Attached files
file | filename |
---|---|
EX-31.1 - SUN LIFE ASSURANCE CO OF CANADA US | exhibit311.htm |
EX-32.1 - SUN LIFE ASSURANCE CO OF CANADA US | exhibit321.htm |
EX-31.2 - SUN LIFE ASSURANCE CO OF CANADA US | exhibit312.htm |
EX-32.2 - SUN LIFE ASSURANCE CO OF CANADA US | exhibit322.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”).
10
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.
12
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.
17
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)
|
-
|
3
|
-
|
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)
|
3
|
(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