
 
2008
 
                         
Value of distribution
$
224
 
$
224
 
$
75
 
$
75
 
VOBA
 
888
   
1,349
   
25
   
319
 
VOCRA
 
779
   
3,011
   
710
   
766
 

The Company has significant transactions with affiliates.  Management believes intercompany revenues and expenses are calculated on a reasonable basis; however, these amounts may not necessarily be indicative of the costs that would be incurred if the Company operated on a stand-alone basis and these transactions were with unrelated parties.



 
22

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
3. SEGMENT INFORMATION
 
As described below, the Company conducts business primarily in three operating segments and maintains a Corporate Segment to provide for the capital needs of the three operating segments and to engage in other financing related activities.  Each segment is defined consistently with the way results are evaluated by the chief operating decision-maker.

Net investment income is allocated based on segmented assets, including allocated capital, by line of business.  Allocations of operating expenses among segments are made using both standard rates and actual expenses incurred.  Management evaluates the results of the operating segments on an after-tax basis.  The Company does not depend on one or a few customers, brokers or agents for a significant portion of its operations.

Wealth Management

The Wealth Management Segment markets, sells and administers funding agreements, individual and group variable annuity products, individual and group fixed annuity products and other retirement benefit products.  These contracts may contain any of a number of features including variable or fixed interest rates and equity index options and may be denominated in foreign currencies.  The Company uses derivative instruments to manage the risks inherent in the contract options.  Additionally, the Company consolidates the CARS Trust as a component of the Wealth Management Segment.

Individual Protection

The Individual Protection Segment markets, sells and administers a variety of life insurance products sold to individuals and corporate owners of life insurance. The products include whole life, universal life and variable life products.

Group Protection

The Group Protection Segment markets, sells and administers group life, group long-term disability, group short-term disability, group dental and group stop loss insurance products to small and mid-size employers in the State of New York through the Company’s subsidiary, SLNY.

Corporate

The Corporate Segment includes the unallocated capital of the Company, its debt financing, its consolidated investments in VIEs, and items not otherwise attributable to the other segments.
 






 
23

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. SEGMENT INFORMATION (CONTINUED)

The following amounts pertain to the various business segments (in 000’s):

                 Nine-month period ended September 30, 2009
 
 
Wealth
 
Individual
 
Group
       
 
Management
 
Protection
 
Protection
 
Corporate
 
Totals
Total revenues
$
2,308,049 
 
$
344,538 
 
$
104,252 
 
$
(11,177)
 
$
2,745,662 
Total benefits and expenses
 
976,677 
   
107,735 
   
86,051 
   
15,913 
   
1,186,376 
Income (loss) before income
   tax expense (benefit)
 
1,331,372 
   
236,803 
   
18,201 
   
(27,090)
   
1,559,286 
Net income
$
879,559 
 
$
154,027 
 
$
11,830 
 
$
63,181 
 
$
1,108,597 
                             
                 Nine-month period ended September 30, 2008
                             
Total revenues
$
(985,682)
 
$
(57,996)
 
$
75,880 
 
$
(7,376)
 
$
(975,174)
Total benefits and expenses
 
86,966 
   
176,224 
   
78,173 
   
24,277 
   
365,640 
Loss before income tax benefit
 
(1,072,648)
   
(234,220)
   
(2,293)
   
(31,653)
   
(1,340,814)
Net loss
$
(674,077)
 
$
(152,138)
 
$
(1,491)
 
$
(107,765)
 
$
(935,471)


                 Three-month period ended September 30, 2009
 
 
Wealth
 
Individual
 
Group
       
 
Management
 
Protection
 
Protection
 
Corporate
 
Totals
Total revenues
$
790,579 
 
$
317,021 
 
$
35,073 
 
$
1,912 
 
$
1,144,585 
Total benefits and expenses
 
243,062 
   
65,722 
   
30,335 
   
1,853 
   
340,972 
Income before income tax
   expense
 
547,517 
   
251,299 
   
4,738 
   
59 
   
803,613 
Net income
$
367,050 
 
$
162,453 
 
$
3,079 
 
$
85,091 
 
$
617,673 
                             
                 Three-month period ended September 30, 2008
                             
Total revenues
$
(885,302)
 
$
(113,043)
 
$
24,509 
 
$
(19,576)
 
$
(993,412)
Total benefits and expenses
 
(60,851)
   
59,173 
   
25,148 
   
6,961 
   
30,431 
Loss before income tax
   benefit
 
(824,451)
   
(172,216)
   
(639)
   
(26,537)
   
(1,023,843)
Net loss
$
(530,624)
 
$
(111,892)
 
$
(416)
 
$
(106,405)
 
$
(749,337)





 
24

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT

On January 1, 2008, the Company adopted FASB ASC Topic 820, which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.  FASB ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company uses various methods including market, income and cost approaches.  The Company utilizes valuation techniques that maximize the use of observable inputs and minimizes the use of unobservable inputs.

As a result of the adoption of FASB ASC Topic 820, the value of the Company’s embedded derivative liabilities decreased by $166.1 million during the nine-month period ended September 30, 2008.  This change was primarily the result of changes to the valuation assumptions regarding policyholder behavior, primarily lapses, as well as the incorporation of risk margins and the Company’s own credit standing in the valuation of embedded derivatives.

In compliance with FASB ASC Topic 820, the Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).  If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

On April 1, 2009, the FASB issued additional guidance on estimating fair value, when the volume and level of activity for the asset or liability have significantly decreased, as well as guidance on identifying circumstances that indicate a transaction is not orderly.  The Company reviewed its pricing sources and methodologies and has concluded that its various pricing sources and methodologies are in compliance with this guidance, which is now a part of FASB ASC Topic 820.

Please refer to Note 6 regarding the valuation techniques utilized by the Company to measure the fair values included herein.  During the nine-month period ended September 30, 2009, there were no changes to these valuation techniques and the related inputs.


 
25

 
 
 
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Financial assets and liabilities recorded at fair value in the Company’s condensed consolidated balance sheets are categorized as follows:

Level 1

·  
Unadjusted quoted prices for identical assets or liabilities in an active market.

The types of assets and liabilities utilizing Level 1 valuations include U.S. Treasury and agency securities, investments in publicly-traded mutual funds with quoted market prices and listed derivatives.

Level 2

·  
Quoted prices in markets that are not active or significant inputs that are observable either directly or indirectly.

Level 2 inputs include the following:

a)  
Quoted prices for similar assets or liabilities in active markets,

b)  
Quoted prices for identical or similar assets or liabilities in non-active markets,

c)  
Inputs other than quoted market prices that are observable, and

d)  
Inputs that are derived principally from or corroborated by observable market data through correlation or other means.

The types of assets and liabilities utilizing Level 2 valuations generally include U.S. Government securities not backed by the full faith and credit of the Government, municipal bonds, structured notes and certain mortgage-backed securities (“MBS”), asset-backed securities (“ABS”), collateralized mortgage obligations (“CMO”), certain corporate debt, certain private equity investments and certain derivatives.

Level 3

·  
Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability.

Generally, the types of assets and liabilities utilizing Level 3 valuations are certain MBS, ABS and CMO, certain corporate debt, certain private equity investments, certain mutual fund holdings and certain derivatives, including derivatives embedded in annuity contracts and certain funding agreements.


 
26

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy

The following table presents the Company's categories for its assets measured at fair value on a recurring basis as of September 30, 2009 (in 000’s):

   
Level 1
 
Level 2
 
Level 3
 
Total
Assets
                       
Available-for-sale fixed maturities
                       
Asset-backed securities
 
$
-
 
$
-
 
$
46
 
$
46
Collateralized mortgage obligations
   
-
   
2,017
   
-
   
2,017
Commercial mortgage-backed securities
   
-
   
14,470
   
1,901
   
16,371
Foreign government & agency securities
   
-
   
548
   
-
   
548
U.S. states and political subdivisions securities
   
-
   
-
   
-
   
-
U.S. treasury and agency securities
   
42,150
   
49,394
   
-
   
91,544
Corporate securities
   
-
   
1,119,456
   
8,140
   
1,127,596
Total available-for-sale fixed maturities
   
42,150
   
1,185,885
   
10,087
   
1,238,122
                         
Trading fixed maturities
                       
Asset-backed securities
   
-
   
382,551
   
126,341
   
508,892
Collateralized mortgage obligations
   
-
   
732,024
   
170,044
   
902,068
Commercial mortgage-backed securities
   
-
   
379,909
   
261,226
   
641,135
Foreign government & agency securities
   
-
   
68,464
   
15,530
   
83,994
U.S. states and political subdivisions securities
   
-
   
-
   
-
   
-
U.S. treasury and agency securities
   
644,009
   
265,447
   
-
   
909,456
Corporate securities
   
-
   
9,609,754
   
126,079
   
9,735,833
Total trading fixed maturities
   
644,009
   
11,438,149
   
699,220
   
12,781,378
                         
Derivative instruments - receivable
   
3,156
   
328,972
   
5,366
   
337,494
Other invested assets
   
-
   
-
   
-
   
-
Cash and cash equivalents
   
3,022,206
   
-
   
-
   
3,022,206
Total investments and cash
   
3,711,521
   
12,953,006
   
714,673
   
17,379,200
                         
Other assets
                       
Separate account assets (1) (2)
   
16,174,871
   
5,824,623
   
642,936
   
22,642,430
                         
Total assets measured at fair value on a recurring basis
 
$
19,886,392
 
$
18,777,629
 
$
1,357,609
 
$
40,021,630
 
                       

 
(1) Pursuant to the conditions set forth in FASB ASC Topic 944, previously issued as American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts," the value of separate account liabilities is set to equal the fair value for separate account assets.

 
(2)Excludes $170.1 million, primarily related to investment sales receivable, net of investment purchases payable, that are not subject to FASB ASC Topic 820.


 
27

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table presents the Company's categories for its liabilities measured at fair value on a recurring basis as of September 30, 2009 (in 000’s):

   
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities
                       
Other policy liabilities
                       
Guaranteed minimum withdrawal benefit liability
 
$
 
$
 
$
323,408 
 
$
323,408 
Guaranteed minimum accumulation benefit liability
   
   
   
181,264 
   
181,264 
Derivatives embedded in reinsurance contracts
   
   
13,049 
   
   
13,049 
Fixed index annuities
   
   
   
131,249 
   
131,249 
Total other policy liabilities
   
   
13,049 
   
635,921 
   
648,970 
                         
Derivative instruments – payable
   
1,285 
   
728,908 
   
47,930 
   
778,123 
                         
Other liabilities
                       
Bank overdrafts
   
42,856 
   
   
   
42,856 
                         
Total liabilities measured at fair value on a recurring basis
 
$
44,141 
 
$
741,957 
 
$
683,851 
 
$
1,469,949 
 
                       




 
28

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table presents the Company's categories for its assets measured at fair value on a recurring basis as of December 31, 2008 (in 000’s):

   
Level 1
 
Level 2
 
Level 3
 
Total
Assets
                       
Available-for-sale fixed maturities
                       
Asset-backed securities
 
$
-
 
$
54,793
 
$
4,466
 
$
59,259
Foreign government & agency securities
   
-
   
472
   
-
   
472
U.S. states and political subdivisions securities
   
-
   
-
   
-
   
-
U.S. treasury and agency securities
   
56,478
   
18,503
   
-
   
74,981
Corporate securities
   
-
   
531,420
   
7,888
   
539,308
Total available-for-sale fixed maturities
   
56,478
   
605,188
   
12,354
   
674,020
                         
Trading fixed maturities
                       
Asset-backed securities
   
-
   
1,771,382
   
462,253
   
2,233,635
Foreign government & agency securities
   
-
   
84,615
   
9,200
   
93,815
U.S. states and political subdivisions securities
   
-
   
528
   
-
   
528
U.S. treasury and agency securities
   
445,732
   
57,373
   
-
   
503,105
Corporate securities
   
-
   
8,796,558
   
134,505
   
8,931,063
Total trading fixed maturities
   
445,732
   
10,710,456
   
605,958
   
11,762,146
                         
Derivative instruments – receivable
   
-
   
724,435
   
2,668
   
727,103
Other invested assets
   
36,300
   
143,645
   
-
   
179,945
Cash and cash equivalents
   
1,624,149
   
-
   
-
   
1,624,149
Total investments and cash
   
2,162,659
   
12,183,724
   
620,980
   
14,967,363
                         
Other assets
                       
Separate account assets (1) (2)
   
376,709
   
18,957,344
   
801,873
   
20,135,926
                         
Total assets measured at fair value on a recurring basis
 
$
2,539,368
 
$
31,141,068
 
$
1,422,853
 
$
35,103,289
 
                       

(1) Pursuant to the conditions set forth in FASB ASC Topic 944, the value of separate account liabilities is set to equal the fair value for separate account assets.

(2) Excludes $395.8 million, primarily related to investment sales receivable, net of investment purchases payable, that are not subject to FASB ASC Topic 820.

 
29

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table presents the Company's categories for its liabilities measured at fair value on a recurring basis as of December 31, 2008 (in 000’s):

   
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities
                       
Other policy liabilities
                       
Guaranteed minimum withdrawal benefit liability
 
$
-
 
$
-
 
$
335,612
 
$
335,612
Guaranteed minimum accumulation benefit liability
   
-
   
-
   
358,604
   
358,604
Derivatives embedded in reinsurance contracts
   
-
   
(50,792)
   
-
   
(50,792)
Fixed index annuities
   
-
   
-
   
106,619
   
106,619
Total other policy liabilities
   
-
   
(50,792)
   
800,835
   
750,043
                         
Derivative instruments – payable
   
22,818
   
1,429,457
   
42,066
   
1,494,341
                         
Other liabilities
                       
Bank overdrafts
   
87,534
   
-
   
-
   
87,534
                         
Total liabilities measured at fair value on a recurring basis
 
$
110,352
 
$
1,378,665
 
$
842,901
 
$
2,331,918
                         


 
30

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

The following table shows a reconciliation of the beginning and ending balances for assets which are categorized as Level 3 for the nine-month period ended September 30, 2009 (in 000’s):

Assets
Beginning
balance
Total realized and unrealized
gains (losses)
Purchases,
issuances, and
settlements
(net)
Transfers in
and/or out
of level 3 (1)
Ending
balance
Change in
unrealized gains
(losses) included
in earnings
relating to
instruments still
held at the
reporting date
Included
in earnings
Included in
other
comprehensive
income
Available-for-sale fixed maturities
             
Asset-backed securities
$              - 
$          (41)
$                 11 
$                      - 
$             76 
$           46    
$                  
Collateralized mortgage obligations
3,046 
(3,046)
Commercial mortgage-backed
securities
1,420 
(265) 
(881) 
1,627 
1,901    
Foreign government & agency
securities
U.S. states and political subdivisions
securities
U.S. treasury and agency securities
Corporate securities
7,888 
17 
1,719 
(207)
(1,277)
8,140    
Total available-for-sale fixed maturities
12,354 
(289)
849 
(207)
(2,620)
10,087    
               
Trading fixed maturities
             
Asset-backed securities
145,267 
32,497 
(197)
(51,226)
126,341    
65,755 
Collateralized mortgage obligations
116,572 
(6,009)
(4,414)
63,895 
170,044    
58,548 
Commercial mortgage-backed
securities
200,414 
45,631 
(254)
15,435 
261,226    
129,428 
Foreign government & agency
securities
9,200 
170 
6,160 
15,530    
1,296 
U.S. states and political subdivisions
securities
U.S. treasury and agency securities
Corporate securities
134,505 
25,165 
1,125 
(34,716)
126,079    
24,612 
Total trading fixed maturities
605,958 
97,454 
(3,740)
(452)
699,220    
279,639
               
Derivative instruments – receivable
2,668 
375 
2,323 
5,366    
2,312 
Other invested assets
Cash and cash equivalents
Total investments and cash
620,980 
97,540 
849 
(1,624)
(3,072)
714,673    
281,951 
               
Other assets
             
Separate account assets (2)
801,873
28,392 
(83,632)
(103,697)
642,936    
127,542 
               
Total assets measured at fair value on
   a recurring basis
$ 1,422,853
$   125,932 
$         849 
$           (85,256)
$    (106,769)
$1,357,609    
$           409,493 

(1)  
Transfers in and/or (out) of Level 3 during the nine-month period ended September 30, 2009 are primarily attributable to changes in the observability of inputs used to price the securities.
(2)  
The realized/unrealized gains (losses) included in net income for separate account assets are offset by an equal amount for separate account liabilities which results in a net zero impact on net income for the Company.

 
31

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

The following table shows a reconciliation of the beginning and ending balances for liabilities which are categorized as Level 3 for the nine-month period ended September 30, 2009 (in 000’s):

Liabilities
Beginning
balance
Total realized and unrealized
(gains) losses
Purchases,
issuances, and
settlements (net)
Transfers in
and/or out
of level 3
Ending
balance
Change in
unrealized (gains)
losses included in
earnings relating
to instruments still
held at the
reporting date
Included in
earnings
Included in
other
comprehensive
income
               
Other policy liabilities
             
Guaranteed minimum withdrawal
benefit liability
$   335,612 
$   (60,464)
$         - 
$       48,260 
$       - 
$  323,408 
$      (49,589)
Guaranteed minimum accumulation
benefit liability
358,604 
(193,195)
15,855 
181,264 
(185,607)
Derivatives embedded in reinsurance
contracts
Fixed index annuities
106,619 
10,028 
14,602 
131,249 
13,626 
Total other policy liabilities
800,835 
(243,631)
78,717 
635,921 
(221,570)
               
Derivative instruments – payable
42,066 
5,864 
47,930 
5,864 
               
Total liabilities measured at fair value
    on a recurring basis
$   842,901 
$ (237,767)
$         - 
$       78,717 
$       - 
$  683,851 
$      (215,706)



32


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table shows a reconciliation of the beginning and ending balances for assets which are categorized as Level 3 for the nine-month period ended September 30, 2008 (in 000’s):

Assets
Beginning
balance
Total realized and
unrealized gains (losses)
 
Purchases,
issuances, and
settlements
(net)
 
Transfers in
and/or out
of level 3 (1)
Ending
balance
 
Change in
unrealized gains
(losses) included in
earnings relating
to instruments still
held at the
reporting date
Included in
earnings
Included in
other
comprehensive
income
Available-for-sale fixed maturities
                             
Asset-backed and mortgage-backed
securities
$
4,330 
$
(480)    
$
(666)
$
$
2,717 
$
5,901  
$
 
Foreign government
 
 
-  
 
 
 
 
-  
 
 
States and political subdivisions
 
 
-  
 
 
 
 
-  
 
 
U.S. treasury and agency securities
 
 
 
 
 
 
-  
 
 
Corporate securities
 
9,039 
 
902     
 
(4,102)
 
(900)
 
4,336 
 
9,275  
 
 
Total available-for-sale fixed maturities
 
13,369 
 
422     
 
(4,768)
 
(900)
 
7,053 
 
15,176  
 
 
                               
Trading fixed maturities
                             
Asset-backed and mortgage-backed
securities
 
1,085,287 
 
(380,557) 
 
 
(3,916) 
 
150,814 
 
851,628  
 
(348,594)
 
Foreign governments
 
63,331 
 
(823)    
 
 
518 
 
(22,975)
 
40,051  
 
(823)
 
States and political subdivisions
 
 
 
 
 
 
-  
 
 
U.S. treasury and agency securities
 
 
 
 
 
 
-  
 
 
Corporate securities
 
134,446 
 
(44,009)    
 
 
(11,180)
 
284,221 
 
363,478  
 
(19,485)
 
Total trading fixed maturities
 
1,283,064 
 
(425,389) 
 
 
(14,578)
 
412,060 
 
1,255,157  
 
(368,902)
 
                               
Derivative instruments – receivable
 
24,073 
 
2,251    
 
 
(24,286)
 
363 
 
2,401  
 
2,251 
 
Other invested assets
 
 
 
 
 
 
-  
 
 
Cash and cash equivalents
 
 
 
 
 
 
-  
 
 
Total investments and cash
 
1,320,506 
 
(422,716) 
 
(4,768)
 
(39,764)
 
419,476 
 
1,272,734  
 
(366,651)
 
                               
Other assets
                             
Separate account assets (2)
 
1,752,495 
 
(216,544) 
 
 
(183,900)
 
(274,517)
 
1,077,534  
 
(220,945)
 
                               
Total assets measured at fair value on
   a recurring basis
$
3,073,001 
$
(639,260) 
$
(4,768)
$
(223,664)
$
144,959 
$
2,350,268  
$
(587,596)
 

(1) The amount of net transfers into Level 3 is due to decreased observability of inputs related to certain of the Company’s fixed maturity securities, relating to decreased market liquidity experienced in the nine-month period ended September 30, 2008.

(2) The realized/unrealized gains (losses) included in net income for separate account assets are offset by an equal amount for separate account liabilities which results in a net zero impact on net income for the Company.


 
33

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table shows a reconciliation of the beginning and ending balances for liabilities which are categorized as Level 3 for the nine-month period ended September 30, 2008 (in 000’s):

Liabilities
Beginning
balance
Total realized and unrealized
(gains) losses
Purchases,
issuances, and
settlements (net)
Transfers in
and/or out
of level 3
Ending
balance
Change in
unrealized (gains)
losses included in
earnings relating
to instruments still
held at the
reporting date
Included in
earnings
Included in
other
comprehensive
income
               
Other policy liabilities
             
Guaranteed minimum withdrawal
benefit liability
$     10,151 
$     75,376 
$                     - 
$             20,499 
$                - 
$  106,026 
$                  75,911 
Guaranteed minimum accumulation
benefit liability
22,649 
98,196 
17,227 
138,072 
98,941 
Derivatives embedded in reinsurance
contracts
Fixed index annuities
392,017 
(204,525)
(15,224)
172,268 
(165,882)
Total other policy liabilities
424,817 
(30,953)
22,502 
416,366 
8,970
               
Derivative instruments – payable
11,627 
35,982 
47,609 
35,982 
               
Total liabilities measured at fair value
   on a recurring basis
$   436,444 
$        5,029
$                      -
$              22,502
$                 -
$   463,975
$                  44,952 



 
34

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

The following table shows a reconciliation of the beginning and ending balances for assets which are categorized as Level 3 for the three-month period ended September 30, 2009 (in 000’s):

   
Total realized and unrealized
gains (losses)
       
Assets
Beginning
balance
Included
in
earnings
Included in
other
comprehensive
income
Purchases,
issuances, and
settlements
(net)
Transfers in
and/or out
of level 3 (1)
Ending
balance
Change in unrealized
gains (losses) included
in earnings relating to
instruments still held
at the reporting date
Available-for-sale fixed maturities
             
Asset-backed securities
$              - 
$     (13)
$                      4 
$           - 
$          55 
$          46 
$                 - 
Collateralized mortgage obligations
2,643  
(2,643)
Commercial mortgage-backed securities
55  
(308)
(434)
2,588 
1,901 
Foreign government & agency securities
U.S. states and political subdivisions
securities
U.S. treasury and agency securities
Corporate securities
10,025 
120 
1,425 
(207)
(3,223)
8,140 
Total available-for-sale fixed maturities
12,723 
(201)
995 
(207)
(3,223)
10,087 
               
Trading fixed maturities
             
Asset-backed securities
149,165 
13,964 
(256)
(36,532)
126,341 
34,206 
Collateralized mortgage obligations
140,533 
8,663 
(4,415)
25,263 
170,044 
45,930 
Commercial mortgage-backed securities
205,597 
40,625 
(254)
15,258 
261,226 
61,909 
Foreign government & agency securities
9,400 
167 
5,963 
15,530 
548 
U.S. states and political subdivisions
securities
U.S. treasury and agency securities
Corporate securities
117,385 
16,625 
1,184 
(9,115)
126,079 
10,318 
Total trading fixed maturities
622,080 
80,044 
(3,741)
837 
699,220 
152,911 
               
Derivative instruments – receivable
3,099 
680 
1,587 
5,366 
1,962 
Other invested assets
Cash and cash equivalents
Total investments and cash
637,902 
80,523 
995 
(2,361)
(2,386)
714,673 
154,873 
               
Other assets
             
Separate account assets (2)
720,926 
147 
(62,387)
(15,750)
642,936 
2,535 
               
Total assets measured at fair value on
a recurring basis
$ 1,358,828 
$  80,670 
$                 995 
$   (64,748)
$      (18,136)
$ 1,357,609   
$                157,408 

(1)  
Transfers in and/or (out) of Level 3 during the three-month period ended September 30, 2009 are primarily attributable to changes in the observability of inputs used to price the securities.
(2)  
The realized/unrealized gains (losses) included in net income for separate account assets are offset by an equal amount for separate account liabilities which results in a net zero impact on net income for the Company

 
35

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

The following table shows a reconciliation of the beginning and ending balances for liabilities which are categorized as Level 3 for the three-month period ended September 30, 2009 (in 000’s):

Liabilities
Beginning
balance
Total realized and unrealized
(gains) losses
Purchases,
issuances, and
settlements (net)
Transfers in
and/or out
of level 3
Ending
balance
Change in
unrealized (gains)
losses included in
earnings relating
to instruments still
held at the
reporting date
Included
in earnings
Included in
other
comprehensive
income
               
Other policy liabilities
             
Guaranteed minimum withdrawal
benefit liability
$  280,489 
$    21,784 
$             - 
$      21,135 
$             - 
$   323,408 
$         25,327 
Guaranteed minimum accumulation
benefit liability
197,789 
(22,488)
5,963 
181,264 
(20,539)
Derivatives embedded in reinsurance
contracts
-
Fixed index annuities
102,791 
11,179 
17,279 
131,249 
17,708 
Total other policy liabilities
581,069 
10,475 
44,377 
635,921 
22,496 
               
Derivative instruments – payable
46,196 
1,734
47,930
1,734 
               
Total liabilities measured at fair value on
   a recurring basis
$  627,265 
$    12,209 
$             - 
$      44,377 
$             - 
$   683,851 
$         24,230 









 
36

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table shows a reconciliation of the beginning and ending balances for assets which are categorized as Level 3 for the three-month period ended September 30, 2008 (in 000’s):

Assets
Beginning
balance
Total realized and
unrealized gains (losses)
Purchases,
issuances, and
settlements
(net)
Transfers in
and/or out
of level 3 (1)
Ending
balance
Change in
unrealized gains
(losses) included in
earnings relating
to instruments still
held at the
reporting date
Included
in
earnings
Included in
other
comprehensive
income
Available-for-sale fixed maturities
                           
Asset-backed and mortgage-backed
   securities
$
6,237   
$
(32)   
$
(304)
$
$
$
5,901 
$
Foreign government
 
 
 
 
 
 
 
States and political subdivisions
 
 
 
 
 
 
 
U.S. treasury and agency securities
 
 
 
 
 
 
 
Corporate securities
 
2,112   
  
663   
 
(2,848)
 
(306)
 
9,654 
 
9,275 
 
Total available-for-sale fixed maturities
 
8,349   
 
631   
 
(3,152)
 
(306)
 
9,654 
 
15,176 
 
                             
Trading fixed maturities
                           
Asset-backed and mortgage-backed
   securities
 
955,993 
 
(169,902)
 
 
(1,597) 
 
67,134 
 
851,628 
 
(133,937)
Foreign governments
 
51,488   
 
(736)   
 
 
 
(10,701)
 
40,051 
 
(448)
States and political subdivisions
 
 
 
 
 
 
 
U.S. treasury and agency securities
 
 
 
 
 
 
 
Corporate securities
 
30,342  
 
(31,617)
 
 
(1,173)
 
365,926 
 
363,478 
 
(10,572)
Total trading fixed maturities
 
1,037,823
 
(202,255)
 
 
(2,770) 
 
422,359 
 
1,255,157
 
(144,957)
                             
Derivative instruments – receivable
 
2,962  
 
(564)   
 
 
 
 
2,401 
 
(564) 
Other invested assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Total investments and cash
 
1,049,134 
 
(202,188)
 
(3,152)
 
(3,073) 
 
432,013 
 
1,272,734
 
(145,521)
                             
Other assets
                           
Separate account assets (2)
 
1,168,305 
 
(57,106)
 
 
(101,374)
 
67,709 
 
1,077,534 
 
(63,717)
                             
Total assets measured at fair value on
   a recurring basis
$
2,217,439 
$
(259,294) 
$
(3,152)
$
(104,447) 
$
499,722 
$
2,350,268 
$
(209,238) 

(1) The amount of net transfers into Level 3 is due to decreased observability of inputs related to certain of the Company’s fixed maturity securities, relating to decreased market liquidity experienced in the three-month period ended September 30, 2008.
 
 
(2) The realized/unrealized gains (losses) included in net income for separate account assets are offset by an equal amount for separate account liabilities which results in a net zero impact on net income for the Company.


 
37

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table shows a reconciliation of the beginning and ending balances for liabilities which are categorized as Level 3 for the three-month period ended September 30, 2008 (in 000’s):

Liabilities
Beginning
balance
Total realized and unrealized
(gains) losses
Purchases,
issuances, and
settlements (net)
Transfers in
and/or out
of level 3
Ending
balance
Change in
unrealized (gains)
losses included in
earnings relating
to instruments still
held at the
reporting date
Included
in earnings
Included in
other
comprehensive
income
               
Other policy liabilities
             
Guaranteed minimum withdrawal
benefit liability
$     50,569 
$     47,789 
$                     - 
$               7,668 
$                 -
$   106,026 
$                  48,150 
Guaranteed minimum accumulation
benefit liability
78,364 
54,215 
5,493 
138,072 
54,710 
Derivatives embedded in reinsurance
contracts
- 
-
-
-
-
-
-
Fixed index annuities
218,401 
(26,220)
(19,913) 
172,268 
(12,501)
Total other policy liabilities
347,334 
75,784 
(6,752) 
416,366 
90,359 
               
Derivative instruments – payable
16,450 
31,159 
47,609 
31,159 
               
Total liabilities measured at fair value on
a recurring basis
$   363,784 
$  106,943  
$                     - 
$            (6,752) 
$               - 
$    463,975
$                121,518


 
38

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

The FV Option

FASB ASC Topic 825 provides entities the option to measure certain financial assets and financial liabilities at fair value (the “FV Option”) with changes in fair value recognized in earnings each period.  FASB ASC Topic 825 also permits the FV Option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.  As of January 1, 2008, the Company elected to apply the provisions of FASB ASC Topic 825 for fixed maturity securities attributable to certain life, health and annuity products, which had previously been designated as available-for-sale.  At December 31, 2007 such available-for-sale securities had a market value of $10.7 billion and an amortized cost of $11.1 billion, and are now classified as trading fixed maturities.

The Company adopted the FV Option to more closely align the changes in the fair values of its derivative instruments, which are reported as a component of net derivative income (loss) in the condensed consolidated statements of operations, with the changes in the fair value of its fixed maturity investments, a significant portion of which are now reported as a component of net investment income in the income statement, due to the election of the FV Option.  The Company does not employ hedge accounting for any of its derivative instruments.  The Company primarily uses interest rate swaps as part of its asset-liability management strategy, which generally experiences changes in fair value due to interest rate changes.  As such, the Company is attempting to mitigate earnings volatility by electing the FV Option for a significant portion of its fixed maturity investment portfolio, which is expected to experience inverse movements in fair value related to interest rate changes.  Additionally, this election provides greater accounting consistency with the Parent and SLF, and will make it possible for the Company to employ different investment strategies in the future, whereby portfolio trading will not influence the Company’s accounting.

Investment income for both trading and available-for-sale fixed maturities is recognized when earned, including amortization of any premium or accrual of any discount, and the effect of estimated principal repayments, if applicable.  Investment income is reported as a component of net investment income in the condensed consolidated statements of operations.

As a result of the adoption of FASB ASC Topic 825, the Company recorded an increase to opening accumulated other comprehensive loss and a decrease to opening retained earnings of $88.4 million, related to the unrealized loss on investments, net of DAC, VOBA, policyholder liabilities, and tax effects at January 1, 2008.


 
39

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS

Fixed Maturities

The amortized cost and fair value of fixed maturities at September 30, 2009, was as follows (in 000’s):

           
     
Gross
   
Available-for-sale fixed maturities
Amortized
Cost
Gross
Unrealized
Gains
Unrealized
Temporary
Losses
OTTI
Losses(1)
Fair
Value
           
Asset-backed securities
$                68
$                   -
$                (23)
$                - 
$                45
Collateralized mortgage obligations
           1,936
             81
                   - 
               - 
        2,017
Commercial mortgage-backed securities
19,058
178
(2,865)
16,371
Foreign government & agency securities
509
39
548
U.S. states and political subdivisions securities
-
-
-
U.S. treasury and agency securities
85,351
6,194
(2)
91,543
Total non-corporate
106,922
6,492
(2,890)
110,524
           
Corporate securities
1,078,891
91,617
(29,010)
(13,900)
1,127,598
           
Total available-for-sale fixed maturities
$    1,185,813
$        98,109
$         (31,900)
$     (13,900)
$    1,238,122
           
     
Gross
   
Trading fixed maturities
Amortized
Cost
Gross
Unrealized
Gains
Unrealized
Temporary
Losses
Fair
Value
 
           
Asset-backed securities
$       720,434
$           8,819
$       (220,363)
$      508,890   
 
Collateralized mortgage obligations
    1,343,249
           5,853
       (447,033)
902,069
 
Commercial mortgage-backed securities
1,041,289
19,983
(420,137)
641,135
 
Foreign government & agency securities
77,353
6,641
83,994
 
U.S. states and political subdivisions securities
-
-
-
 
U.S. treasury and agency securities
896,315
25,356
(12,216)
909,455
 
Total non-corporate
4,078,640
66,652
(1,099,749)
3,045,543
 
           
Corporate securities
9,815,056
366,172
(445,393)
9,735,835
 
           
Total trading fixed maturities
$ 13,893,696
$       432,824
$    (1,545,142)
$12,781,378
 

(1)  Represents the before tax non-credit OTTI loss recorded as a component of accumulated other comprehensive loss (“AOCI”) for assets still held at the reporting date.



 
40

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


5. INVESTMENTS (CONTINUED)

Fixed Maturities (continued)

The amortized cost and fair value of fixed maturities at December 31, 2008, was as follows (in 000’s):

     
Gross
 
   
Gross
Unrealized
 
 
Amortized
Unrealized
Temporary
Fair
Available-for-sale fixed maturities
Cost
Gains
Losses
Value
         
Collateralized mortgage obligations
$              22,504
$             94
$           (4,489)
$            18,109
Mortgage-backed securities
40,107
1,060
(17)
41,150
Foreign government & agency securities
509
-
(37)
472
U.S. treasury & agency securities
61,824
13,262
(105)
74,981
Total non-corporate
124,944
14,416
(4,648)
134,712
         
Corporate securities
657,917
4,475
(123,084)
539,308
         
Total available-for-sale fixed maturities
$           782,861
$       18,891
$        (127,732)
$           674,020
         
     
Gross
 
   
Gross
Unrealized
 
 
Amortized
Unrealized
Temporary
Fair
Trading fixed maturities
Cost
Gains
Losses
Value
         
Asset-backed securities
$               796,032
$        4,357
$         (294,557)
$          505,832
Collateralized mortgage obligations
2,627,715
8,543
(1,141,245)
1,495,013
Mortgage-backed securities
213,175
4,579
(325)
217,429
Foreign government & agency securities
110,991
1,972
(3,788)
109,175
U.S. treasury & agency securities
484,910
36,528
(18,332)
503,106
Total non-corporate
4,232,823
55,979
(1,458,247)
2,830,555
         
Corporate securities
10,676,606
38,976
(1,783,991)
8,931,591
         
Total trading fixed maturities
$         14,909,429
 $      94,955
 $     (3,242,238)
 $     11,762,146

 
41

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Fixed Maturities (continued)

The amortized cost and estimated fair value by maturity periods for fixed maturity investments held at September 30, 2009 are shown below.  Actual maturities may differ from contractual maturities on ABS and MBS because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(in 000’s)
       
       
Amortized Cost
Fair Value
Maturities of available-for-sale fixed securities:
   
 
Due in one year or less
 $                    41,754
$                       44,945
 
Due after one year through five years
292,682
331,610
 
Due after five years through ten years
211,962
231,435
 
Due after ten years
   
571,256
562,304
          Subtotal – Maturities of available-for-sale fixed securities
 
1,117,654
1,170,294
ABS, CMO, and MBS securities
 
68,159
67,828
          Total available-for-sale fixed securities
 
$               1,185,813
$                  1,238,122
       
Maturities of trading fixed securities:
   
 
Due in one year or less
$                   359,638
$                    362,044
 
Due after one year through five years
4,817,056
4,893,496
 
Due after five years through ten years
3,153,739
3,111,467
 
Due after ten years
2,207,949
2,099,221
 
Subtotal – Maturities of trading fixed securities
10,538,382
10,466,228
ABS, CMO and MBS securities
3,355,314
2,315,150
 
Total trading fixed securities
$             13,893,696
$               12,781,378

Gross gains of $3.7 million and gross losses of $2.9 million were realized on the sale of available-for-sale fixed maturity securities for the nine-month period ended September 30, 2009.






 
42

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Unrealized Losses

The following table shows the fair value and gross unrealized losses, which includes temporary unrealized losses and the portion of non-credit OTTI losses recognized in AOCI, of the Company’s available-for-sale fixed maturity investments, aggregated by investment category and length of time that the individual securities had been in an unrealized loss position at September 30, 2009 (in 000’s).

 
 
Less Than Twelve Months
 
Twelve Months Or More
 
Total
             
 
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
             
Corporate securities
$       62,947
$  (4,934)
$   245,410
$   (37,976)
$  308,357
$     (42,910)
Asset-backed securities
-
-
46
(23)
46
(23)
Commercial mortgage-backed securities
915
(570)
5,849
(2,295)
6,764
(2,865)
U.S. treasury & agency securities
-
-
219
(2)
219
(2)
             
 Total
$       63,862
$  (5,504)
$  251,524
$  (40,296)
$  315,386
$    (45,800)

The following table shows the fair value and gross unrealized losses of the Company’s available-for-sale fixed maturity investments, which were deemed to be temporarily impaired, aggregated by investment category and length of time that the individual securities had been in an unrealized loss position at December 31, 2008 (in 000’s).

 
 
Less Than Twelve Months
 
Twelve Months Or More
 
Total
             
 
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
             
Corporate securities
$    213,657
$    (37,430)
$    226,295
$      (85,654)
$  439,952
$     (123,084)
Collateralized mortgage obligations
2,967
(1,162)
12,739
(3,327)
15,706
(4,489)
Mortgage-backed securities
1,054
(7)
3,137
(10)
4,191
(17)
U.S. treasury & agency securities
1,855
(105)
1,855
(105)
Foreign government & agency securities
473
(37)
473
(37)
             
Total
$    220,006
$   (38,741)
$     242,171
$       (88,991)
$  462,177
$     (127,732)



 
43

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Other-Than-Temporary Impairment

As described in Note 1, the Company presents and discloses OTTI in accordance with FASB ASC Topic 320, beginning on April 1, 2009.  Securities whose fair value is less than their carrying amount are considered to be impaired and are evaluated for potential other-than-temporary impairment.  If the Company intends to sell, or if it is more likely than not that it will be required to sell an impaired security prior to recovery of its cost basis, the security is considered other-than-temporarily impaired and the Company records a charge to earnings for the full amount of impairment (the difference between the current carrying amount and fair value of the security).  Otherwise, losses on securities which are other-than-temporarily impaired are separated into two categories, namely, credit loss and non-credit loss.  The credit loss portion is charged to net realized investment losses in the condensed consolidated statements of operations, while the non-credit loss is charged to other comprehensive income (loss).  When an unrealized loss on a fixed maturity is considered temporary, the Company continues to record the unrealized loss in other comprehensive income (loss) and not in earnings.  To compute the credit loss component of OTTI for corporate bonds on the date of transition (April 1, 2009), both historical default (by rating) data, used as a proxy for the probability of default, and loss given default (by issuer) projections were applied to the par amount of the bond.  For corporate bonds post-transition, the present value of future cash flows using the book yield is used to determine the credit component of OTTI.  If the present value of the cash flow is less than the security’s amortized cost then the difference is recorded as a credit loss.  The difference between the estimates of the credit related loss and the overall OTTI was concluded to be the non-credit-related component.

As a result of the adoption of FASB ASC Topic 320, a cumulative effect adjustment, net of tax, of $9.1 million was recorded to increase accumulated other comprehensive loss with a corresponding decrease to accumulated deficit for the non-credit loss component of previously impaired securities that the Company neither intends to sell, nor is it more likely than not that the Company will be required to sell, before recovery of amortized cost.

For those securities where the Company does not have the intent to sell and it is not more likely than not that the Company will be required to sell, the Company employs a portfolio monitoring process to identify securities that are other-than-temporarily impaired.  The Company has a Credit Committee comprised of professionals from its investment and accounting functions which meets at least quarterly to review individual issues or issuers that may be of concern.  In determining whether a security is other-than-temporarily-impaired, the Credit Committee considers the factors described below.  The process involves a quarterly screening of all impaired securities, with particular attention paid to identify those securities whose fair value to amortized cost percentages have been less than 80% for an extended period of time.  Discrete credit events, such as a ratings downgrade, are also used to identify securities that may be other-than-temporarily impaired.  The securities identified are then evaluated based on issuer-specific facts and circumstances, such as the issuer’s ability to meet current and future interest and principal payments, an evaluation of the issuer’s financial position and its near term recovery prospects, difficulties being experienced by an issuer’s parent or affiliate, and management’s assessment of the outlook for the issuer’s sector.  In making these evaluations, the Credit Committee exercises considerable judgment.  Based on this evaluation, issues or issuers are considered for inclusion on one of the Company’s following credit lists:

“Monitor List”- Management has concluded that the Company’s amortized cost will be recovered through timely collection of all contractually specified cash flows, but that changes in issuer-specific facts and circumstances require monitoring on a quarterly basis.  No OTTI charge is recorded in the Company’s condensed consolidated statements of operations for unrealized loss on securities related to these issuers.

“Watch List”- Management has concluded that the Company’s amortized cost will be recovered through timely collection of all contractually specified cash flows, but that changes in issuer-specific facts and circumstances require continued monitoring during the quarter.  A security is moved from the Monitor List to the Watch List when changes in issuer-specific facts and circumstances increase the possibility that a security may become impaired within the next 24 months.  No OTTI charge is recorded in the Company’s condensed consolidated statements of operations for unrealized loss on securities related to these issuers.

 
44

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Other-Than-Temporary Impairment (continued)

“Impaired List”- This list includes securities that the Company has the intent to sell or more likely than not will be required to sell.  In addition, it includes those securities that management has concluded that the Company’s amortized cost will not be recovered due to expected delays or shortfalls in contractually specified cash flows. For these investments, an OTTI charge is recorded or the security is sold and a realized loss is recorded as a charge to income.  Credit OTTI losses are recorded in the Company’s condensed consolidated statement of operations and non-credit OTTI losses are recorded in other comprehensive income (loss).

Structured securities, typically those rated single A or below, are subject to certain provisions in FASB ASC Topic 325, “Investments–Other,” previously issued by Emerging Issues Task Force (“EITF”) Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continued to Be Held by a Transferor in Securitized Financial Assets.”  These provisions require the Company to periodically update its best estimate of cash flows over the life of the security.  In the event that fair value is less than carrying amount and there has been an adverse change in the expected cash flows (as measured by comparing the original expected cash flows to the current expectation of cash flows, both discounted at the current effective rate), then an impairment charge is recorded to income.  Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third parties, along with assumptions and judgments about the future performance of the underlying collateral.  Losses incurred on the respective commercial mortgage backed securities (“CMBS”) and residential mortgage backed securities (“RMBS”) portfolios are based on expected loss models, not incurred loss models.  Expected cash flows include assumptions about key systematic risks (e.g. unemployment rates, housing prices) and loan-specific information (e.g. delinquency rates, loan-to-volume ratio.)

There are inherent risks and uncertainties in management’s evaluation of securities for OTTI.  These risks and uncertainties include factors both external and internal to the Company, such as general economic conditions, an issuer’s financial condition or near-term recovery prospects, market interest rates, unforeseen events which affect one or more issuers or industry sectors, and portfolio management parameters, including asset mix, interest rate risk, portfolio diversification, duration matching and greater than expected liquidity needs.  All of these factors could impact management’s evaluation of securities for OTTI.


 
45

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Other-Than-Temporary Impairment (continued)

For securities that are assessed to have incurred a credit loss, the amount of credit loss is calculated based upon the cash flows that the Company expects to collect given an assessment of the relevant facts and circumstances for the issuer and specific bond issue.  Such factors include the financial condition, credit quality, and the near-term prospects of the issuer, as well as the issuer's relative liquidity, among other factors.

The Company recorded credit OTTI losses in its condensed consolidated statement of operations totaling $0 million and $4.8 million for the three and nine-month periods ended September 30, 2009, respectively, for OTTI on its available-for-sale fixed maturity securities.  The $4.8 million credit loss OTTI recorded during the nine-month period ended September 30, 2009 was concentrated in corporate debt of financial institutions.  These impairments were driven primarily by adverse financial conditions of the issuers.

The following table rolls forward the amount of credit losses recognized in earnings on debt securities held on the date of transition, April 1, 2009, for which a portion of the OTTI was also recognized in other comprehensive loss.

   
Six-month Period Ended
September 30, 2009
(in 000’s)
     
Beginning balance
$
Add: Credit losses remaining in accumulated deficit related
to the adoption of FASB ASC Topic 320
 
27,805 
Add: Credit losses on OTTI not previously recognized
 
4,834 
Less: Credit losses on securities sold
 
 (5,031)
Less: Credit losses on securities impaired due to intent to
sell
 
 - 
Add: Credit losses on previously impaired securities
 
Less: Increases in cash flows expected on previously
impaired securities
 
 (686)
Ending balance
$
26,922 















 
46

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Derivative Instruments and Hedging Activities

The Company uses derivative financial instruments for risk management purposes to hedge against specific interest rate risk, foreign currency exchange rates, equity market conditions, and to alter exposure arising from mismatches between assets and liabilities.  Derivative instruments are recorded in the condensed consolidated balance sheets at fair value and are presented as assets or liabilities.

The Company does not employ hedge accounting.  The Company believes that its derivatives provide economic hedges and the cost of formally documenting hedge effectiveness in accordance with the provisions of FASB ASC Topic 815, previously issued as SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” is not justified.  As a result, all changes in the fair value of derivatives are recorded in the current period operations as a component of net derivative income.

The primary types of derivatives held by the Company include swap agreements, swaptions, futures, call/put options and embedded derivatives, as described below.

Swap Agreements

As a component of its investment strategy, the Company utilizes swap agreements.  Swap agreements are agreements to exchange with a counterparty a series of cash flow payments at pre-determined intervals and are based upon or calculated by reference to changes in specified interest rates (fixed or floating), foreign currency exchange rates, or prices on an underlying principal balance (notional).  Typically, no cash is exchanged at the outset of the contract and no principal payments are made by either party, except on certain foreign currency exchange swaps.  A single net payment is usually made by one counterparty at pre-determined dates. The net payment is recorded as a component of net derivative loss in the condensed consolidated statement of operations.

Interest rate swaps are generally used to change the character of cash flows (e.g. fixed payments to floating rate payments) for duration matching purposes and to manage exposures to changes in the risk-free interest rate.

Foreign currency swaps are utilized as an economic hedge against changes in foreign currencies associated with certain non-U.S. dollar denominated cash flows.  From 2000 through 2002, and again in 2005, the Company marketed guaranteed investment contracts (“GICs”) to unrelated third parties.  Each transaction is highly-individualized but typically involves the issuance of foreign currency denominated contracts backed by cross currency swaps or equity-linked cross currency swaps.  The combination of the currency swaps with interest rate swaps allows the Company to lock in U.S. dollar fixed rate payments for the life of the contract.


 
47

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Derivative Instruments and Hedging Activities (continued)

Swap Agreements (continued)

On September 6, 2006 the Company entered into an agreement with the CARS Trust.  Through this agreement, the Company purchased a funded note, which is referenced through a credit default swap, as the seller of credit protection, to the credit performance of a portfolio of corporate reference entities.  See Note 1 for additional information on the CARS Trust.

Swaptions

The Company utilizes payer swaptions to hedge exposure to interest rate risk.  Swaptions give the buyer the option to enter into an interest rate swap per the terms of the original swaption agreement.  A premium is paid on settlement date and no further cash transactions occur until the positions settle or expire.  At expiration, the swaption either cash settles for value, settles into an interest rate swap, or expires worthless per the terms of the original swaption agreement.

Futures

Futures contracts, both long and short, are entered into for purposes of hedging liabilities on fixed index and domestic variable annuity products with guaranteed minimum death benefits (“GMDB”) and living benefit features, with cash flows based on changes in equity indices.  Certain futures are also utilized to hedge interest rate risk associated with these products.  On the trade date, an initial cash margin is exchanged.  Daily cash is exchanged to settle the daily variation margin.

Call/Put Options

In addition to short futures, the Company also utilizes over-the-counter (“OTC”) put options on major indices to hedge against stock market exposure inherent in the guaranteed minimum death benefit and living benefit features of the Company's variable annuities.  Unlike futures, however, these options require initial cash outlays. The Company also purchases OTC call options on major indices to economically hedge its obligations under certain fixed annuity contracts, as well as enhance income on the underlying assets.

 
48

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Derivative Instruments and Hedging Activities (continued)

Embedded Derivatives

The Company issues annuity contracts and enters into reinsurance agreements that contain a derivative instrument that is embedded in the contract.  Upon issuing the contract, the embedded derivative is separated from the host contract (annuity contract or reinsurance agreement) and is carried at fair value.  See Note 10 for further information regarding derivatives embedded in annuity contracts; see also Note 7 for further information regarding derivatives embedded in reinsurance contracts.

The following is a summary of the Company’s derivative positions:

 
As of
September 30, 2009
As of
December 31, 2008
 
Number of Contracts
Principal
Notional
(in 000’s)
Number of Contracts
Principal
Notional
(in 000’s)
         
Interest rate swaps
150
 $             9,789,100
218
$     14,036,100
Currency swaps
13
                   354,307
14
      408,773
Credit default swaps
1
  55,000
1
        55,000
Equity swaps
2
                       4,908
2
          4,908
Swaptions
5
                1,150,000
5
   1,150,000
Futures
          (11,998)
                2,164,648
927
   1,991,840
Index call options
          7,012
                1,174,528
8,081
   1,166,148
Index put options
              8,300
                 786,325
5,500
     591,385
Total
  3,485
$           15,478,816
14,748
$     19,404,154

Since December 31, 2008, short future and index put option positions have been added to hedge against potential adverse movements in the stock market as the U.S. economy continues to recover. Correspondingly, index call options have been reduced.





 
49

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Derivative Instruments and Hedging Activities (continued)

The following is a summary of the Company’s derivative asset and liability positions by primary risk exposure at September 30, 2009 (in 000’s).  With the exception of embedded derivatives, all derivatives are carried at fair value in derivative instruments – receivable or derivative instruments – payable in the Company’s condensed consolidated balance sheets.  Embedded derivatives related to reinsurance agreements and annuity contracts are carried at fair value in contractholder deposit funds and other policy liabilities in the Company’s condensed consolidated balance sheets.

 
At September 30, 2009
 
Asset Derivatives
Liability Derivatives
   
Fair Value (a)
 
Fair Value (a)
         
Interest rate contracts
 
$                  204,170
 
$                728,372
Foreign currency contracts
 
57,639
 
535
Equity contracts
 
72,530
 
-
Credit contracts
 
-
 
47,930
Futures (b)
 
3,155
 
1,286
Derivative instruments
 
337,494
 
778,123
Embedded derivatives (c)
 
14,638
 
663,608
Total
 
$                 352,132
 
$             1,441,731

(a)  
Amounts are presented without consideration of cross-transaction netting and collateral.
(b)  
Futures include both interest rate and equity price risks.
(c)  
Embedded derivatives expose the Company to a combination of credit, interest rate and equity price risks.

All realized and unrealized derivative gains and losses are recorded in net derivative loss in the Company’s condensed consolidated statement of operations.  The following is a summary of the Company’s realized and unrealized gains and losses by derivative type for the periods ended September 30, 2009 (in 000’s):

   
 
          Three-Month
         Nine-Month
   
Period
 
Period
         
Interest rate contracts
 
$                   (64,545)
 
$               223,086 
Foreign currency contracts
 
(5,371)
 
(7,580)
Equity contracts
 
(16,867)
 
(58,355)
Credit contracts
 
(1,734)
 
(5,864)
Futures
 
(142,847)
 
(246,742)
Embedded derivatives
 
(73,082)
 
92,599 
Total
 
$                (304,446)
 
$                 (2,856)








 
50

 


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Derivative Instruments and Hedging Activities (continued)

Concentration of Credit Risk

Credit risk relates to the uncertainty of an obligor’s continued ability to make timely payments in accordance with the contractual terms of the instrument or contract.  With derivative instruments, the Company is primarily exposed to credit risk through its counterparty relationships.  The Company primarily manages credit risk through policies which address the quality of counterparties, contractual requirements for transacting with counterparties and collateral support agreements, and limitations on counterparty concentrations.  Exposures by counterparty are monitored closely, as well as counterparty credit ratings.  All contracts are held with counterparties rated A- or higher.  As of September 30, 2009, the Company’s liability positions were linked to a total of 14 counterparties, of which the largest single unaffiliated counterparty payable had credit exposure of $106.6 million.  The Company’s net asset positions were linked to a total of 21 counterparties, of which the largest single unaffiliated counterparty receivable had credit exposure of $175.8 million.

Credit-related Contingent Features

All derivative transactions are covered under standardized contractual agreements with counterparties all of which include credit-related contingent features.  Certain counterparty relationships may also include supplementary agreements with such tailored terms as additional triggers for early terminations, acceptable practices related to cross transaction netting, or minimum thresholds for determining collateral.

Credit-related triggers include failure to pay or deliver on an obligation past certain grace periods, bankruptcy or the downgrade of credit ratings to below a stipulated level.  These triggers apply to both the Company and its counterparty.  The aggregate value of all derivative instruments with credit risk-related contingent features that were in a liability position at September 30, 2009 was approximately $738.5 million.

In the event of an early termination, the Company might be required to accelerate payments to counterparties, up to the current value of its liability positions, offset by the value of previously pledged collateral and cross-transaction netting.  If payments cannot be exchanged simultaneously at early termination, funds will also be held in escrow to facilitate settlement.  If an early termination was triggered on September 30, 2009, the Company would be expected to settle a net obligation of approximately $208.3 million.

If counterparties are unable to meet accelerated payment obligations, the Company may also be exposed to uncollectible asset positions, offset by the value of collateral that has been posted with the Company.

At September 30, 2009, the Company had collateral of $267.6 million pledged to counterparties, including a combination of cash and U.S. treasury securities and other collateral. The Company was holding cash collateral posted by counterparties of $10.2 million.



 
51

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

6.  FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB ASC Topic 825, previously issued as SFAS No. 107, “Disclosure about Fair Value of Financial Instruments,” excludes certain insurance liabilities and other non-financial instruments from its disclosure requirements.  The fair value amounts presented herein do not include the expected interest margin (interest earnings over interest credited) to be earned in the future on investment-type products or other intangible items.  Accordingly, the aggregate fair value amounts presented herein do not necessarily represent the underlying value to the Company.  Likewise, care should be exercised in deriving conclusions about the Company's business or financial condition based on the fair value information presented herein.

The following table presents the carrying amounts and estimated fair values of the Company's financial instruments (in 000’s) at:

     
September 30, 2009
 
December 31, 2008
     
Carrying
Estimated
 
Carrying
Estimated
     
Amount
Fair Value
 
Amount
Fair Value
Financial assets:
         
 
Cash and cash equivalents
$         3,022,206 
$         3,022,206 
 
$           1,624,149
$           1,624,149
 
Fixed maturities
14,019,500 
14,019,500 
 
12,436,166
12,436,166
 
Mortgages
1,975,462 
1,949,700 
 
2,083,003
2,083,089
 
Derivative instruments -receivables
337,494 
337,494 
 
727,103
727,103
 
Policy loans
719,428 
852,626 
 
729,407
768,658
 
Other invested assets
11,737 
12,659 
 
179,945
179,945
 
Separate accounts
21,780,876 
21,780,876 
 
20,531,724
20,531,724
             
Financial liabilities:
         
 
Contractholder deposit funds and other policy liabilities
14,519,935 
13,458,507 
 
14,292,665
13,256,964
 
Derivative instruments - payables
778,123 
778,123 
 
1,494,341
1,494,341
 
Long-term debt to affiliates
2,098,000 
2,098,000 
 
1,998,000
1,998,000
 
Other liabilities
42,856 
42,856 
 
87,534
87,534
 
Separate accounts
21,780,876 
21,780,876 
 
20,531,724
20,531,724

The following methods and assumptions were used by the Company in determining the estimated fair value of its financial instruments:

Interest receivable on the above financial instruments is stated at carrying value which approximates fair value.

Cash and cash equivalents: The carrying value for cash and cash equivalents approximates fair values due to the short-term nature and liquidity of the balance.


 
52

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Fixed maturities: The Company determines the fair value of its publicly traded fixed maturities using four primary pricing methods: third-party pricing services, non-binding broker quotes, pricing matrices and pricing models.  Prices are first sought from third-party pricing services; the remaining unpriced securities are priced using one of the remaining three methods.  Third-party pricing services derive the security prices through recently reported trades for identical or similar securities with adjustments for trading volumes and market observable information through the reporting date.  In the event that there are no recent market trades, pricing services and brokers may use pricing matrices and models to develop a security price based on future expected cash flows discounted at an estimated market rate using collateral performance and vintages.  The Company generally does not adjust quotes or prices obtained from brokers or pricing services.

Structured securities, such as CMO, CMBS, and ABS, are priced using a matrix, fair value model or independent broker quotations.  CMBS securities, which are a subset of the Company's CMO holdings, are priced using the last sale price of the day or a broker quote, if no sales were transacted that day.  Other CMO and ABS are priced using matrices, models and independent broker quotations.  Typical inputs used by these three pricing methods include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids and/or estimated cash flows and prepayment speeds.  In addition, estimates of expected future prepayments are factors in determining the price of ABS, MBS, CMBS and CMO.  These estimates are based on the underlying collateral and structure of the security, as well as prepayment speeds previously experienced in the market at interest rate levels projected for the underlying collateral.  Actual prepayment experience may vary from these estimates.

For privately-placed fixed maturities, fair values are estimated using matrices, which take into account credit spreads for publicly traded securities of similar credit risk, maturity, prepayment and liquidity characteristics.  A portion of privately-placed fixed maturities are also priced using market prices or broker quotes.

Mortgages: The fair values of mortgage and other loans 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.

Derivative instruments, receivables and payables: The fair values of swaps are based on current settlement values, dealer quotes and market prices.  Fair values for options and futures are also based on dealer quotes and market prices.

Policy loans:  The fair value of policy loans is determined by estimating future policy loan cash flows and discounting the cash flows at a current market interest rate.

Other invested assets:  This financial instrument consists primarily of corporate loans, certain cash instruments and fixed maturity securities, which were purchased using cash collateral related to a securities lending program in which the Company participates.  Corporate loans are priced using independent broker quotations.  The fair value of the cash instrument is consistent with the method used in calculating the fair value of the cash and cash equivalents, as described above.  The pricing methods used for the fixed maturity securities component of the securities lending program is as explained in the fair value of fixed maturities above.  As of September 30, 2009, the Company recorded the collateral investment at fair value in the condensed consolidated balance sheets in available-for-sale fixed maturity securities and cash and cash equivalent.  At December 31, 2008, the Company recorded the collateral investment at fair value in the condensed consolidated balance sheets in other invested assets.

Separate accounts, assets and liabilities: The estimated fair value of assets held in separate accounts is based on quoted market prices.  The fair value of liabilities related to separate accounts is the amount payable on demand, which excludes surrender charges.



 
53

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Contractholder deposit funds and other policy liabilities: The fair values of the Company's general account insurance reserves and 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.  The fair values of other deposits with future maturity dates are estimated using discounted cash flows.  The fair values of S&P 500 Index and other equity-linked embedded derivatives are produced using standard derivative valuation techniques.  Guaranteed minimum accumulation benefits (“GMABs”) or withdrawal benefits (“GMWBs”) are considered to be derivatives under FASB ASC Topic 815 and are included in contractholder deposit funds.  Consistent with the provisions of FASB ASC Topic 820, the Company incorporates risk margins and the Company’s own credit standing, as well as changes in assumptions regarding policyholder behavior, in the calculation of the fair value of embedded derivatives.

Long term debt: The fair value of notes payable and other borrowings is based on future cash flow discounted at the stated interest rate, considering all appropriate terms of the related agreements. Due to certain provisions included in such agreements, whereby the issuer of the notes has the ability to call each note at par with appropriate approvals, the fair value is equal to par value.

Other liabilities:  This financial instrument consists of issued checks and transmitted wires that have not been cashed and processed in the Company’s bank accounts as of the end of the reporting period.  The fair value of other liabilities is consistent with the method used in calculating the fair value of cash and cash equivalents, as described above.






 
54

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. REINSURANCE

Reinsurance ceded contracts do not relieve the Company from its obligations to policyholders.  The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreement.  To minimize its exposure to significant losses from reinsurer insolvencies, the Company regularly evaluates the financial position of its reinsurers and monitors concentrations of credit risk.  Management believes that any liability from this contingency is unlikely.  A brief discussion of the Company’s significant reinsurance agreements by business segment follows.

Wealth Management Segment

The Wealth Management Segment manages a closed block of single premium whole life ("SPWL") insurance policies, a retirement-oriented tax-advantaged life insurance product.  The Company discontinued sales of the SPWL product in response to certain tax law changes in the 1980s.  The Company had SPWL policyholder balances of $1.5 billion and $1.6 billion at September 30, 2009 and December 31, 2008, respectively.  This entire block of business is reinsured on a funds withheld basis with SLOC, an affiliate.  Pursuant to this reinsurance agreement, the Company held the following assets and liabilities (in thousands) at:

 
September 30,
 
December 31,
 
2009
 
2008
Assets
Reinsurance receivable
 
$
 
1,534,679
 
 
$
 
1,560,946
Other assets
 
-
   
38,998
           
Liabilities
Contractholder deposit funds and other policy liabilities
 
1,496,501
   
1,428,331
Reinsurance payable
 
1,557,164
   
1,509,989

The funds withheld assets of $1.5 billion are comprised of bonds, mortgage loans, policy loans, derivative instruments, and cash and cash equivalents that are managed by the Company.  The significant decline in the value of the funds withheld assets during the year ended December 31, 2008 increased the value of an embedded derivative which has been separated from the host reinsurance contract and recorded at fair value in the Company’s condensed consolidated balance sheets.  The fair value of the embedded derivative reduced contractholder deposit funds and other policy liabilities by $13.9 million and $130.6 million at September 30, 2009 and December 31, 2008, respectively.  The change in value of this embedded derivative decreased derivative income by $58.9 million and $116.8 million for the three and nine-month periods ended September, 2009, respectively.

By reinsuring the SPWL product, the Company reduced net investment income by $20.0 million and $89.0 million for the three and nine-month periods ended September 30, 2009, respectively, and by $1.1 million and $67.9 million for the three and nine-month periods ended September 30, 2008, respectively.  The Company also reduced interest credited by $18.5 million and $56.1 million for the three and nine-month periods ended September 30, 2009, respectively, and by $19.9 million and $56.3 million for the three and nine-month periods ended September 30, 2008, respectively.  In addition, the Company increased net investment income relating to an experience rate refund under the reinsurance agreement by $2.9 million and $6.7 million for the three and nine-month periods ended September 30, 2009, respectively, and by $8.1 million and $13.4 million for the three and nine-month periods ended September 30, 2008, respectively.


 
55

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. REINSURANCE (CONTINUED)

Individual Protection Segment

The following are the Company’s significant reinsurance agreements that impact the Individual Protection Segment:

On February 11, 2009, the Company received regulatory approval and entered into a reinsurance agreement with BarbCo 3, an affiliate, to cede all of the risks associated with certain in-force corporate and bank-owned variable universal life and private placement variable universal life policies on a combination coinsurance, coinsurance with funds withheld and a modified coinsurance basis.  Future new business will also be ceded under this agreement.

At the inception of the transaction, BarbCo 3 paid an initial ceding commission to the Company of $41.5 million and the Company recorded a reinsurance payable and related reinsurance receivable of $370.7 million and $329.2 million, respectively.  The reinsurance payable included a funds withheld liability of $247.9 million and a deferred gain of $122.8 million.  Pursuant to this agreement, the Company held the following assets and liabilities (in thousands) at:

 
September 30,
   
 
2009
   
Assets
Reinsurance receivable
 
$
 
344,917
     
           
Liabilities
Contractholder deposit funds and other policy liabilities
 
385,118
     
Reinsurance payable
 
373,199
     
           

At September 30, 2009, reinsurance payable includes a funds withheld liability and a deferred gain of $230.2 million and $119.9 million, respectively.  The funds withheld assets are comprised of bonds, policy loans, and cash and cash equivalents that are managed by the Company.  The coinsurance treaty with funds withheld gives rise to an embedded derivative requiring that it be separated from the host reinsurance contract.  The fair value of the embedded derivative increased contractholder deposit funds and other policy liabilities by $25.7 million at September 30, 2009 and resulted in a decrease of derivative income by $14.1 million and $25.7 million for the three and nine-month period ended September 30, 2009, respectively.  The reinsurance agreement decreased revenues by approximately $18.5 million and $44.5 million, respectively, and decreased expenses by $13.9 million and $28.4 million, respectively, for the three and nine-month periods ended September 30, 2009.











 
56

 


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. REINSURANCE (CONTINUED)

Individual Protection Segment (continued)

The Company’s subsidiary, Sun Life Vermont, entered into a reinsurance agreement with SLOC effective November 8, 2007.  Pursuant to this reinsurance agreement, Sun Life Vermont will fund AXXX reserves, attributable to certain UL policies sold by SLOC through its United States branch (the "Branch").  Sun Life Vermont reinsures, on a coinsurance basis, a 100% quota share of SLOC's risk on the UL policies covered under the reinsurance agreement.  Sun Life Vermont's obligations are secured in part through a reinsurance trust and in part on a funds-withheld basis.  Pursuant to this agreement, Sun Life Vermont held the following assets and liabilities (in thousands):

 
September 30,
 
December 31,
 
2009
 
2008
Assets
Deferred policy acquisition costs
 
$
 
104,514
 
 
$
 
73,958
Reinsurance receivable
 
949,679
   
1,125,408
           
Liabilities
Contractholder deposit funds and other policy liabilities
 
 
775,732
   
 
813,387
Future contract and policy benefits
 
101,972
   
73,058
Reinsurance payable
 
1,017
   
-
Other liabilities
 
88,946
   
21,529

The funds withheld assets are comprised of bonds, mortgage loans, derivatives, and cash and cash equivalents that are held in a separate trust account for the protection of policyholders and claimants of the Branch.  The assets of the trust are managed by SLOC with all of the investment returns, net of expenses, inuring to the Company.  The funds withheld assets are reported as reinsurance receivable in the Company’s condensed consolidated balance sheets.  The coinsurance treaty with funds withheld gives rise to an embedded derivative requiring that it be separated from the host reinsurance contract.  The fair value of the embedded derivative increased contractholder deposit funds and other policy liabilities by $2.0 million and $91.8 million at September 30, 2009 and December 31, 2008, respectively.  The change in value of this embedded derivative increased (decreased) derivative income by $66.7 million and $89.8 million for the three and nine-month periods ended September 30, 2009, respectively, and by $(39.0) million and $(67.4) million for the three and nine-month periods ended September 30, 2008, respectively.  Other liabilities include $88.9 million and $9.5 million of unearned revenue at September 30, 2009 and December 31, 2008, respectively.

The reinsurance agreement has increased (decreased) revenues by approximately $186.0 million and $(5.2) million for the three and nine-month periods ended September 30, 2009, respectively, and by $2.8 million and $17.9 million for the three and nine-month periods ended September 30, 2008, respectively.  This agreement has also increased expenses by $63.7 million and $58.8 million for the three and nine-month periods ended September 30, 2009, respectively, and by $21.3 million and $52.3 million for the three and nine-month periods ended September 30, 2008, respectively.





 
57

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. REINSURANCE (CONTINUED)

Individual Protection Segment (continued)

Effective December 31, 2007, the Company’s subsidiary, SLNY, entered into a reinsurance agreement with SLOC under which SLOC will fund AXXX reserves attributable to certain UL policies sold by SLNY.  Under this agreement, SLNY ceded, and SLOC assumed, on a funds withheld 90% coinsurance basis certain in-force policies at December 31, 2007.  Future new business will also be reinsured under this agreement.  Pursuant to this agreement, SLNY held the following assets and liabilities at (in thousands):

 
September 30,
 
December 31,
 
2009
 
2008
Assets
Reinsurance receivable
 
$
 
110,150
 
 
$
 
77,628
Other assets
 
-
   
2,676
           
Liabilities
Contractholder deposit funds and other policy liabilities
 
 
76,114
   
 
63,210
Future contract and policy benefits
 
9,784
   
3,162
Reinsurance payable to affiliate
 
171,340
   
140,832
Other liabilities
 
-
   
1,057

Reinsurance payable to affiliate includes a funds withheld liability of $121.6 million and $89.4 million at September 30, 2009 and December 31, 2008, respectively; and a deferred gain of $49.4 million and $51.4 million at September 30, 2009 and December 31, 2008, respectively.  The funds withheld assets are comprised of bonds, mortgage loans, policy loans, and cash and cash equivalents being managed by SLNY.  The coinsurance treaty with funds withheld gives rise to an embedded derivative requiring that it be separated from the host reinsurance contract.  The fair value of the embedded derivative reduced contractholder deposit funds and other policy liabilities by $0.8 million and $12.0 million at September 30, 2009 and December 31, 2008, respectively.  The change in value of this embedded derivative decreased derivative income by $7.1 million and $11.2 million for the three and nine-month periods ended September 30, 2009, respectively, and increased derivative income by $2.5 million and $4.9 million for the three and nine-month periods ended September 30, 2008, respectively.

The reinsurance agreement between SLOC and SLNY decreased revenues by approximately $12.0 million and $23.7 million for the three and nine-month period ended September 30, 2009, respectively, and by $1.0 million and $8.5 million for the three and nine-month periods ended September 30, 2008, respectively.  This agreement also (decreased) increased benefits and expenses by approximately $(7.2) million and $(16.4) million for the three and nine-month periods ended September 30, 2009, respectively, and by $0.8 million and $(3.6) million for the three and nine-month periods ended September 30, 2008, respectively.

The Company has other reinsurance agreements with SLOC and several unrelated companies, which provide reinsurance for portions of the net-amount-at-risk under certain individual variable universal life, individual private placement variable universal life, bank owned life insurance (“BOLI”) and corporate owned life insurance (“COLI”) policies.  These amounts are reinsured on a monthly renewable term, a yearly renewable term or a modified coinsurance basis.  These other agreements have decreased revenues by approximately $37.2 million and $119.8 million for the three and nine-month periods ended September 30, 2009, respectively, and by $35.9 million and $103.5 million for the three and nine-month periods ended September 30, 2008, respectively.  These agreements have also decreased expenses by approximately $58.1 million and $120.0 million for the three and nine-month periods ended September 30, 2009, respectively, and by $10.4 million and $40.0 million for the three and nine-month periods ended September 30, 2008, respectively.  The decrease in expenses in 2009 was primarily related to the surrender of a reinsured BOLI policy.


 
58

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. REINSURANCE (CONTINUED)

Group Protection Segment

SLNY has several reinsurance agreements with unrelated companies whereby the unrelated companies reinsure the mortality and morbidity risks of certain of the SLNY’s group contracts.

SLNY has a reinsurance agreement, effective May 31, 2007, to assume the net risks of SLHIC’s New York issued contracts.  At September 30, 2009 and December 31, 2008, SLNY held policyholder liabilities related to this agreement of $33.0 million and $32.8 million, respectively.  In addition, the reinsurance agreement increased revenues by $13.1 million and $40.2 million for the three and nine-month periods ended September 30, 2009, respectively, and by $15.0 million and $44.0 million for the three and nine-month periods ended September 30, 2008, respectively.  This agreement also increased benefits and expenses by $11.7 million and $35.3 million for the three and nine-month periods ended September 30, 2009, respectively, and by $12.6 million and $33.6 million for the three and nine-month periods ended September 30, 2008, respectively.

8. COMMITMENTS AND CONTINGENCIES

Regulation and Regulatory Developments

Under insurance guaranty fund laws in each state, the District of Columbia and Puerto Rico, insurers licensed to do business can be assessed by state insurance guaranty associations for certain obligations of insolvent insurance companies to policyholders and claimants. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer's solvency and further provide annual limits on such assessments.  Part of the assessments paid by the Company pursuant to these laws may be used as credits for a portion of the associated premium taxes.

Litigation, Income Taxes and Other Matters

In Revenue Ruling 2007-61, issued on September 25, 2007, the Internal Revenue Service (“IRS”) announced its intention to issue regulations with respect to certain computational aspects of the dividends-received-deduction (the “DRD”) on separate account assets held in connection with variable annuity contracts.  Revenue Ruling 2007-61 suspended Revenue Ruling 2007-54, issued on August 16, 2007, that purported to change accepted industry and IRS interpretations of the statutes governing computational questions impacting the DRD.  New DRD regulations that the IRS proposes for issuance on this matter will be subject to public comment, at which time the insurance industry and other interested parties will have the opportunity to raise comments and questions about the content, scope and application of new regulations.  The timing, substance and effective date of the new regulations are unknown, but they could result in the elimination of some or all of the separate account DRD tax benefit that the Company ultimately receives.  Related to the separate account DRD, the Company recorded benefits of $4.1 million and $12.3 million for the three and nine-month periods ended September 30, 2009, respectively, and $4.5 million and $13.5 million for the three and nine-month periods ended September 30, 2008, respectively.

The Company is not aware of any contingent liabilities arising from litigation or other matters that could have a material effect upon the financial position, results of operations or cash flows of the Company.


 
59

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Indemnities

In the normal course of its business, the Company has entered into agreements that include indemnities in favor of third parties, such as contracts with advisors and consultants, outsourcing agreements, underwriting and agency agreements, information technology agreements, distribution agreements and service agreements.  The Company has also agreed to indemnify its directors and certain of its officers and employees in accordance with the Company’s by-laws.  The Company believes any potential liability under these agreements is neither probable nor estimatable. Therefore, the Company has not recorded any associated liability.

9.  RETIREMENT PLANS

Prior to December 31, 2008, the Company sponsored three non-contributory defined benefit pension plans for its employees and certain affiliated employees.  These plans were the staff qualified pension plan (“staff pension plan”), the agents’ qualified pension plan (“agents’ pension plan”) and the staff nonqualified pension plan (“UBF plan”) (collectively, the “Pension Plans”).  Expenses are allocated to participating companies based in a manner consistent with the allocation of employee compensation expenses.

Effective December 31, 2008, the agents’ pension plan was merged into the staff pension plan. The plan merger resulted in a transfer from the agents’ pension plan to the staff pension plan of a projected benefit obligation of $8.8 million and plan assets of $28.3 million. The plan merger did not change the provisions of the agents’ pension plan.

The Company sponsors a postretirement benefit plan for its employees and certain affiliated employees providing certain health, dental and life insurance benefits for retired employees and dependents (the “Other Benefit Plan”).  Expenses are allocated to participating companies based on the number of participants.

The following table sets forth the components of the Company’s net periodic pension cost (benefit) for the nine-month periods ended September 30 (in 000’s):

 
2009
2008
 
Pension Plans
Other Benefit
Plan
Pension Plans
Other Benefit
Plan
         
Components of net periodic pension cost (benefit):
       
Service cost
$                   1,948 
$                    1,315 
$                    2,640 
$                   1,212
Interest cost
13,075 
2,414 
12,462
2,499
Expected return on plan assets
(11,259)
(17,229)
-
Amortization of transition obligation asset
(1,570)
(1,569)
-
Amortization of prior service cost (credit)
253 
(397)
252
(396)
Recognized net actuarial losses (gains)
2,087 
286 
(594)
686 
Net periodic pension cost (benefit)
$               4,534 
$                   3,618 
$               (4,038)
$                 4,001
The Company’s share of net periodic pension cost
    (benefit)
$               4,534 
$                   2,930 
$               (4,038)
$                 3,480



 
60

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

9.  RETIREMENT PLANS (CONTINUED)

The following table sets forth the components of the net periodic pension cost (benefit) for the three-month periods ended September 30 (in 000’s):

 
2009
2008
 
Pension Plans
Other Benefit
Plan
Pension Plans
Other Benefit
Plan
         
Components of net periodic pension cost (benefit):
       
Service cost
$                     649 
$                    438
$                  880
$                    404
Interest cost
4,358 
805
4,154
833
Expected return on plan assets
(3,853)
-
(5,743)
-
Amortization of transition obligation asset
(523)
-
(523)
-
Amortization of prior service cost (credit)
84 
(132)
84
(132)
Recognized net actuarial losses (gains)
696 
95
(198)
228
Net periodic pension cost (benefit)
$                 1,411 
$                 1,206
$             (1,346)
$                1,333
The Company’s share of net periodic pension cost
(benefit)
$                 1,411 
$                    988
$             (1,346)
$                1,160


 
61

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

10.  LIABILITIES FOR CONTRACT GUARANTEES

The Company offers various guarantees to certain policyholders, including a return of no less than (a) total deposits made on the contract, adjusted for any customer withdrawals, (b) total deposits made on the contract, adjusted for any customer withdrawals, plus a minimum return, or (c) the highest contract value on a specified anniversary date, minus any customer withdrawals following the contract anniversary.  These guarantees include benefits that are payable in the event of death, upon annuitization, or at specified dates during the accumulation period of an annuity.

The table below represents information regarding the Company’s variable annuity contracts with guarantees at September 30, 2009 (in 000’s, except for age data):

Benefit Type
Account Balance
Net Amount
at Risk 1
Average
Attained Age
Minimum death
$           16,192,211   
$           2,742,189   
66.5
Minimum income
$                199,499   
  $                95,095   
                   61.4
Minimum accumulation and
withdrawal
$             8,123,803   
$              301,273   
63.1

The table below represents information regarding the Company’s variable annuity contracts with guarantees at December 31, 2008:

Benefit Type
Account Balance
Net Amount
at Risk 1
Average
Attained Age
Minimum Death
$          12,627,787   
$           4,398,559   
66.7
Minimum Income
$               189,863   
$              130,177   
60.8
Minimum Accumulation or
Withdrawal
$            4,961,237   
$              857,764   
63.0
1 Net amount at risk represents the difference between guaranteed benefits and account balance.

The following roll-forward summarizes the change in reserves for the Company’s guaranteed minimum death and income benefits at September 30, 2009 (in 000’s):

 
Guaranteed
Minimum
Death Benefit
 
Guaranteed
Minimum
Income Benefit
 
Total
Balance at December 31, 2008
$             201,648 
 
$            18,773 
 
$          220,421 
           
Benefit ratio change /
    Assumption changes
 (63,705)
 
(5,874)
 
(69,579)
Incurred guaranteed benefits
35,127 
 
2,149 
 
              37,276 
Paid guaranteed benefits
 (82,226)
 
 (4,680)
 
            (86,906)
Interest
8,542 
 
                1,085 
 
                9,627 
           
Balance at September 30, 2009
$             99,386 
 
$            11,453 
 
$          110,839 


 
62

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

10.  LIABILITIES FOR CONTRACT GUARANTEES (CONTINUED)

The following roll-forward summarizes the change in reserves for the Company’s guaranteed minimum death and income benefits at September 30, 2008 (in 000’s):

 
Guaranteed
Minimum
Death Benefit
 
Guaranteed
Minimum
Income Benefit
 
Total
Balance at December 31, 2007
$             39,673 
 
$          4,817 
 
$           44,490 
           
Benefit ratio change /
    Assumption changes
87,189 
 
5,797 
 
92,986 
Incurred guaranteed benefits
13,266 
 
781 
 
14,047 
Paid guaranteed benefits
(31,523)
 
(1,303)
 
(32,826)
Interest
3,983 
 
249 
 
4,232 
           
Balance at September 30, 2008
$            112,588 
 
$          10,341 
 
$        122,929 

The liability for death and income benefit guarantees is established equal to a benefit ratio, multiplied by the cumulative contract charges earned, plus accrued interest less contract benefit payments.  The benefit ratio is calculated as the estimated present value of all expected contract benefits divided by the present value of all expected contract charges.  The benefit ratio may be in excess of 100%.  For guarantees in the event of death, benefits represent the current guaranteed minimum death payments in excess of the current account balance.  For guarantees at annuitization, benefits represent the present value of the minimum guaranteed annuity benefits in excess of the current account balance.

Projected benefits and assessments used in determining the liability for guarantees are developed using models and stochastic scenarios that are also used in the development of estimated expected future gross profits.  Underlying assumptions for the liability related to income benefits include assumed future annuitization elections based upon factors such as eligibility conditions and the annuitant’s attained age.

The liability for guarantees is re-evaluated regularly, and adjustments are made to the liability balance through a charge or credit to policyholder benefits.

GMABs and GMWBs are considered to be derivatives under FASB ASC Topic 815 and are recorded at fair value through earnings.  Consistent with the provisions of FASB ASC Topic 820, the Company began incorporating actively-managed volatility adjustments, a credit standing adjustment, and a behavior risk margin in its calculation of the embedded derivative.  The net balance of GMABs and GMWBs constituted a liability in the amount of $504.7 million and $694.2 million at September 30, 2009 and December 31, 2008, respectively.  The Company records GMAB and GMWB liabilities in its condensed consolidated balance sheets as part of contractholder deposit funds and other policy liabilities.


 
63

 


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

11. GOODWILL

Goodwill represents the intangible asset related to the transfer of goodwill to SLNY, based on the SLHIC to SLNY asset transfer, effective May 31, 2007.  Goodwill is allocated to the Group Protection Segment.  In accordance with FASB ASC Topic 350, “Intangibles-Goodwill, and Other,” previously issued as SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is tested for impairment on an annual basis.  The Company completed the required impairment tests of goodwill and indefinite-lived intangible assets during the second quarter of 2009 and concluded that these assets were not impaired.

12. SECURITIES LENDING

The Company participates in a securities lending program to generate additional income, whereby certain fixed maturity securities are loaned for a specified period of time from the Company’s portfolio to qualifying third parties, via a lending agent.  Borrowers of these securities provide collateral of 102% of the market value of the loaned securities.  The Company accepts cash as the only form of collateral.  Under the terms of the securities lending program, the lending agent indemnifies the Company against borrower defaults.

As of September 30, 2009 and December 31, 2008, the fair value of the loaned securities was approximately $77.0 million and $175.0 million, respectively, and was included in trading fixed maturities, available-for-sale fixed maturities, and cash and cash equivalents in the Company’s condensed consolidated balance sheets.  The Company recorded cash collateral relating to the securities lending program in the amount of $83.0 million and $183.5 million as of September 30, 2009 and December 31, 2008, respectively, all of which was re-invested in certain cash instruments and other available-for-sale securities.  As of December 31, 2008, the Company recorded the collateral investments at fair value in the condensed consolidated balance sheets in other invested assets.  At September 30, 2009, the Company recorded the collateral investments at fair value in the condensed consolidated balance sheets in available-for-sale securities and cash and cash equivalents.  The fair value of the collateral investments at September 30, 2009 and December 31, 2008 was $78.0 million and $179.9 million, respectively.

The Company earns income from the reinvestment of the cash collateral.  The Company recorded before-tax income from securities lending transactions, net of lending fees, in the amount of $0.1 million and $0.6 million for the three and nine-month periods ended September 30, 2009, respectively, and $0.4 million and $1.9 million for the three and nine-month periods ended September 30, 2008, respectively.  The net security lending transaction income is included in net investment income (loss) in the condensed consolidated statement of operations.


 
64

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

13. INCOME TAXES

The Company accounts for current and deferred income taxes and recognizes reserves for income taxes in accordance with FASB ASC Topic 740, “Income Taxes,” portions of which were previously issued as SFAS No. 109, “Accounting for Income Taxes,” and FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes.”

Under the applicable asset and liability method for recording deferred income taxes, deferred taxes are recognized when assets and liabilities have different values for financial statement and tax reporting purposes, using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company’s differences between the bases of assets and liabilities used for financial statement versus tax reporting primarily result from policy reserves, policy acquisition expenses, unrealized gains and losses on investments and net operating loss (“NOL”) carryforwards.

The Company’s net deferred tax asset at September 30, 2009 was comprised of gross deferred tax assets and gross deferred tax liabilities.  The gross deferred tax assets are primarily related to unrealized investment security losses, policyholder reserves and NOL carryforwards.  If unutilized, the NOL carryforward will begin to expire in 2023.  The Company’s net deferred tax asset was $364.2 million and $856.8 million at September 30, 2009 and December 31, 2008, respectively.

In prior quarters the Company established a valuation allowance for deferred tax assets that do not meet the more likely than not realization criteria.  The valuation allowance was $79.9 million at December 31, 2008, related to certain deferred tax assets that arose from investment impairment losses. The Company released the cumulative recorded valuation allowance of $91.6 million during the quarter ended September 30, 2009, because the Company believes that it is more likely than not that the deferred tax assets related to the impairment losses will be realized due to tax planning strategies executed in the quarter related to certain mortgage-backed securities, the Company’s intent and ability to hold the related investment securities to maturity, and other tax planning strategies.  For the remaining unrealized investment losses, the Company believes that it is more likely than not that the related deferred tax assets will be realized due to the Company’s intent and ability to hold the related investment securities to recovery of amortized cost.

14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The following Condensed Consolidating financial statements are provided in compliance with Regulation S-X of the U.S. Securities and Exchange Commission (the “SEC”) and in accordance with SEC Rule 12h-5.

The Company’s wholly-owned subsidiary, SLNY, sells, among other products, combination fixed and variable annuity contracts (the “Contracts”) in the State of New York.  The Contracts contain a fixed investment option, where interest is paid at a guaranteed rate for a specified period of time, and withdrawals made before the end of the specified period may be subject to a market value adjustment that can increase or decrease the amount of the withdrawal proceeds (the “fixed investment option period”).  Effective September 27, 2007, the Company provided a full and unconditional guarantee (the “guarantee”) of SLNY’s obligation related to the fixed investment option period related to Contracts currently in-force or sold on or after that date.  The guarantee relieves SLNY of its obligation to file annual, quarterly, and current reports with the SEC on Form 10-K, Form 10-Q, and Form 8-K.


 
65

 


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

14.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

In the following presentation of condensed consolidating financial statements, the term "SLUS as Parent" is used to denote the Company as a standalone entity, isolated from its subsidiaries, and the term "Other Subs" is used to denote the Company's other subsidiaries, with the exception of SLNY.  All condensed consolidating financial statements are presented in thousands.

Condensed Consolidating Statements of Operations
For the nine-month period ended September 30, 2009

 
SLUS
as Parent
 
SLNY
 
Other
Subs
 
Elimination
 
Consolidated
Company
                             
Revenues
                           
                             
Premiums and annuity considerations
$
10,602 
 
$
90,410 
 
$
 
$
 
$
101,012 
Net investment income (1)
 
2,049,633 
   
208,693 
   
99,673 
   
   
2,357,999 
Net derivative (loss) income
 
(188,157)
   
5,278 
   
180,023 
   
   
(2,856)
Net realized investment (losses) gains, excluding
   impairment losses on available-for-sale
   securities
 
(7,677)
   
   
(727)
   
   
(8,401)
Other-than-temporary impairment losses (2)
 
(4,450)
   
(181)
   
(203)
   
   
(4,834)
Fee and other income
 
279,960 
   
6,034 
   
16,748 
   
   
302,742 
                             
Total revenues
 
2,139,911 
   
310,237 
   
295,514 
   
   
2,745,662 
                             
Benefits and Expenses
                           
                             
Interest credited
 
255,942 
   
35,261 
   
26,352 
   
   
317,555 
Interest expense
 
33,212 
   
769 
   
18,029 
   
   
52,010 
Policyowner benefits
 
26,799 
   
59,611 
   
31,650 
   
   
118,060 
Amortization of DAC, VOBA and VOCRA
 
434,372 
   
85,696 
   
(4,889)
   
   
515,179 
Other operating expenses
 
137,788 
   
34,162 
   
11,622 
   
   
183,572 
                             
Total benefits and expenses
 
888,113 
   
215,499 
   
82,764 
   
   
1,186,376 
                             
Income before income tax expense
 
1,251,798 
   
94,738 
   
212,750 
   
   
1,559,286 
                             
Income tax expense
 
359,512 
   
27,500 
   
63,677 
   
   
450,689 
Equity in the net income of subsidiaries
 
216,311 
   
   
   
(216,311)
   
                             
Net income
$
1,108,597 
 
$
67,238 
 
$
149,073 
 
$
(216,311)
 
$
1,108,597 

(1)  
SLUS’, SLNY’s and Other Subs’ net investment income includes an increase in market value of trading fixed maturity securities of $1,724.4 million, $168.9 million and $151.6 million, respectively, for the nine-month period ended September 30, 2009.
(2)  
SLUS’, SLNY’s and Other Subs’ OTTI losses for the nine-month period ended September 30, 2009 represent impairments related to credit loss.


 
66

 


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

14.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Operations
For the nine-month period ended September 30, 2008

 
 
SLUS
as Parent
 
SLNY
 
Other
Subs
 
Elimination
 
Consolidated
Company
                             
Revenues
                           
                             
Premiums and annuity considerations
$
12,131
 
$
78,430 
 
$
 
$
 
$
90,561 
Net investment loss  (1)
 
(779,714)
   
(43,159)
   
(38,055)
   
   
(860,928)
Net derivative loss  (2)
 
(181,756)
   
(7,533)
   
(83,759)
   
   
(273,048)
    Net realized investment losses, excluding
impairment losses on available-for-sale
securities
 
 
 
(234,835)
   
 
 
(29,099)
   
 
 
(29,560)
   
 
 
   
 
 
(293,494)
Other-than-temporary impairment losses
 
(11,278)
   
(5,117)
   
(1,869)
   
   
(18,264)
Fee and other income
 
341,421 
   
8,655 
   
29,923 
   
   
379,999 
                             
Total revenues
 
(854,031)
   
2,177 
   
(123,320)
   
   
(975,174)
                             
Benefits and Expenses
                           
                             
Interest credited
 
360,300 
   
32,861 
   
23,987 
   
   
417,148 
Interest expense
 
53,128 
   
(498)
   
33,503 
   
   
86,133 
Policyowner benefits
 
159,292 
   
57,815 
   
14,548 
   
   
231,655 
Amortization of DAC, VOBA and VOCRA  (3)
 
(516,743)
   
(76,010)
   
(214)
   
   
(592,967)
   Other operating expenses
 
168,018 
   
34,008 
   
21,645 
   
   
223,671 
                             
Total benefits and expenses
 
223,995 
   
48,176 
   
93,469 
   
   
365,640 
                             
Loss before income tax benefit
 
(1,078,026)
   
(45,999)
   
(216,789)
   
   
(1,340,814)
                             
Income tax benefit
 
(335,291)
   
(4,846)
   
(65,206)
   
   
(405,343)
Equity in the net loss of subsidiaries
 
(192,736)
   
   
   
192,736 
   
                             
Net loss
$
(935,471)
 
$
(41,153)
 
$
(151,583)
 
$
192,736 
 
$
(935,471)


 
(1)SLUS’, SLNY’s and Other Subs’ net investment loss includes a decrease in market value of trading fixed maturity securities of $1,420.7 million, $98.4 million and $156.9 million, respectively, for the nine-month period ended September 30, 2008.
 
(2)SLUS’ and SLNY’s net derivative loss for the nine-month period ended September 30, 2008 includes $165.8 million and $0.3 million, respectively, of income related to the Company’s adoption of FASB ASC Topic 820, which is further discussed in Note 4.
 
(3)SLUS’ and SLNY’s amortization of DAC, VOBA and VOCRA for the nine-month period ended September 30, 2008 includes $3.0 million and $0.2 million, respectively, of expenses related to the Company’s adoption of FASB ASC Topic 820, which is further discussed in Note 4.


 
67

 


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

14.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Operations
For the three-month period ended September 30, 2009

 
SLUS
as Parent
 
SLNY
 
Other
Subs
 
Elimination
 
Consolidated
Company
                             
Revenues
                           
                             
Premiums and annuity considerations
$
5,656 
 
$
29,861 
 
$
 
$
 
$
35,517 
Net investment income (1)
 
956,969 
   
86,866 
   
170,764 
   
   
1,214,599 
Net derivative (loss) income
 
(340,946)
   
(5,585)
   
42,085 
   
   
(304,446)
Net realized investment losses, excluding
impairment losses on available-for-sal
e securities
 
(5,285)
   
(41)
   
(238)
   
 
 
   
(5,564)
Other-than-temporary impairment losses (2)
 
   
   
   
   
Fee and other income
 
118,994 
   
2,629 
   
82,856 
   
   
204,479 
                             
Total revenues
 
735,388 
   
113,730 
   
295,467 
   
   
1,144,585 
                             
Benefits and Expenses
                           
                             
Interest credited
 
57,928 
   
9,097 
   
8,545 
   
   
75,570 
Interest expense
 
8,275 
   
(32)
   
4,598 
 
 
   
12,841 
Policyowner benefits
 
(23,110)
   
20,899 
   
25,744 
   
   
23,533 
Amortization of DAC, VOBA and VOCRA
 
56,032 
   
62,216 
   
28,043 
   
   
146,291 
Other operating expenses
 
63,699 
   
16,200 
   
2,838 
   
   
82,737 
                             
Total benefits and expenses
 
162,824 
   
108,380 
   
69,768 
   
   
340,972 
                             
Income  before income tax expense
 
572,564 
   
5,350 
   
225,699 
   
-
   
803,613 
                             
Income tax expense (benefit)
 
116,984 
   
(3,518)
   
72,474 
   
-
   
185,940 
Equity in the net income of subsidiaries
 
162,093 
   
   
   
(162,093)
   
                             
Net income
$
617,673 
 
$
8,868 
 
$
153,225 
 
$
(162,093)
 
$
617,673 

(1)  
SLUS’, SLNY’s and Other Subs’ net investment income includes an increase in market value of trading fixed maturity securities of $880.7 million, $75.6 million and $110.7 million, respectively, for the three-month period ended September 30, 2009.
(2)  
SLUS’, SLNY’s and Other Subs’ OTTI losses for the three-month period ended September 30, 2009 represent impairments related to credit loss.



 
68

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

14.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Operations
For the three-month period ended September 30, 2008

 
SLUS
as Parent
 
SLNY
 
Other
Subs
 
Elimination
 
Consolidated
Company
                             
Revenues
                           
                             
Premiums and annuity considerations
$
3,464 
 
$
26,725 
 
$
 
$
 
$
30,189 
Net investment loss  (1)
 
(483,107)
   
(43,549)
   
(47,048)
   
   
(573,704)
Net derivative loss
 
(193,980)
   
(5,545)
   
(59,650)
   
   
(259,175)
    Net realized investment losses, excluding
impairment losses on available-for-sale
securities
 
 
 
(238,070)
   
 
 
(29,172)
   
 
 
(29,542)
   
 
 
   
 
 
(296,784)
Other-than-temporary impairment losses
 
(11,278)
   
(5,117)
   
(1,869)
   
   
(18,264)
Fee and other income
 
110,397 
   
3,856 
   
10,073 
   
   
124,326 
                             
Total revenues
 
(812,574)
   
(52,802)
   
(128,036)
   
   
(993,412)
                             
Benefits and Expenses
                           
                             
Interest credited
 
113,416 
   
11,592 
   
8,137 
   
   
133,145 
Interest expense
 
19,478 
   
(37)
   
10,144 
   
   
29,585 
Policyowner benefits
 
78,719 
   
20,499 
   
4,272 
   
   
103,490 
Amortization of DAC, VOBA and VOCRA
 
(239,817)
   
(61,628)
   
3,387 
   
   
(298,058)
Other operating expenses
 
45,083 
   
10,503 
   
6,683 
   
   
62,269 
                             
Total benefits and expenses
 
16,879 
   
(19,071)
   
32,623 
   
   
30,431 
                             
Loss before income tax benefit
 
(829,453)
   
(33,731)
   
(160,659)
   
   
(1,023,843)
                             
Income tax benefit
 
(228,891)
   
(149)
   
(45,466)
   
   
(274,506)
Equity in the net loss of subsidiaries
 
(148,775)
   
   
   
148,775 
   
                             
Net loss
$
(749,337)
 
$
(33,582)
 
$
(115,193)
 
$
148,775 
 
$
(749,337)

(1)  
SLUS’, SLNY’s and Other Subs’ net investment loss includes a decrease in market value of trading fixed maturity securities of $712.0 million, $61.9 million and $98.0 million, respectively, for the three-month period ended September 30, 2008.


 
69

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

14.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Balance Sheets at September 30, 2009

 
SLUS
as Parent
 
SLNY
 
Other
Subs
 
Elimination
 
Consolidated
Company
ASSETS
                           
                             
Investments
                           
Available-for-sale fixed maturities at fair value
$
1,000,920 
 
$
180,881 
 
$
56,321 
 
$
 
$
1,238,122 
Trading fixed maturities at fair value
 
10,163,408 
   
1,354,553 
   
1,263,417 
   
   
12,781,378 
Investment in subsidiaries
 
750,650 
   
   
   
(750,650)
   
Mortgage loans
 
1,791,297 
   
166,511 
   
17,654 
   
   
1,975,462 
Derivative instruments – receivable
 
337,494 
   
   
   
   
337,494 
Limited partnerships
 
50,236 
   
   
   
   
50,236 
Real estate
 
155,948 
   
   
44,111 
   
   
200,059 
Policy loans
 
696,983 
   
208 
   
22,237 
   
   
719,428 
Other invested assets
 
40,448 
   
74 
   
   
   
40,522 
Cash and cash equivalents
 
2,377,436 
   
267,928 
   
376,842 
   
   
3,022,206 
Total investments and cash
 
17,364,820 
   
1,970,155 
   
1,780,582 
   
(750,650)
   
20,364,907 
                             
Accrued investment income
 
201,317 
   
15,648 
   
16,691 
   
   
233,656 
Deferred policy acquisition costs
 
2,410,536 
   
192,104 
   
104,514 
   
   
2,707,154 
Value of business and customer renewals acquired
 
157,515 
   
9,075 
   
   
   
166,590 
Net deferred tax asset
 
556,674 
   
   
   
(192,442)
   
364,232 
Goodwill
 
   
7,299 
   
   
   
7,299 
Receivable for investments sold
 
23,373 
   
1,861 
   
139 
   
   
25,373 
Reinsurance receivable
 
2,170,381 
   
124,745 
   
949,722 
   
   
3,244,848 
Other assets
 
198,180 
   
41,695 
   
1,839 
   
   
241,714 
Separate account assets
 
21,506,502 
   
924,326 
   
41,498 
   
   
22,472,326 
                             
Total assets
$
44,589,298 
 
$
3,286,908 
 
$
2,894,985 
 
$
(943,092)
 
$
49,828,099
                             
LIABILITIES
                           
                             
Contractholder deposit funds and other policy liabilities
$
15,355,960 
 
$
1,619,431 
 
$
802,752 
 
$
-
 
$
17,778,143 
Future contract and policy benefits
 
732,492 
   
97,465 
   
102,398 
   
   
932,355 
Payable for investments purchased
 
88,542 
   
108 
   
2,656 
   
   
91,306 
Accrued expenses and taxes
 
141,786 
   
(11,518)
   
26,481 
   
   
156,749 
Deferred tax liability
 
   
9,603 
   
182,839 
   
(192,442)
   
Debt payable to affiliates
 
883,000 
   
   
1,215,000 
   
   
2,098,000 
Reinsurance payable
 
1,930,898 
   
172,235 
   
1,054 
   
   
2,104,187 
Derivative instruments – payable
 
712,910 
   
   
65,213 
   
   
778,123 
Other liabilities
 
464,376 
   
59,503 
   
120,199 
   
   
644,078 
Separate account liabilities
 
21,506,502 
   
924,326 
   
41,498 
   
   
22,472,326 
                             
Total liabilities
 
41,816,466 
   
2,871,153 
   
2,560,090 
   
(192,442)
   
47,055,267 
                             
STOCKHOLDER’S EQUITY
                           
                             
Common stock
$
6,437 
 
$
2,100 
 
$
2,542 
 
$
(4,642)
 
$
6,437 
Additional paid-in capital
 
3,621,022 
   
389,963 
   
268,659 
   
(658,622)
   
3,621,022
Accumulated other comprehensive (loss) income
 
(18,822)
   
(2,749)
   
714 
   
2,035 
   
(18,822)
Accumulated (deficit) earnings
 
(835,805)
   
26,441 
   
62,980 
   
(89,421)
   
(835,805)
                             
Total stockholder’s equity
 
2,772,832 
   
415,755 
   
334,895
   
(750,650)
   
2,772,832 
                             
Total liabilities and stockholder’s equity
$
44,589,298 
 
$
3,286,908 
 
$
2,894,985 
 
$
(943,092)
 
$
49,828,099 


 
70

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

14.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Balance Sheets at December, 2008

 
SLUS
as Parent
 
SLNY
 
Other
Subs
 
Elimination
 
Consolidated
Company
ASSETS
                           
                             
Investments
                           
Available-for-sale fixed maturities at fair value
$
476,180 
 
$
148,124 
 
$
49,716 
 
$
 
$
674,020 
Trading fixed maturities at fair value
 
9,639,477 
   
988,809 
   
1,133,860 
   
   
11,762,146 
Investment in subsidiaries
 
450,444 
   
   
   
(450,444)
   
Mortgage loans
 
1,911,114 
   
171,889 
   
   
   
2,083,003 
Derivative instruments – receivable
 
727,103 
   
   
   
   
727,103 
Limited partnerships
 
78,289 
   
   
   
   
78,289 
Real estate
 
157,403 
   
   
44,067 
   
   
201,470 
Policy loans
 
704,548 
   
156 
   
24,703 
   
   
729,407 
Other invested assets
 
206,902 
   
4,529 
   
   
   
211,431 
Cash and cash equivalents
 
1,202,336 
   
377,958 
   
43,855 
   
   
1,624,149 
Total investments and cash
 
15,553,796 
   
1,691,465 
   
1,296,201 
   
(450,444)
   
18,091,018 
                             
Accrued investment income
 
250,170 
   
15,226 
   
17,168 
   
   
282,564 
Deferred policy acquisition costs
 
2,555,042 
   
233,401 
   
73,958 
   
   
2,862,401 
Value of business and customer renewals acquired
 
169,083 
   
10,742 
   
   
   
179,825 
Net deferred tax asset
 
910,344 
   
22,627 
   
   
(76,126)
   
856,845 
Goodwill
 
   
7,299 
   
   
   
7,299 
Receivable for investments sold
 
6,743 
   
430 
   
375 
   
   
7,548 
Reinsurance receivable
 
1,872,687 
   
82,976 
   
1,120,952 
   
   
3,076,615 
Other assets
 
200,218 
   
20,835 
   
1,787 
   
   
222,840 
Separate account assets
 
19,797,280 
   
690,524 
   
43,920 
   
   
20,531,724 
                             
Total assets
$
41,315,363 
 
$
2,775,525 
 
$
2,554,361 
 
$
(526,570)
 
$
46,118,679 
                             
LIABILITIES
                           
                             
Contractholder deposit funds and other policy liabilities
$
15,351,097 
 
$
1,348,109 
 
$
846,515 
 
$
 
$
17,545,721 
Future contract and policy benefits
 
847,228 
   
93,975 
   
73,485 
   
   
1,014,688 
Payable for investments purchased
 
212,788 
   
150,160 
   
565 
   
   
363,513 
Accrued expenses and taxes
 
81,362 
   
(21,325)
   
58,634 
   
   
118,671 
Deferred tax liability
 
   
   
76,126 
   
(76,126)
   
Debt payable to affiliates
 
883,000 
   
   
1,115,000 
   
   
1,998,000 
Reinsurance payable
 
1,509,989 
   
140,832 
   
   
   
1,650,821 
Derivative instruments – payable
 
1,327,126 
   
   
167,215 
   
   
1,494,341 
Other liabilities
 
510,238 
   
44,597 
   
51,110 
   
   
605,945 
Separate account liabilities
 
19,797,280 
   
690,524 
   
43,920 
   
   
20,531,724 
                             
Total liabilities
 
40,520,108 
   
2,446,872 
   
2,432,570 
   
(76,126)
   
45,323,424 
                             
STOCKHOLDER’S EQUITY
                           
                             
Common stock
$
6,437 
 
$
2,100 
 
$
2,542 
 
$
(4,642)
 
$
6,437 
Additional paid-in capital
 
2,872,242 
   
389,963 
   
209,749 
   
(599,712)
   
2,872,242 
Accumulated other comprehensive loss
 
(129,884)
   
(20,008)
   
(3,626)
   
23,634 
   
(129,884)
Accumulated deficit
 
(1,953,540)
   
(43,402)
   
(86,874)
   
130,276 
   
(1,953,540)
                             
Total stockholder’s equity
 
795,255 
   
328,653 
   
121,791 
   
(450,444)
   
795,255  
                             
Total liabilities and stockholder’s equity
$
41,315,363 
 
$
2,775,525 
 
$
2,554,361 
 
$
(526,570)    
 
$
46,118,679


 
71

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

14.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Cash Flow
For the nine-month period ended September 30, 2009

 
SLUS
as Parent
 
SLNY
 
Other
Subs
 
Elimination
 
Consolidated
Company
                             
Cash Flows From Operating Activities:
                           
Net income
$
1,108,597 
 
$
67,238 
 
$
149,073 
 
$
(216,311)
 
$
1,108,597 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                           
Net amortization of premiums on investments
 
7,724 
   
212 
   
(1,832)
   
   
6,104 
Amortization of DAC, VOBA and VOCRA
 
434,372 
   
85,696 
   
(4,889)
   
   
515,179 
Depreciation and amortization
 
3,447 
   
233 
   
603 
   
   
4,283 
Net loss (gain) on derivatives
 
97,978 
   
(5,278)
   
(191,801)
   
   
(99,101)
Net realized losses and OTTI credit losses on
available-for-sale investments
 
12,127 
   
178 
   
930 
   
   
13,235 
Changes in fair value of trading investments
 
(1,724,398)
   
(168,863)
   
(151,624)
   
   
(2,044,885)
Net realized losses (gains) on trading investments
 
257,385 
   
10,751 
   
(25)
   
   
268,111 
Undistributed loss on private equity limited
partnerships
 
11,477 
   
   
   
   
11,477 
Interest credited to contractholder deposits
 
255,942 
   
35,261 
   
26,352 
   
   
317,555 
Deferred federal income taxes
 
302,403 
   
21,532 
   
103,955 
   
   
427,890 
Equity in net income of subsidiaries
 
(216,311)
   
   
   
216,311 
   
Changes in assets and liabilities:
                           
Additions to DAC, VOBA and VOCRA
 
(242,545)
   
(37,282)
   
(25,667)
   
   
(305,494)
Accrued investment income
 
48,853 
   
(422)
   
477 
   
   
48,908 
Net change in reinsurance receivable/payable
 
108,502 
   
(7,844)
   
172,284 
   
   
272,942 
Future contract and policy benefits
 
(114,736)
   
3,490 
   
28,913 
   
   
(82,333)
Other, net
 
36,786 
   
(147,857)
   
36,802 
   
   
(74,269)
                             
Net cash provided by (used in) operating activities
 
387,603 
   
(142,955)
   
143,551 
   
   
388,199 
                             
Cash Flows From Investing Activities:
                           
Sales, maturities and repayments of:
                           
Available-for-sale fixed maturities
 
34,569 
   
4,102 
   
1,435 
   
   
40,106 
Trading fixed maturities
 
965,384 
   
209,827 
   
27,957 
   
   
1,203,168 
Mortgage loans
 
119,355 
   
7,503 
   
(36)
   
(18,357)
   
108,465 
Other invested assets
 
(125,692)
   
1,587 
   
   
   
(124,105)
Purchases of:
                           
Available-for-sale fixed maturities
 
(333,234)
   
(3,578)
   
(311)
   
   
(337,123)
Trading fixed maturities
 
(50,392)
   
(419,107)
   
(1,634)
   
   
(471,133)
Mortgage loans
 
(9,902)
   
(2,125)
   
(18,389)
   
18,357 
   
(12,059)
Real estate
 
(904)
   
   
(647)
   
   
(1,551)
Other invested assets
 
(97,908)
   
(15)
   
   
   
(97,923)
Net change in other investments
 
(109,307)
   
8,831 
   
   
   
(100,476)
Net change in policy loans
 
7,565 
   
(52)
   
2,466 
   
   
9,979 
                             
Net cash provided by (used in) investing activities
$
399,534 
 
$
(193,027)
 
$
10,841 
 
$
 
$
217,348 

Continued on next page

 
72

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

14.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Cash Flow (continued)
For the nine-month period ended September 30, 2009

 
SLUS
as Parent
 
SLNY
 
Other
Subs
 
Elimination
 
Consolidated
Company
                             
Cash Flows From Financing Activities:
                           
Additions to contractholder deposit funds
$
1,859,301 
 
$
416,555 
 
$
26,211 
 
$
 
$
2,302,067 
Withdrawals from contractholder deposit funds
 
(2,123,945)
   
(183,188)
   
(6,526)
   
   
(2,313,659)
Capital contribution to subsidiaries
 
(58,910)
   
   
   
58,910 
   
Capital contribution from Parent
 
748,652 
   
   
58,910 
   
(58,910)
   
748,652 
Debt proceeds
 
   
   
100,000 
   
   
100,000 
Other, net
 
(37,135)
   
(7,415)
   
   
   
(44,550)
                             
Net cash provided by financing activities
 
387,963 
   
225,952 
   
178,595 
   
   
792,510 
                             
Net change in cash and cash equivalents
 
1,175,100 
   
(110,030)
   
332,987 
   
   
1,398,057 
                             
Cash and cash equivalents, beginning of period
 
1,202,336 
   
377,958 
   
43,855 
   
   
1,624,149 
                             
Cash and cash equivalents, end of period
$
2,377,436 
 
$
267,928 
 
$
376,842 
 
$
 
$
3,022,206 
                             



 
73

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

14.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Cash Flows
For the nine-month period ended September 30, 2008

 
SLUS
as Parent
 
SLNY
 
Other
Subs
 
Elimination
 
Consolidated
Company
                             
Cash Flows From Operating Activities:
                           
Net loss
$
(935,471)
 
$
(41,153)
 
$
(151,583)
 
$
192,736 
 
$
(935,471)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
                           
Net amortization of premiums on investments
 
16,334 
   
2,460 
   
(930)
   
   
17,864 
Amortization of DAC, VOBA and VOCRA
 
(516,742)
   
(76,011)
   
(214)
   
   
(592,967)
Depreciation and amortization
 
4,079 
   
233 
   
640 
   
   
4,952
Net loss on derivatives
 
137,665 
   
7,533 
   
78,071 
   
   
223,269 
Net realized losses on available-for-sale investments
 
6,573 
   
4,812 
   
2,024 
   
   
13,409 
Changes in fair value of trading investments
 
1,420,662 
   
98,448 
   
156,929 
   
   
1,676,039 
Net realized losses on trading investments
 
268,678 
   
30,182 
   
25,989
   
   
324,849 
Undistributed loss on private equity limited
partnerships
 
4,919 
   
   
   
   
4,919 
Interest credited to contractholder deposits
 
360,300 
   
32,861 
   
23,987 
   
   
417,148 
Deferred federal income taxes
 
(318,131)
   
(4,875)
   
(27,709)
   
   
(350,715)
Equity in net loss of subsidiaries
 
192,736 
   
   
   
(192,736)
   
Changes in assets and liabilities:
                           
Additions to DAC, VOBA and VOCRA
 
(192,632)
   
(21,978)
   
(58,579)
   
   
(273,189)
Accrued investment income
 
55,277 
   
(215)
   
(11,596)
   
   
43,466 
Net change in reinsurance receivable/payable
 
137,859 
   
62,170 
   
(200,705)
   
   
(676)
Future contract and policy benefits
 
49,187 
   
(4,125)
   
13,553 
   
   
58,615 
Other, net
 
36,197 
   
(437)
   
100,214 
   
   
135,974 
                             
Net cash provided by (used in) operating activities
 
727,490 
   
89,905 
   
(49,909)
   
   
767,486 
                             
Cash Flows From Investing Activities:
                           
Sales, maturities and repayments of:
                           
Available-for-sale fixed maturities
 
78,581 
   
5,956 
   
4,888 
   
   
89,425 
Trading fixed maturities
 
1,115,703 
   
179,748 
   
216,932 
   
   
1,512,383 
Mortgages loans
 
233,030 
   
7,143 
   
20,672 
   
   
260,845 
Real estate
 
1,160 
   
   
   
   
1,160 
Other invested assets
 
231,748 
   
27,225 
   
   
   
258,973 
Purchases of:
                           
Available-for-sale fixed maturities
 
(46,363) 
   
(14,027)
   
(7,737)
   
   
(68,127) 
Trading fixed maturities
 
(710,344)
   
(256,338)
   
(848,805)
   
   
(1,815,487)
Mortgage loans
 
(23,096)
   
(11,150)
   
(19,000)
   
   
(53,246)
Real estate
 
(3,861)
   
   
(303)
   
   
(4,164)
Other invested assets
 
(79,977)
   
   
   
   
(79,977)
Net change in other investments
 
(232,971)
   
(27,225)
   
   
   
(260,196)
Net change in policy loans
 
(9,049)
   
(57)
   
1,300 
   
   
(7,806)
                             
Net cash provided by (used in) investing activities
$
554,561 
 
$
(88,725)
 
$
(632,053)
 
$
 
$
(166,217)

Continued on next page



 
74

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

14.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Cash Flows (continued)
For the nine-month period ended September 30, 2008

 
SLUS
as Parent
 
SLNY
 
Other
Subs
 
Elimination
 
Consolidated
Company
                             
Cash Flows From Financing Activities:
                           
Additions to contractholder deposit funds
$
1,369,898 
 
$
285,681 
 
$
89,500 
 
$
 
$
1,745,079 
Withdrawals from contractholder deposit funds
 
(2,448,372)
   
(260,019)
   
(4,667)
   
   
(2,713,058)
Capital contribution from Parent
 
300,000
   
   
   
   
300,000
Debt proceeds
 
60,000 
   
   
115,000 
   
   
175,000 
Other, net
 
(21,298)
   
(8,450)
   
(12)
   
   
(29,760)
                             
Net cash (used in) provided by financing activities
 
(739,772)
   
17,212 
   
199,821
   
   
(522,739)
                             
Net change in cash and cash equivalents
 
542,279 
   
18,392
   
(482,141)
   
   
78,530 
                             
Cash and cash equivalents, beginning of period
 
415,494 
   
65,901 
   
688,306 
   
   
1,169,701 
                             
Cash and cash equivalents, end of period
$
957,773 
 
$
84,293 
 
$
206,165 
 
$
 
$
1,248,231 
                             







 
75

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Item 2. Management’s Discussion and Analysis of Financial Position and Results of Operations.

Pursuant to General Instruction H(2)(a) of Form 10-Q, the registrant, Sun Life Assurance Company of Canada (U.S.) (the “Company”), elects to omit the Management’s Discussion and Analysis of Financial Position and Results of Operations.  Below is an analysis of the Company’s results of operations that explains material changes in the Condensed Consolidated Statements of Operations between the nine-month periods ended September 30, 2009 and September 30, 2008.

Cautionary Statement

This Form 10-Q may include forward-looking statements by the Company under the Private Securities Litigation Reform Act of 1995. These statements are not matters of historical fact; they relate to such topics as future product sales, volume growth, market share, market and interest rate risk 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, including but not limited to those set forth in Part I, Item IA, Risk Factors, in the Company's annual report on Form 10-K for the year ended December 31, 2008.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 Company has identified the following estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability: deferred policy acquisition costs (“DAC”), the value of business acquired (“VOBA”), the value of customer renewals acquired (“VOCRA”), derivative instruments, the fair value of financial instruments, policy liabilities and accruals, other-than-temporary impairments of investments, goodwill and income taxes.  In developing these estimates, management makes subjective and complex judgments that are inherently uncertain and subject to material change as facts and circumstances develop. Although variability is inherent in these estimates, management believes the amounts provided are appropriate based upon the facts available upon compilation of the financial statements. For discussion of the Company’s critical accounting estimates, see Management’s Discussion and Analysis of Financial Position and Result of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.




 
76

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULTS OF OPERATIONS

Nine-month period ended September 30, 2009 compared to the nine-month period ended September 30, 2008:

Net Income

The Company’s net income (loss) was $1,108.6 million and $(935.5) million for the nine-month periods ended September 30, 2009 and 2008, respectively.  Income (loss) before income taxes was $1,559.3 million and $(1,340.8) million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The significant changes are described below.

REVENUES

Total revenues were $2,745.7 million and $(975.2) million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The increase of $3,720.9 million was primarily due to the following:

Premium and annuity considerations - were $101.0 million and $90.6 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The $10.4 million increase was primarily attributable to an $8.5 million increase in group stop loss premiums, a $5.0 million increase in group disability premiums, a $4.4 million increase in group dental premiums and a $0.5 million increase in group life premiums, offset by $6.1 million decrease in group health premiums and $1.9 million decrease in annuity considerations.  The increase in group stop loss and group disability premiums was due to increased sales.  The decrease in group health premiums reflects the Company’s decision to discontinue the sale of group fully-insured medical products.  This block of business is set to expire at the end 2009.

Net investment income (loss) - was $2,358.0 million and $(860.9) million for the nine-month periods ended September 30, 2009 and 2008, respectively.

Investment income, excluding the mark to market of the trading portfolio, partnership income, and assumed and ceded investment income, was $535.8 million and $830.2 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The decrease of $294.5 million during 2009, as compared to 2008, was the result of lower average investment yield which decreased investment income by approximately $319.8 million, offset by higher average invested assets which increased investment income by approximately $25.3 million.

The change in investment income (loss) primarily related to changes in the market value of securities in the trading portfolio and limited partnerships was $2,024.1 million and $(1,681.0) million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The change in the market value of the trading portfolio was primarily related to improvement in the market conditions in the nine-month period ended September 30, 2009, as compared to the nine-month period ended September 2008.  Credit spreads tightened in the nine-month period ended September 30, 2009, as compared to widening credit spreads that were greater than the overall decrease in risk free rates during the nine-month period ended September 30, 2008.

Investment income on funds withheld reinsurance portfolios is included as a component of net investment income in the Company’s condensed consolidated statements of operations.  The Company assumed net investment (loss) income of $(102.7) million and $58.8 million for the nine-month periods ended September 30, 2009 and 2008, respectively, and ceded net investment income of $99.2 million and $69.0 million for the nine-month period ended September 30, 2009 and 2008, respectively, related to the Company’s funds withheld reinsurance agreements.

The increase in investment income was offset by the $161.5 million decrease in assumed investment income and the $30.2 million increase in ceded investment income during 2009 as compared to 2008.  The assumed investment income relates to the funds withheld reinsurance agreement between Sun Life Financial (U.S.) Reinsurance Company (“Sun Life Vermont”), a subsidiary of the Company, and Sun Life Assurance Company of Canada (“SLOC”), an affiliate.  The change in ceded investment income primarily relates to the funds withheld reinsurance agreement between the Company and SLOC for single premium whole life (“SPWL”) policies.

 
77

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

REVENUES (Continued)

Net derivative loss - was $2.9 million and $273.0 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  Derivative losses primarily represent fair value changes of interest rate swaps resulting from declining swap interest rates and the net interest received or paid on swap agreements.  Generally, as interest rates decline, the market value of the Company's interest rate swaps decreases.  This is due to the fact that, in most instances, the Company is paying a fixed interest rate and receiving a floating rate on the swaps.

Net derivative loss for the nine-month periods ended September 30, 2009 and 2008 includes an increase (decrease) in income of $297.9 million and $(130.8) million, respectively, related to increase (decrease) in the fair value of interest rate swap agreements as a result of change in the applicable interest rate.  The $428.7 million increase in income during the nine-month period ended September 30, 2009 as compared to the nine-month period ended September 30, 2008, was offset by a $111.5 million decrease in income related to changes in the fair values of call options and futures and by a $34.2 million decrease related to expenses on swap agreements.

The net income on embedded derivative liabilities for the nine-month periods ended September 30, 2009 and 2008 was $92.6 million and $105.5 million, respectively.  The income on embedded derivatives for the nine-month period ended September 30, 2008 included $166.1 million related to the decrease in the value of embedded derivative liabilities, upon the Company’s adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820 “Fair Value Measurements and Disclosures,” (formerly, Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements”) on January 1, 2008.

All derivatives are recognized on the Company’s condensed consolidated balance sheets at fair value.  Net interest received or paid on swap agreements and changes in the fair value of derivatives are reported in the Company’s condensed consolidated statements of operations as a component of net derivative loss.  The Company believes that these derivatives provide economic hedges and the cost of formally documenting the effectiveness of the fair value of the hedged items in accordance with the provisions of FASB ASC Topic 815 “Derivatives and Hedging,” (formerly,  SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities”) is not justified at this time.

The Company issues annuity contracts and certain funding agreements that contain a derivative instrument that is embedded in the contract.  Upon issuing the contract, the embedded derivative is separated from the host contract (annuity contract or funding agreement) and is carried at fair value.  The Company also purchases call options and futures on the Standard & Poor’s 500 Composite Stock Price Index (“S&P 500 Index”) (“S&P”, “S&P 500”, and “Standard & Poor’s” are trademarks of The McGraw Hill Companies, Inc. and have been licensed for use by the Company) to economically hedge its obligations under certain fixed index annuity contracts.  Certain funding agreement contracts are highly-individualized and typically involve the issuance of foreign currency denominated contracts backed by cross currency swaps or equity-linked cross currency swaps.  The combination of these swaps with interest rate swaps allows the Company to lock in U.S. dollar fixed rate payments for the life of the funding agreement.

As a component of its investment strategy and to reduce its exposure to interest rate risk, the Company utilizes interest rate swap agreements.  Interest rate swap agreements are agreements to exchange with a counterparty interest rate payments of differing character (e.g., fixed-rate payments exchanged for floating-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes.  The Company also utilizes equity and interest rate derivatives to hedge against stock market exposure inherent in the guaranteed minimum living and death benefit features of the Company’s variable annuities.



 
78

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

REVENUES (Continued)

Net derivative loss consisted of the following (in 000’s):

 
Nine-month periods ended September 30,
 
2009
2008
     
Net expense on swap agreements
$                      (76,507)
$                      (42,294)
Change in fair value of swap agreements
   (interest rate, currency, and equity)
297,918
(130,840)
Change in fair value of options, futures and
   embedded derivatives
(224,267)
(99,914)
     
Net derivative loss
$                       (2,856)
$                    (273,048)

Net realized investment losses, excluding impairment losses on available-for-sale securities - were $8.4 million and $293.5 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The $285.1 million decrease during the nine-month period ended September 30, 2009 as compared to the nine-month period ended September 30, 2008, was primarily due to $298.3 million realized losses on certain trading fixed maturity securities in 2008.  All realized losses in trading fixed maturity securities for the nine-month period ended September 30, 2009 are reported in the Company’s net investment income.  The net realized losses for the nine-month period ended September 30, 2009 primarily related to write-downs on mortgage loans.

Other-than-temporary impairment losses - were $4.8 million and $18.3 million for the nine-month periods ended September 30, 2009 and 2008, respectively, related to available-for-sale fixed maturity securities.  The other-than-temporary impairment (“OTTI”) losses for the nine-month period ended September 30, 2009 relate to credit losses and were recorded to earnings in accordance with certain aspects of FASB ASC Topic 320, “Fair Value Measurements and Disclosures,” which were previously issued as FASB Staff Position (“FSP”) Nos. FAS 115-2 and 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” that the Company adopted on April 1, 2009 as described in Note 5.  The Company did not incur any OTTI losses related to other factors during the nine-month period ended September 30, 2009 and therefore did not record any reclassification of OTTI losses from earnings to other comprehensive loss.

Fees and other income - were $302.7 million and $380.0 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  Fees and other income consist primarily of mortality and expense charges, rider fees, surrender charges and other income.  Mortality and expense charges and rider fees are based on the market values of the assets in the separate accounts supporting the contract.  Mortality and expense charges and rider fees combined were $207.6 million and $240.3 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  Variable product fees represented 1.31% and 1.34% of the average variable annuity separate account balances for the nine-month periods ended September 30, 2009 and 2008, respectively.  Average separate account assets were $21.2 billion and $23.9 billion for the nine-month periods ended September 30, 2009 and 2008, respectively.  The decrease in the average separate account assets was primarily related to the surrender of a reinsured bank-owned life insurance (“BOLI”) policy.

Surrender charges represent revenues earned on the early withdrawal of fixed, fixed index, variable annuity, individual universal life (“UL”) and variable universal life (“VUL”) policyholder balances.  Surrender charges on fixed, fixed index and variable annuities, UL and VUL surrenders generally are assessed at declining rates applied to policyholder surrenders during the first four to ten years of the contract.  Total surrender charges were $15.8 million and $16.6 million for the nine-month periods ended September 30, 2009 and 2008, respectively.


 
79

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

REVENUES (Continued)

Fees and other income (continued)

Other income represents fees charged for the cost of insurance, investment advisory services, asset participation fees and administrative service fees.  Other income was $79.3 million and $123.1 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The $43.8 million decrease during the nine-month period ended September 30, 2009 was primarily due to unearned revenue liabilities and ceded fee income.  Front-ended fees are deferred as unearned revenue and recognized in proportion to the emergence of actual profits.  Actual gross profits related to certain UL products that Sun Life Vermont assumed from SLOC declined in the period due to a reduction in the fair value of long-term interest rate swaps held in the fund withheld investment portfolio.  The increase in ceded fee income relates to the reinsurance agreement between the Company and Sun Life Reinsurance (Barbados) No. 3 Corp. (“BarbCo 3”) which became effective on February 11, 2009.

BENEFITS AND EXPENSES

Total benefits and expenses were $1,186.4 million and $365.6 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The increase of $820.8 million was primarily due to the following:

Interest credited - to policyholders was $317.6 million and $417.1 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The $99.5 million decrease was the result of a lower average crediting rate, decreasing interest credited by $50.4 million and lower average policyholder balances, which decreased interest credited by $8.0 million.  In the nine-month period ended September 30, 2009, the Company changed the classification of certain expenses from interest credited to other operating expenses.  The reclassification accounts for the remainder of the decrease.

Interest expense - was $52.0 million and $86.1 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The $34.1 million decrease in interest expense was primarily due to a decrease in interest on the Company’s promissory and demand notes which was attributable to a decrease in LIBOR during 2009, as compared to 2008, and the promissory note redemption on December 29, 2008 of $62.0 million of the $80.0 million that the Company issued to Sun Life (Hungary) Group Financing Limited Company (“Sun Life (Hungary) LLC”), an affiliate.

Policyholder benefits - were $118.1 million and $231.7 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The $113.6 million decrease in 2009 compared to 2008 was primarily due to a $158.4 million decrease in reserves, a $15.7 million decrease in benefits due to reimbursement related to the surrender of a reinsured BOLI policy and a $5.1 million decrease in surrender benefits, offset by a $50.0 million increase in death benefits, a $9.8 million increase in annuity payments, and a $6.4 million increase in health benefits paid.  The decrease in reserves was mainly attributable to reserves for guaranteed minimum death benefits (“GMDB”) on variable annuity products.  The decrease in GMDB reserves represents a decrease in the difference between guaranteed benefits and variable annuity account values.  Variable annuity account value increases are driven primarily by improvement in the equity markets.  The increase in death benefits was primarily related to certain variable annuity products.



 
80

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

BENEFITS AND EXPENSES (Continued)

Amortization of DAC - relates to the amortization of costs of acquiring new business, which vary with and are primarily related to the production of new business.  Such acquisition costs include commissions, costs of policy issuance and underwriting and selling expenses. Amortization expense was $501.9 million and $(497.7) million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The $999.6 million increase in amortization expense during the nine-month period ended September 30, 2009, as compared with the nine-month period ended September 30, 2008, was attributable to a $1,221.7 million increase in current period amortization expense and interest on the DAC asset, offset by $222.1 million decrease in expense, related to changes in estimated gross profits.

The $1,221.7 million increase in current period amortization expense and interest was primarily due to improvement in actual gross profits in 2009, relative to 2008, which was mostly related to changes in the liabilities held for guaranteed minimum benefits on certain variable annuity products as a result of changes in equity markets and to changes in the fair value of trading fixed maturity investments during the periods.  The Company tested its DAC asset for future recoverability, and determined that this asset was not impaired at September 30, 2009.  The $222.1 million decrease related to updates to profitability projections due to actual changes in policies in-force.

The Company tests its DAC asset for loss recognition on a quarterly basis.  The test is performed by comparing the GAAP net liability to the future expected gross profits; an adjustment is required if the current GAAP net liability is lower than the future expected gross profits.  Amortization expense for the nine-month period ended September 30, 2009 included an expense of $27.0 million due to loss recognition testing.  The Company did not record any expenses related to loss recognition testing for the nine-month period ended September 30, 2008.

Amortization of VOBA and VOCRA - relates to the actuarially-determined value of in-force business on November 1, 2001, the date that the Company acquired Keyport Life Insurance Company, and at May 31, 2007, the effective date that the Company’s subsidiary, Sun Life Insurance and Annuity Company of New York ("SLNY"), entered into a series of agreement with Sun Life and Health Insurance Company (U.S.) (“SLHIC”), an affiliate, pursuant to which SLNY has agreed to assume direct responsibility for all sales and administration of existing and new business issued in New York (collectively the “SLHIC to SLNY asset transfer”).  This amount is amortized in proportion to the projected emergence of profits or premium income over the estimated lives of the contracts.  Amortization was $13.3 million and $(95.3) million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The $108.6 million increase in amortization expense primarily related to improvements in actual gross profits driven by increases in the fair value of fixed maturity investments, as well as changes in estimated future gross profits.





 
81

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

BENEFITS AND EXPENSES (Continued)

Other operating expenses - were $183.6 million and $223.7 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The $40.1 million decrease in 2009 compared to 2008 was primarily due to an $18.1 million decrease in premium taxes and a $22.0 million decrease in other operating expenses.  The decrease in premium taxes was primarily driven by a decrease in BOLI sales in 2009 as compared to 2008.

Of the $22.0 million decrease in other operating expenses, $44.2 million was due primarily to the fact that, starting on January 1, 2009, Sun Life Vermont no longer assumed the risk associated with any new UL policies issued by SLOC in accordance with the reinsurance agreement between the Sun Life Vermont and SLOC, as well as the ceding of the risk associated with certain of the Company’s VUL policies to BarbCo 3 which occurred on February 11, 2009 in accordance with the reinsurance agreement between the Company and BarbCo 3.  The decrease in other operating expenses was also due to cost reduction initiatives taken by the Company’s management during the first quarter of 2009.  In the nine-month period ended September 30, 2009, the Company changed the classification of certain expenses from interest credited to other operating expenses.  The reclassification offsets the above decreases.

Income tax expense (benefit) - was $450.7 million and $(405.3) million for the nine-month periods ended September 30, 2009 and September 30, 2008, respectively.  The effective tax rates for the same periods were 28.9% and 30.2%, respectively. The effective rate for the nine-month period ended September 30, 2009 differs from the U.S. federal statutory tax rate of 35% primarily due to a release of the accumulated recorded valuation allowance of $91.6 million against deferred tax assets for impairment losses on investment assets, tax benefits from the separate account dividends received deduction and tax credits.  The effective tax rate for the nine-month period ended September 30, 2008 differs from the U.S. federal statutory tax rate of 35% primarily due to an increase in the valuation allowance against deferred tax assets for impairment losses, offset by tax benefits from the separate account dividends received deduction and tax credits.  The increase in valuation allowance during the nine-month period ended September 30, 2008 reduced the recorded tax benefit on the pre-tax loss incurred for that period while the tax benefits referenced above served to increase the recorded tax benefit.


 
82

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

Results of Operations by Segment

The Company’s net income (loss) from operations reflects the operations of its four business segments:  Wealth Management, Individual Protection, Group Protection, and Corporate.

The following provides a summary of net income (loss) from operations by segment.

Wealth Management Segment

The Wealth Management Segment sells a full range of retirement-oriented insurance products that provide fixed, indexed or variable returns to policyholders.  Annuities are insurance products designed to offer individuals protection against the risk of outliving their financial assets during retirement.  Annuities offer a tax-deferred means of accumulating savings for retirement needs and provide a source of income in the payout period.  The Company earns spread income from fixed and indexed annuities; variable annuities primarily produce fee income.  This segment also markets funding agreements to both related and unrelated third parties.

The segment’s principal products are described below:

Variable Annuities - Variable annuities offer a selection of underlying investment alternatives that may satisfy a variety of policyholder risk/return objectives.  Under a variable annuity, the policyholder has the opportunity to select separate account investment options (consisting of underlying mutual funds), which pass the investment risk directly to the policyholder in return for the potential of higher returns.  Variable annuities also include guaranteed fixed interest options and benefits.  The Company has several different variable annuity products that offer various separate account investment choices, depending on the product, and guaranteed fixed interest options.

Fixed Annuities - Fixed annuity products are primarily single premium deferred annuities ("SPDA").  An SPDA policyholder typically makes a single premium payment at the time of issuance.  The Company obligates itself to credit interest to the policyholder's account at a rate that is guaranteed for an initial term and is reset annually thereafter for certain of the Company’s annuity products, subject to a guaranteed minimum rate.

Fixed Index Annuities - Fixed index annuities credit interest to the policyholder using a formula based upon the positive change in value of a specified equity index.  The Company’s fixed index annuity products calculate interest earnings using the S&P 500 Index.  The Company’s fixed index products also provide a guarantee of principal (less withdrawals) at the end of the term or surrender charge period.









 
83

 


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

Wealth Management Segment (continued)

Institutional Investment Contracts - Institutional investment contracts are funding agreements issued to institutional investors or to entities that in turn issue promissory notes to unrelated third parties.  These contracts may contain any of a number of features including variable or fixed interest rates and fixed index options, and may be denominated in foreign currencies.

The Company uses derivative instruments to manage the risks inherent in the contract options of many of these products.

In 1997, the Company discontinued the marketing of group pension products in the United States.  Although these products are not currently sold in the U.S., the Company continues to hold an in-force block of U.S. group retirement business.  A significant portion of these pension contracts are non-surrenderable, resulting in limited liquidity exposure to the Company.

The Company issued floating rate funding agreements to its affiliates, Sun Life Financial Global Funding III, L.L.C., Sun Life Financial Global Funding II, L.L.C. and Sun Life Financial Global Funding, L.L.C.  The impact of these agreements is described in Note 2 of the Company’s condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.

Other - The Wealth Management Segment currently manages a closed block of SPWL insurance policies, a retirement-oriented tax-advantaged life insurance product.  The Company discontinued sales of the SPWL product in response to certain tax law changes in the 1980s.  The Company had SPWL policyholder balances of $1.5 billion and $1.6 billion at September 30, 2009 and December 31, 2008, respectively.  This entire block of business is reinsured on a funds withheld, coinsurance basis with SLOC.  The impact of the SPWL reinsurance agreement on the Company’s financial statements is described in Note 7 of the Company’s condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.

The Company markets its annuity products through an affiliated wholesale distribution organization, Sun Life Financial Distributors, Inc., and through a variety of unaffiliated retail and wholesale organizations, including securities brokers, financial institutions, insurance agents and financial advisers.

On September 6, 2006, the Company entered into an agreement with Credit and Repackaged Securities Limited Series 2006-10 Trust (the "CARS Trust"), pursuant to which the Company is the sole beneficiary of the CARS Trust.  The impact of this agreement on the Company’s financial statements is described in Note 1 of the Company’s condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.




 
84

 

 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Wealth Management Segment (continued)

The following is a Statement of Operations for the Wealth Management Segment for the nine-month periods ended September 30 (in 000’s):

 
2009
 
2008
Revenues
     
       
Premiums and annuity considerations
$
10,754
 
$
12,650
Net investment income (loss)
2,202,559
 
(827,537)
Net derivative loss
(144,967)
 
(189,574)
Net realized investment losses, excluding
   impairment losses on available-for-sale
   securities
(11,034)
 
(259,039)
Other-than-temporary impairment losses
(203)
 
(1,869)
Fee and other income
250,940
 
279,687
       
Total revenues
2,308,049
 
(985,682)
       
Benefits and Expenses
     
       
Interest credited
287,677
 
379,747
Interest expense
25,517
 
31,825
Policyowner benefits
34,403
 
158,887
Amortization of DAC, VOBA and VOCRA
508,704
 
(592,816)
Other operating expenses
120,376
 
109,323
       
Total benefits and expenses
976,677
 
86,966
       
Income (loss) before income tax expense
benefit)
1,331,372
 
(1,072,648)
       
Income tax expense (benefit)
451,813
 
(398,571)
       
Net income (loss)
$
879,559
 
$
(674,077)

Income (loss) before income tax expense (benefit) increased by $2,404.0 million during the nine-month period ended September 30, 2009 as compared to the nine-month period ended September 30, 2008.  The significant changes are described below.


 
85

 


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Wealth Management Segment (continued)

REVENUES

Total revenues were $2,308.0 million and $(985.7) million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The increase of $3,293.7 million was primarily due to the following:

Net investment income (loss) - was $2,202.6 million and $(827.5) million for the nine-month periods ended September 30, 2009 and 2008, respectively.  Net investment income (loss), excluding the mark to market of the trading portfolio and ceded investment income, was $466.8 million and $728.0 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The decrease of $261.2 million during 2009, as compared to 2008, was the result of a lower average investment yield which decreased investment income by $269.4 million, offset by an increase in average invested assets which increased investment income by $8.2 million.

Investment income (loss) related to changes in the market value of securities in the trading portfolio was $1,824.8 million and $(1,487.7) million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The increase in market value of the trading portfolio was primarily due to improvement in the market conditions in the nine-month period ended September 30, 2009, as compared to the nine-month period ended September 30, 2008.  Credit spreads tightened during the nine-month period ended September 30, 2009, as compared to widening credit spreads that were greater than the overall decrease in risk free rates during the nine-month period ended September 30, 2008.

The increase in investment income was offset by a $21.2 million increase in ceded investment income under funds withheld reinsurance agreements during the nine-month period ended September 30, 2009, as compared to the nine-month period ended September 30, 2008.  The change in ceded investment income was primarily due to the reinsurance of the SPWL policies to SLOC.

Net derivative loss - was $145.0 million and $189.6 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The net derivative loss for the nine-month periods ended September 30, 2009 and 2008 includes an increase (decrease) in income of $197.4 million and $(113.7) million , respectively, related to the increase (decrease) in the fair value of interest rate swap agreements as a result of changes in the applicable interest rate and currency exchange rates.

The $311.1 million increase in income in the nine-month period ended September 30, 2009, as compared to the nine-month period ended September 30, 2008, was offset by a $128.3 million decrease in income related to embedded derivatives, a $112.3 million increase in expense related to the change in the fair value of call options and futures, and a $25.9 million increase in net expense on swap agreement.  The income related to embedded derivatives for the nine-month period ended September 30, 2008 included $166.1 million related to the Company’s adoption of FASB ASC Topic 820 on January 1, 2008.

Net derivative loss for the Wealth Management Segment consisted of the following (in 000’s):

 
Nine-month periods ended September 30,
 
2009
2008
     
Net expense on swap agreements
$                     (65,160)
$                        (39,288)
Change in fair value of swap agreements
    (interest rate, currency, and equity)
197,419
(113,655)
Change in fair value of options, futures and
embedded derivatives
(277,226)
(36,631)
     
Net derivative loss
$                   (144,967)
$                      (189,574)



 
86

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Wealth Management Segment (continued)

REVENUES (continued)

Net realized investment losses, excluding impairment losses on available-for-sale securities - were $11.0 million and $259.0 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The $248.0 million decrease during the nine-month period ended September 30, 2009 as compared to the nine-month period ended September 30, 2008, was primarily due to $260.8 million realized losses on certain of trading fixed maturity securities in 2008.  All realized losses on trading fixed maturity securities for the nine-month period ended September 30, 2009 are reported in the Company’s net investment income.  The net realized losses for the nine-month period ended September 30, 2009 primarily relate to write-downs on mortgage loans.

Other-than-temporary impairment losses – were $0.2 million and $1.9 million for the nine-month periods ended September 30, 2009 and 2008, respectively, related to available-for-sale fixed maturity securities.  The OTTI losses for the nine-month period ended September 30, 2009 represent losses related to credit loss and were recorded to earnings in accordance with FASB ASC Topic 320.

Fees and other income - were $250.9 million and $279.7 million for the nine-month periods ended September 30, 2009, and 2008, respectively.  Fees and other income consist primarily of mortality and expense charges, rider fees, surrender charges and other income.  Mortality and expense charges and rider fees are based on the market values of the assets in the separate accounts supporting the contracts.  Mortality and expense charges and rider fees combined were $179.6 million and $208.3 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  Variable product fees represented 1.83% and 1.73% of the average variable annuity separate account balances at September 30, 2009 and 2008, respectively.  Average separate account assets were $13.1 billion and $16.0 billion for the nine-month periods ended September 30, 2009 and 2008, respectively.

Surrender charges represent revenues earned on the early withdrawal of fixed, fixed index and variable annuity policyholder balances.  Surrender charges on fixed, fixed index and variable annuity surrenders generally are assessed at declining rates applied to policyholder surrenders during the first four to ten years of the contract.  Total surrender charges were $15.8 million and $16.6 million for the nine-month periods ended September 30, 2009 and 2008, respectively.
 
Other income primarily represents fees charged for administrative services fee, investment advisory services and asset participation fees.  Other income was $55.5 million and $54.8 million for the nine-month periods ended September 30, 2009 and 2008, respectively.

BENEFITS AND EXPENSES

Total benefits and expenses were $976.7 million and $87.0 million for the nine-month periods ended September 30, 2009 and 2008, respectively. The increase of $889.7 million was primarily due to the following:

Interest credited - to policyholders was $287.7 million and $379.7 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The $92.0 million decrease was the result of a lower average crediting rate which decreased interest credited by $45.8 million and lower average policyholder balances which decreased interest credited by $5.0 million.  The decrease in interest credited was also attributable to the change in classification of certain expenses from interest credited to other operating expenses during the nine-month period ended September 30, 2009.

 
87

 



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Wealth Management Segment (continued)

BENEFITS AND EXPENSES (continued)

Interest expense - was $25.5 million and $31.8 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The $6.3 million decrease was primarily due to a decrease in interest expense related to the Company’s floating rate demand notes, resulting from a decrease in LIBOR during 2009, as compared to 2008, as well as the redemption of a promissory note from Sun Life (Hungary) LLC on December 29, 2008.

Policyholder benefits - were $34.4 million and $158.9 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The $124.5 million decrease in 2009 as compared to 2008 was primarily due to a $184.4 million decrease in reserves and $1.4 million decrease in surrender benefits offset by a $51.6 million increase in death benefits paid and a $9.8 million increase in annuity payments.  The decrease in reserves was mainly attributable to reserves for GMDB on variable annuity products.  The decrease in GMDB reserves represents a decrease in the difference between guaranteed benefits and variable annuity account values. Variable annuity account value increases are driven primarily by the improvement in the equity markets.

Amortization of DAC - was $497.1 million and $(493.2) million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The $990.3 million increase in amortization expense during the nine-month period ended September 30, 2009, as compared with the nine-month period ended September 30, 2008, was attributable to a $1,212.7 million increase in current period amortization expense and interest on the DAC asset, offset by $222.4 million decrease in expense related to changes in estimated gross profits.

The $1,212.7 million increase in current period amortization expense and interest is primarily due to improvement in actual gross profits in 2009, relative to 2008. This improvement was largely due to changes in the liabilities held for guaranteed minimum benefits on certain variable annuity products, as a result of changes in equity markets during the periods.  The Company tested its DAC asset for future recoverability and determined that this asset was not impaired at September 30, 2009.  The $222.4 million decrease resulted from updates to profitability projections due to actual changes in policies in-force.

The Company tests its DAC asset for loss recognition on a quarterly basis.  The test is performed by comparing the GAAP net liability to future expected gross profits; an adjustment is required if the current GAAP net liability is lower than the future expected gross profits.  Amortization expense for the nine-month period ended September 30, 2009 includes an expense of $27.0 million due to loss recognition testing.  The Company did not record any expenses to its Wealth Management Segment related to loss recognition testing for the nine-month period ended September 30, 2008.

Amortization of VOBA - was $11.6 million and $(99.7) million for the nine-month periods ended September 30, 2009 and 2008, respectively. The $111.3 million increase in amortization expense primarily related to improvements in actual gross profits driven by increases in the fair value of fixed maturity investments, as well as changes in estimated future gross profits.

Operating expenses - were $120.4 million and $109.3 million for the nine-month period ended September 30, 2009 and 2008, respectively.  The increase of $11.1 million in 2009 as compared to 2008 was primarily due to the change in classification of certain expenses from interest credited to other operating expenses during the nine-month period ended September 30, 2009.  The increase was partially offset by cost reduction initiatives taken by the Company’s management during the first quarter of 2009.



 
88

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Wealth Management Segment (continued)

BENEFITS AND EXPENSES (continued)

Income tax expense (benefit) - was $451.8 million and $(398.6) million for the nine-month period ended September 30, 2009 and September 30, 2008, respectively.  The effective tax rates for the same periods were 33.9% and 37.2% respectively.  The effective tax rate for the nine-month period ended September 30, 2009 differs from the U.S. federal statutory tax rate of 35% primarily due to tax benefits from the separate account dividends received deduction and tax credits.  The effective tax rate for the nine-month period ended September 30, 2008 differs from the U.S. federal statutory tax rate of 35% primarily due to tax benefits from the separate account dividends received deduction and tax credits. The difference in the effective tax rates for the two periods relates primarily to the fact that the tax benefits referenced above typically serve to reduce the effective tax rate below the prescribed statutory rate.  However, in periods such as the nine-month period ended September 30, 2008, where a pre-tax loss was incurred, these same benefits serve to increase the recorded tax benefit and by default the effective tax rate.

Individual Protection Segment

The Individual Protection Segment markets individual UL and variable life insurance products, including VUL products marketed to individuals, corporate-owned life insurance ("COLI") and BOLI.  UL products allow for flexible premiums and feature an investment return to policyholders at a specified rate declared by the Company.  VUL products allow for flexible premiums and variable rates of investment return; the policyholder directs how the cash value is invested and bears the investment risk.

The following provides a summary of the operations for the Individual Protection Segment for the nine-month periods ended September 30 (in 000’s):

 
2009
 
2008
           
Total revenues
$
344,538 
 
$
(57,996)
Total benefits and expenses
 
107,735 
   
176,224 
Income (loss) before income tax
     expense (benefit)
 
236,803 
   
(234,220)
           
Net income (loss)
$
154,027 
 
$
(152,138)

Total revenues were $344.5 million and $(58.0) million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The $402.5 million increase was caused by increases of $193.0 million and $222.0 million in net investment income and derivative income, respectively, and a favorable decrease in net realized investment losses of $36.7 million.  These favorable results were offset by a $49.2 million decrease in fee and other income.

The increase of $193.0 million in net investment income resulted primarily from an increase of $384.4 million in the fair value of securities in the trading portfolio, offset by a $170.6 million decrease in investment income related to the segment’s reinsurance agreements with affiliates, a $10.4 million decrease in realized gains from the trading portfolio, and a $8.6 million decrease in interest income.  The $384.4 million increase in the fair value of securities in the trading portfolio resulted from credit spreads tightening considerably during 2009.  Of the $170.6 million decrease in investment income from reinsurance agreements with affiliates, $161.7 million resulted from an increase in investment losses attributable to the funds withheld reinsurance agreement between Sun Life Vermont and SLOC.

The increase of $222.0 million in derivative income resulted from an increase of $106.6 million of income from interest rate swaps held by Sun Life Vermont and an increase of $115.4 million from a net favorable change in the fair value of embedded derivatives related to the segment’s reinsurance agreements with affiliates.  The $106.6 million increase from interest rate swaps resulted from LIBOR rate decreases during 2009.  Improvements in market conditions, including a decrease in volatility, resulted in a decrease in the present value of future benefit guarantees represented by the embedded derivatives, a component of contractholder liabilities; this decrease in liabilities caused an increase in embedded derivative income.

 
89

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Individual Protection Segment (continued)

The $49.2 million decrease in fee income was primarily due to $25.8 million in additional negative amortization of unearned revenue related to investment losses attributable the segment’s reinsurance agreements with affiliates and a decrease of $23.4 million in other fee income.  Of this $23.4 million decrease in other fee income, $11.4 million was due to income ceded to BarbCo 3, an affiliate, pursuant to a reinsurance agreement which ceded all risks associated with certain in-force COLI, BOLI and private placement VUL policies on a combination coinsurance, coinsurance with funds withheld and a modified coinsurance basis.

Total benefits and expenses were $107.7 million and $176.2 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The $68.5 million decrease was primarily due to a decrease in other operating expenses of $34.7 million related to commission expenses and $18.6 million related to premium taxes.  The decrease in commission expenses was due primarily to the discontinued sale, beginning January 1, 2009, of certain UL policies for which Sun Life Vermont assumed the risk from SLOC, combined with ceding commission expenses related to the reinsurance agreement with BarbCo 3.  Of the $18.6 million decrease in premium taxes, $11.4 million resulted from a decrease in BOLI sales.  In addition, interest expense decreased by $17.6 million due to a decrease in the floating interest rate of the surplus note issued by Sun Life Vermont.  Interest credited also decreased by $7.5 million.  These favorable decreases in benefits and expenses were offset by an increase in DAC amortization of $9.3 million.

Group Protection Segment

The Group Protection Segment markets and administers group life insurance, group stop loss insurance, group dental and group short-term and group long-term disability insurance products primarily to small and mid-size employers.  This segment operates only in the State of New York through the Company’s subsidiary, SLNY.  Effective May 31, 2007, the Company completed the SLHIC to SLNY asset transfer and SLNY entered into a series of agreements with SLHIC pursuant to which SLNY agreed to assume direct responsibility for all sales and administration of existing and new business issued in by SLHIC in New York.

The following provides a summary of operations for the Group Protection Segment for the nine-month periods ended September 30 (in 000’s):

 
2009
 
2008
           
Total revenues
$
104,252 
 
$
75,880 
Total benefits and expenses
 
86,051 
   
78,173 
Income (loss) before income tax
     expense (benefit)
 
18,201 
   
(2,293)
Net income (loss)
$
11,830 
 
$
(1,491)

The Group Protection Segment had pretax income (loss) of $18.2 million and $(2.3) million for the nine-month periods ended September 30, 2009 and 2008, respectively.  Total revenues for the nine-month period ended September 30, 2009 increased by $28.4 million, as compared to the nine-month period ended September 30, 2008.  The increase in revenues resulted mainly from increases in premiums and net investment income of $12.4 million and $15.8 million, respectively.  The increase in premiums was driven by increased direct business in-force within the group disability and group stop loss product areas.  The increase in net investment income was primarily attributable to the change in fair value of securities in the trading portfolio.

Total benefits and expenses for the nine-month period ended September 30, 2009 increased by $7.9 million in comparison to the nine-month period ended September 30, 2008.  The increase in benefits and expenses resulted from an increase in policyowner benefits and other operating expenses of $10.4 million due to the growth of in-force business.  These increases were offset by a decrease in VOBA amortization of $2.7 million.

 
90

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Corporate Segment

The Corporate Segment consists of the unallocated capital of the Company, its debt financing, and items not otherwise attributable to the other segments.

The following provides a summary of operations for the Corporate Segment for the nine-month periods ended September 30 (in 000’s):

 
2009
 
2008
           
Total revenues
$
(11,177)
 
$
(7,376)
Total benefits and expenses
 
15,913
   
24,277
Loss before income tax (benefit)
     expense
 
(27,090)
   
(31,653)
           
Net income (loss)
$
63,181
 
$
(107,765)

The Corporate Segment had a pretax loss of $27.1 million and $31.7 million for the nine-month periods ended September 30, 2009 and 2008, respectively.  The $4.6 decrease was primarily attributable to a $20.0 million decrease in net investment income, offset by an $11.8 million decrease related to OTTI charges, a $10.4 million decrease in interest expense and a $3.6 million decrease in derivative loss.  The decrease in net investment income was primarily due to lower earnings related to the limited partnership investments and an increase in the allocation of investment income to the operating segments in 2009 as compared 2008.

The income tax benefit for the nine-month period ended September 30, 2009, was primarily due to a release of the pre-tax loss incurred for the nine-month period ended September 30, 2009, as well as the release of the recorded valuation allowance against deferred tax assets for impairment losses on invested assets.


 
91

 


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

CAPITAL MANAGEMENT & LIQUIDITY RISK

The Company ensures that adequate capital is maintained to support the risk associated with its businesses.  The approach to managing capital has been developed to ensure that an appropriate balance is maintained between the internal assessment of capital required and the requirements of regulators and rating agencies. During the nine-month period ended September 30, 2009, the Company received capital contributions totaling $748.7 million from its parent, Sun Life of Canada (U.S.) Holdings, Inc. (the “Parent”), to ensure that the Company continues to exceed certain capital requirements, prescribed by National Association of Insurance Commissioners (the “NAIC”).  The NAIC has established regulations that provide minimum capitalization requirements based on risk-based capital formulas for life insurance companies, which establish capital requirements relating to insurance, business, asset and interest rate risks, including equity, interest rate and expense recovery risks associated with variable annuities that contain death benefits or certain living benefits.  Furthermore, declining equity markets may result in an increase in required capital for regulatory purposes.

Liquidity risk is the risk that the Company will not be able to fund all cash outflow commitments as they fall due.  The Company generally maintains a conservative liquidity position that exceeds all the liabilities payable on demand.  The Company’s asset-liability management allows it to maintain its financial position by ensuring that sufficient liquid assets are available to cover its potential funding requirements.  The Company invests in various types of assets with a view of matching them with its liabilities of various durations.  To strengthen its liquidity further, the Company actively manages and monitors its capital and asset levels, the diversification and credit quality of its investments and cash forecasts and actual amounts against established targets.  The Company also maintains liquidity contingency plans for the management of liquidity in the event of a liquidity crisis.

Through effective cash management and capital planning, the Company ensures that it is sufficiently funded and maintains adequate liquidity to meet its obligations.  At September 30, 2009, the Company, through its operational cash flows and various sources of liquidity (e.g., capital contributions from the Parent) had sufficient liquidity to meet all of its obligations.

 
92

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Omitted pursuant to Instruction H(2)(c) of Form 10-Q.

Item 4T. Controls and Procedures.

Management's Report on Internal Control over Financial Reporting

The Company's management, including the Company's principal executive officer and principal financial officer, have evaluated the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based on this evaluation, management concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2009 due to the material weakness in internal control over financial reporting identified in Item 9A(T) of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2008.

Status of Remediation of Material Weakness

Management is in the process of remediating the material weakness in the Company’s processes related to the implementation and subsequent recording of certain reinsurance transactions with affiliated companies, pursuant to the remediation plan described in Item 9A(T) of the Company’s annual report on Form 10-K for the year ended December 31, 2008.  During the nine-month period ended September 30, 2009, management designed and implemented additional controls relating to the recording of embedded derivatives and financial accounting for the Company’s reinsurance agreements.  However, management will further assess the effectiveness of these new controls before determining whether the material weakness has been fully remediated.

In response to the material weaknesses described above, management performed additional detailed procedures and analysis and other post-closing procedures during the preparation of the Company’s condensed consolidated financial statements, and concluded that the Company’s condensed consolidated financial statements contained in this report present fairly the Company’s financial position, results of operations and cash flows for the periods covered thereby in all material respects in accordance with GAAP.

Changes in Internal Control over Financial Reporting

Except as discussed above, there has been no change in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the nine-month period ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

The Company and its subsidiaries are parties to pending legal proceedings, including ordinary routine litigation incidental to their business, both as a defendant and as a plaintiff.  While it is not possible to predict the resolution of these proceedings, management believes, based on the information currently available to it, that the ultimate resolution of these matters will not be material to the Company's financial position, results of operations or cash flows.

Item 1A.  Risk Factors.

For discussion of the Company's risk factors, see Part I, Item IA, Risk Factors, in the Company's annual report on Form 10-K for the year ended December 31, 2008.



 
93

 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

PART II - OTHER INFORMATION (CONTINUED)

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Omitted pursuant to Instruction H(2)(b) of Form 10-Q.

Item 3. Defaults Upon Senior Securities.

Omitted pursuant to Instruction H(2)(b) of Form 10-Q.

Item 4. Submission of Matters to a Vote of Security Holders.

Omitted pursuant to Instruction H(2)(b) of Form 10-Q.

Item 5. Other Information.

(a)  None.

(b)  Not applicable.

Item 6. Exhibits.

Index to exhibits:

Exhibit No.

31.1
Certification pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2
Certification pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002




 
94

 

 
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 
Sun Life Assurance Company of Canada (U.S.)
(Registrant)




November 12, 2009
/s/ Westley V. Thompson
Date
Westley V. Thompson, President, SLF U.S.
 
(principal executive officer)


November 12, 2009
/s/ Ronald H. Friesen
Date
Ronald H. Friesen , Senior Vice President and Chief Financial Officer
 
(principal financial officer)




 
95