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EX-32.1 - SECTION 906 CEO CERTIFICATION - SUN LIFE ASSURANCE CO OF CANADA USexhibit321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - SUN LIFE ASSURANCE CO OF CANADA USexhibit312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - SUN LIFE ASSURANCE CO OF CANADA USexhibit311.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - SUN LIFE ASSURANCE CO OF CANADA USexhibit322.htm

 
 

 




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

FORM 10-Q

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

For the quarterly period ended
June 30, 2010
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 August 13, 2010, 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 JUNE 30, 2010

TABLE OF CONTENTS

 
Page

PART I  - FINANCIAL INFORMATION
     
Item 1.
Financial Statements:
 
     
 
Condensed Consolidated Statements of Operations for the six-month periods ended June 30,
2010 and 2009 (Unaudited)
3
     
 
Condensed Consolidated Statements of Operations for the three-month periods ended June 30,
2010 and 2009 (Unaudited)
4
     
 
Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009
(Unaudited)
5
     
 
Condensed Consolidated Statements of Comprehensive Income for the six and three-month
periods ended June 30, 2010 and 2009 (Unaudited)
6
     
 
Condensed Consolidated Statements of Changes in Stockholder’s Equity for the six-month
periods ended June 30, 2010 and 2009 (Unaudited)
7
     
 
Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30,
2010 and 2009 (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
73
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
85
     
Item 4.
Controls and Procedures
85
     
     

PART II – OTHER INFORMATION
     
Item 1 .
Legal Proceedings
85
     
Item 1A.
Risk Factors
85
     
Item 2 .
Unregistered Sales of Equity Securities and Use of Proceeds
85
     
Item 3.
Defaults Upon Senior Securities
85
     
Item 4 .
(Removed and Reserved)
85
     
Item 5 .
Other Information
85
     
Item 6 .
Exhibits
86


 
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 six-month periods ended June 30,

 
Unaudited
 
 
 
2010
 
 
2009
           
Revenues
         
           
Premiums and annuity considerations
$
68,242 
 
$
65,495 
Net investment income (1)
 
851,447 
   
1,216,943 
Net derivative (loss) income (Note 5)
 
(567,165)
   
163,652 
Net realized investment gains (losses), excluding impairment
   losses on available-for-sale securities
 
16,339 
   
(2,837)
Other-than-temporary impairment losses (2)  (Note 5)
 
(885)
   
(4,834)
Fee and other income
 
236,228 
   
166,668 
           
Total revenues
 
604,206 
   
1,605,087 
           
Benefits and Expenses
         
           
Interest credited
 
176,811 
   
225,158 
Interest expense
 
26,452 
   
25,738 
Policyowner benefits
 
 116,577 
   
90,036 
Amortization of deferred policy acquisition costs
   and value of business and customer renewals acquired
 
 (253,232)
   
401,820 
Other operating expenses
 
159,793 
   
93,744 
           
Total benefits and expenses
 
226,401 
   
836,496 
           
Income from continuing operations before income tax expense
 
377,805 
   
768,591 
           
Income tax expense
 
121,354 
   
273,883 
           
Net income from continuing operations
 
256,451 
   
494,708 
           
Loss from discontinued operations, net of tax (Note 1)
 
   
(3,784)
           
Net income
$
256,451 
 
$
490,924 

 
(1)Net investment income includes an increase in market value of trading fixed maturity securities of $449.9 million and $941.4 million for the six-month periods ended June 30, 2010 and 2009, respectively.
 
(2)The other-than-temporary impairment (“OTTI”) losses for the six-month periods ended June 30, 2010 and 2009 represent solely credit losses.  The Company incurred no non-credit OTTI losses during the six-month periods ended June 30, 2010 and 2009,
   and as such, no non-credit OTTI losses were recognized in other comprehensive income for the periods.


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 June 30,

 
Unaudited
 
 
 
2010
 
 
2009
           
Revenues
         
           
Premiums and annuity considerations
$
33,178 
 
$
32,955 
Net investment income (1)
 
407,618 
   
1,073,286 
Net derivative (loss) income (Note 5)
 
(525,715)
   
33,806 
Net realized investment gains (losses), excluding impairment
   losses on available-for-sale securities
 
11,174 
   
(940)
Other-than-temporary impairment losses (2)  (Note 5)
 
   
(4,834)
Fee and other income
 
120,475 
   
90,467 
           
Total revenues
 
46,730 
   
1,224,740 
           
Benefits and Expenses
         
           
Interest credited
 
87,428 
   
112,374 
Interest expense
 
9,355 
   
13,658 
Policyowner benefits
 
81,974 
   
(11,951)
Amortization of deferred policy acquisition costs
   and value of business and customer renewals acquired
 
(424,941)
   
509,244 
Other operating expenses
 
78,883 
   
46,803 
           
Total benefits and expenses
 
(167,301)
   
670,128 
           
Income from continuing operations before income tax expense
 
214,031 
   
554,612 
           
Income tax expense
 
69,231 
   
201,180 
           
Net income from continuing operations
 
144,800 
   
353,432 
           
Income from discontinued operations, net of tax (Note 1)
 
   
87,878 
           
Net income
$
144,800 
 
$
441,310 

 
(1)Net investment income includes an increase in market value of trading fixed maturity securities of $179.5 million and $971.3 million for the three-month periods ended June 30, 2010 and 2009, respectively.
 
(2)The OTTI losses for the three-month periods ended June 30, 2010 and 2009 represent solely credit losses.  The Company incurred no non-credit OTTI losses during the three-month periods ended June 30, 2010 and 2009, and as such, no non-credit OTTI
   losses were recognized in other comprehensive income for the periods.




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 share data)


 
Unaudited
ASSETS
 
June 30, 2010
 
 
December 31, 2009
Investments
         
Available-for-sale fixed maturity securities at fair value (amortized cost of $1,454,603
    and $1,121,424 in 2010 and 2009, respectively) (Note 5)
$
1,535,353 
 
$
1,175,516 
Trading fixed maturity securities at fair value (amortized cost of $12,528,553 and
    $12,042,961in 2010 and 2009, respectively) (Note 5)
 
12,068,974 
   
11,130,522 
Mortgage loans
 
1,844,572 
   
1,911,961 
Derivative instruments – receivable (Note 5)
 
286,370 
   
259,227 
Limited partnerships
 
46,418 
   
51,656 
Real estate
 
204,392 
   
202,277 
Policy loans
 
713,834 
   
722,590 
Other invested assets
 
7,941 
   
47,421 
Short-term investments (Note 1)
 
75,086 
   
1,267,311 
Cash and cash equivalents
 
2,074,999 
   
1,804,208 
Total investments and cash
 
18,857,939 
   
18,572,689 
           
Accrued investment income
 
225,868 
   
230,591 
Deferred policy acquisition costs
 
2,559,875 
   
2,173,642 
Value of business and customer renewals acquired
 
172,377 
   
168,845 
Net deferred tax asset (Note 11)
 
396,729 
   
549,764 
Goodwill (Note 10)
 
7,299 
   
7,299 
Receivable for investments sold
 
552,864 
   
12,611 
Reinsurance receivable
 
2,369,014 
   
2,350,207 
Other assets
 
129,400 
   
183,963 
Separate account assets
 
23,604,384 
   
23,326,323 
           
Total assets
$
48,875,749 
 
$
47,575,934 
           
LIABILITIES
         
           
Contractholder deposit funds and other policy liabilities
$
16,864,706 
 
$
16,709,589 
Future contract and policy benefits
 
827,345 
   
815,638 
Payable for investments purchased
 
195,547 
   
88,131 
Accrued expenses and taxes
 
105,457 
   
61,903 
Debt payable to affiliates
 
883,000 
   
883,000 
Reinsurance payable
 
2,219,461 
   
2,231,764 
Derivative instruments – payable (Note 5)
 
602,790 
   
572,910 
Other liabilities
 
292,727 
   
280,224 
Separate account liabilities
 
23,604,384 
   
23,326,323 
           
Total liabilities
 
45,595,417 
   
44,969,482 
           
Commitments and contingencies (Note 7)
         
           
STOCKHOLDER’S EQUITY
         
           
Common stock, $1,000 par value – 10,000 shares authorized; 6,437 shares
    issued and outstanding in 2010 and 2009
$
6,437 
 
$
6,437 
Additional paid-in capital
 
3,927,875 
   
3,527,677 
Accumulated other comprehensive income
 
52,475 
   
35,244 
Accumulated deficit
 
(706,455)
   
(962,906)
           
Total stockholder’s equity
 
3,280,332 
   
2,606,452 
           
Total liabilities and stockholder’s equity
$
48,875,749 
 
$
47,575,934 

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
(in thousands)

For the six-month periods ended June 30,

   
 
2010
   
 
2009
           
Net income
$
256,451 
 
$
490,924 
           
Other comprehensive income:
         
           
Change in unrealized holding gains on available-for-sale fixed
    maturity securities, net of tax and policyholder amounts (1)
 
26,986 
   
51,282 
Reclassification adjustment for OTTI losses, net of tax (2)
 
363 
   
Reclassification adjustments of net realized investment (gains)
    losses into net income, net of tax (3)
 
(10,118)
   
1,961 
           
Other comprehensive income
 
17,231 
   
53,243 
           
Comprehensive income
$
273,682 
 
$
544,167 

(1)  
Net of tax expense of $(14.5) million and $(27.6) million for the six-month periods ended June 30, 2010 and 2009, respectively.
(2)  
Represents an adjustment to OTTI losses due to the sale of other-than-temporarily impaired available-for-sale fixed maturity securities.
(3)  
Net of tax benefit (expense) of $5.4 million and $(1.1) million for the six-month periods ended June 30, 2010 and 2009, respectively.


For the three-month periods ended June 30,

 
Unaudited
   
 
2010
   
 
2009
           
Net income
$
144,800 
 
$
441,310 
           
Other comprehensive income:
         
           
Change in unrealized holding gains on available-for-sale fixed
    maturity securities, net of tax and policyholder amounts (4)
 
18,818 
   
79,883 
Reclassification adjustment for OTTI losses, net of tax (2)
 
259 
   
Reclassification adjustments of net realized investment (gains)
    losses into net income, net of tax (5)
 
(7,735)
   
2,718 
           
Other comprehensive income
 
11,342
   
82,601 
           
Comprehensive income
$
156,142 
 
$
523,911 

(4)  
Net of tax expense of $(10.1) million and $(43.0) million for the three-month periods ended June 30, 2010 and 2009, respectively.
(5)  
Net of tax benefit (expense) of $4.2 million and $(1.5) million for the three-month periods ended June 30, 2010 and 2009, respectively.


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 CHANGES IN STOCKHOLDER’S EQUITY
(in thousands)

For the six-month periods ended June 30, 2010 and 2009


Unaudited

 
Common
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
(Loss) Income (1)
 
Accumulated
Deficit
 
Total
Stockholder’s
Equity
                             
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)
             
(9,138)
   
9,138 
   
Net income
                   
490,924 
   
490,924 
Tax benefit from stock options
       
24 
               
24 
Capital contribution from Parent
(Note 2)
       
748,652 
               
748,652 
Other comprehensive income
             
53,243 
         
53,243 
                             
Balance at June 30, 2009
$
6,437 
 
$
3,620,918 
 
$
(85,779)
 
$
(1,453,478)
 
$
2,088,098
                             
                             
                             
Balance at December 31, 2009
$
6,437 
 
$
3,527,677 
 
$
35,244 
 
$
(962,906)
 
$
2,606,452 
                             
Net income
                   
256,451 
   
256,451 
Tax benefit from stock options
       
198 
               
198 
Capital contribution from Parent
(Note 2)
       
400,000 
         
   
400,000 
Other comprehensive income
             
17,231 
         
17,231 
                             
Balance at June 30, 2010
$
6,437 
 
$
3,927,875
 
$
52,475 
 
$
(706,455)
 
$
3,280,332 


 
(1)  As of June 30, 2010, the total amount of after tax non-credit OTTI losses recorded in the Company’s accumulated other comprehensive income was $8.6 million.
 
(2) Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 320, “Investments- Debt and Equity Securities.”


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 six-month periods ended June 30,

 
Unaudited
 
2010
 
2009
           
Cash Flows From Operating Activities:
         
Net income
$
256,451 
 
$
490,924 
Adjustments to reconcile net income to net cash provided by operating
         activities:
         
Net amortization of premiums on investments
 
10,365 
   
8,356 
Amortization of deferred policy acquisition costs and value of
   business and customer renewals acquired
 
(253,232)
   
401,820 
Depreciation and amortization
 
2,430 
   
2,806 
Net losses (gains) on derivatives
 
509,669 
   
(228,702)
Net realized (gains) losses and OTTI credit losses on available-for-
   sale investments
 
(15,454)
   
7,671 
Net increase in fair value of trading investments
 
(449,854)
   
(941,433)
Net realized losses on trading investments
 
30,822 
   
135,812 
Undistributed loss on private equity limited partnerships
 
492 
   
11,750 
Interest credited to contractholder deposits
 
176,811 
   
225,158 
Deferred federal income taxes
 
143,756 
   
281,509 
Changes in assets and liabilities:
         
Additions to deferred policy acquisition costs and value of business
   and customer renewals acquired
 
(117,946)
   
(200,553)
Accrued investment income
 
4,723 
   
963 
Net change in reinsurance receivable/payable
 
36,789 
   
104,163 
Future contract and policy benefits
 
11,707 
   
(50,740)
Other, net
 
138,028 
   
(134,400)
Adjustments related to discontinued operations
 
   
137,204 
           
Net cash provided by operating activities
 
485,557 
   
252,308 
           
Cash Flows From Investing Activities:
         
Sales, maturities and repayments of:
         
Available-for-sale fixed maturity securities
 
284,652 
   
26,666 
Trading fixed maturity securities
 
1,488,444 
   
589,822 
Mortgage loans
 
92,420 
   
115,607 
Other invested assets
 
152,900 
   
76,420 
Purchases of:
         
Available-for-sale fixed maturity securities
 
(602,292)
   
(392,624)
Trading fixed maturity securities
 
(2,472,109)
   
(131,288)
Mortgage loans
 
(28,551)
   
(55,337)
Real estate
 
(1,974)
   
(45)
Other invested assets
 
(28,255)
   
(57,799)
Net change in other investments
 
   
(86,195)
Net change in policy loans
 
8,756 
   
9,741 
Net change in short-term investments (Note 1)
 
1,192,225 
   
117,829 
           
Net cash provided by investing activities
$
86,216 
 
$
212,797 

Continued on next page

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


 
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 six-month periods ended June 30,

 
 
2010
 
 
2009
           
Cash Flows From Financing Activities:
         
Additions to contractholder deposit funds
$
647,901 
 
$
1,613,327 
Withdrawals from contractholder deposit funds
 
(1,336,122)
   
(1,532,302)
Capital contribution from Parent
 
400,000 
   
748,652 
Debt proceeds
 
   
100,000 
Other, net
 
(12,761)
   
(40,156)
           
Net cash (used in) provided by financing activities
 
(300,982)
   
889,521 
           
Net change in cash and cash equivalents
 
270,791 
   
1,354,626 
           
Cash and cash equivalents, beginning of period
 
1,804,208 
   
1,024,668 
           
           
Cash and cash equivalents, end of period
$
2,074,999 
 
$
2,379,294 
           




























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”) which in turn is wholly-owned by 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 six-month period ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.  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, 2009.

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  As of June 30, 2010, the Company directly or indirectly owned all of the outstanding shares or member interest of SLNY, a New York life insurance company which issues individual fixed and variable annuity contracts, group life, group disability, group dental and group stop loss insurance, and individual life insurance in New York; Independence Life and Annuity Company, a Rhode Island life insurance company that sold variable and whole life insurance products; 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.

On December 31, 2009, the Company paid a dividend of all of the issued and outstanding common stock of Sun Life Financial (U.S.) Reinsurance Company (“Sun Life Vermont”) to the Parent.  As a result of this transaction, Sun Life Vermont is no longer the Company’s wholly-owned subsidiary and is not included in the Company’s condensed consolidated balance sheets at June 30, 2010 and December 31, 2009, or the condensed consolidated statements of operations for the six and three -month periods ended June 30, 2010.  In addition, Sun Life Vermont’s net (loss) income from operations for the six and three-month periods ended June 30, 2009, respectively, and changes in cash flows from the operating activities of Sun Life Vermont for the six-month period ended June 30, 2009 are presented as discontinued operations in the condensed consolidated statements of operations and condensed consolidated statements of cash flows.




 
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)

The following table provides a summary of operations of Sun Life Vermont for the six and three-month periods ended June 30, 2009 (in 000’s):

 
Six-month period ended
 
Three-month period ended
 
June 30, 2009
 
June 30, 2009
       
Total revenues
 
$          (4,010)  
   
$           147,274  
Total benefits and expenses
 
8,908   
   
13,288  
(Loss) income before income tax
   (benefit) expense
 
(12,918)  
   
133,986  
           
Net (loss) income
 
$          (3,784)  
   
$             88,878  

See Notes 1 and 2 of the consolidated financial statements included in Part II, Item 8 of the Company’s annual report on Form 10-K for the year ended December 31, 2009 for additional information concerning this transaction.

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 Financial Accounting Standard Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 810, “Consolidation.” 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. In the event that the CARS trust is 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.  At June 30, 2010, the sum of all the credit events exceeded the threshold amount and the CARS Trust made cumulative payments of $17.6 million to the swap counterparty, all of which were made during the year ended December 31, 2009.  As of June 30, 2010, the maximum future payments the CARS Trust could be required to make is $37.4 million.  The fair value of the assets held as collateral by the CARS Trust was $35.3 million as of June 30, 2010 and December 31, 2009, respectively.  As of June 30, 2010 and December 31, 2009, the fair value of the credit default swap was $33.7 million and $34.3 million, respectively.

The Company had a greater than or equal to 20%, but less than 50% interest in four variable interest entities (“VIEs”) at June 30, 2010.  The Company is a creditor in three trusts and one special purpose corporation.  The Company’s maximum exposure to loss related to all of these VIEs is the investments’ carrying value, which was $8.5 million at June 30, 2010.  The investments in these VIEs mature at various dates through 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. This assessment 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.


 
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)

BASIS OF PRESENTATION (CONTINUED)

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 maturity securities on the condensed consolidated balance sheets.

All material intercompany transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.
 
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 policy benefits, other-than-temporary impairments of investments, allowance for loan loss, valuation allowance on deferred tax assets and provision for income taxes.  Actual results could differ from those estimates.

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash, cash equivalents and short-term investments are highly liquid securities.  The Company’s cash equivalents primarily include cash, commercial paper and money market investments which have an original term to maturity of less than three months.  Short-term investments include debt instruments with a term to maturity exceeding three months, but less than one year from the date of acquisition.  Cash equivalents and short-term investments are held at amortized cost, which approximates fair value.

Immaterial Restatement

Subsequent to the issuance of the Company’s interim condensed consolidated financial statements for the six-month period ended June 30, 2009, the Company’s management determined certain investments with an original term to maturity of greater than three months, but less than one year, were improperly classified as cash and cash equivalents.  As a result, the condensed consolidated balance sheet as of June 30, 2009 has been restated to reclassify $481.7 million from cash and cash equivalents to short-term investments.  In addition, the condensed consolidated statement of cash flows for the six-month period ended June, 2009 has been restated as follows:
 
 
As Previously
   
 
Reported
Adjustments
As Restated
Net change in short-term investments
$                     -
$     117,829 
$         117,829
Net cash provided by investing activities
$           94,968
$     117,829 
$         212,797
Net change in cash and cash equivalents
$      1,236,797
$     117,829 
$      1,354,626
Cash and cash equivalents, beginning of period
$      1,624,149
$   (599,481)
$      1,024,668
Cash and cash equivalents, end of period
$      2,860,946
$   (481,652)
$      2,379,294
       

The effects of these corrections also have been reflected in the accompanying notes to the unaudited condensed consolidated financial statements, where applicable.  The short-term investments at December 31, 2009 were appropriately reported in the consolidated financial statements included in Part II, Item 8 of the Company’s annual report on Form 10-K for the year ended December 31, 2009.





 
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)

ACCOUNTING PRONOUNCEMENTS

New and Adopted Accounting Pronouncements
 
In January 2010, the FASB issued Accounting Standard Update (“ASU”) 2010-06 “Fair Value Measurement and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements,” which provides amendments to FASB ASC Topic 820 “Fair Value Measurements and Disclosures” that will provide more robust disclosures about the following:

Ø  
The different classes of assets and liabilities measured at fair value;
Ø  
The valuation techniques and inputs used;
Ø  
The transfers between Levels 1, 2, and 3; and
Ø  
The activity in Level 3 fair value measurements.

Certain new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 31, 2009.  Disclosures about purchases, sales, issuances and settlements in the roll-forward of activities in Level 3 are effective for fiscal years beginning after December 15, 2010.  The Company adopted this guidance on January 1, 2010.  The enhanced disclosures required by ASU 2010-06 for the periods beginning after December 31, 2009, are included in Note 4.

On January 1, 2010, the Company adopted the provisions of FASB ASC Topic 860, “Transfers and Servicing,” which were issued in June 2009.  These provisions amend and expand 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.  FASB ASC Topic 860 amends previously issued derecognition accounting and disclosure guidance 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 the provisions of FASB ASC Topic 860.  This guidance is effective for financial asset transfers occurring in fiscal years and interim periods beginning after November 15, 2009.  The adoption did not have a material impact on the Company’s condensed consolidated financial statements.

On January 1, 2010, the Company adopted the provisions of FASB ASC Topic 810 which were issued in June 2009.  This guidance amends previously issued consolidation guidance which affects all entities currently within the scope of FASB ASC Topic 810, including QSPEs, as the concept of these entities was eliminated by FASB ASC Topic 860.  This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2009.  The adoption did not have a material impact on the Company’s condensed consolidated financial statements.

Refer to Note 1 of the consolidated financial statements included in Part II, Item 8 of the Company’s annual report on Form 10-K for the year ended December 31, 2009 for other accounting pronouncements that the Company adopted during the year ended December 31, 2009.


 
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)
 
Accounting Standards Not Yet Adopted

In March 2010, the FASB issued ASU 2010-11 “Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives,” which provides amendments to FASB ASC Topic 815, “Derivatives and Hedging” to clarify the embedded credit derivative scope exception included therein.  The amendments address how to determine which embedded credit derivative features are considered to be embedded derivatives that should not be analyzed for potential bifurcation and separate accounting under ASC Topic 815.  Under ASU 2010-11, only the embedded credit derivative feature created by subordination between financial instruments is not subject to the bifurcation requirements of ASC Topic 815.  However, other embedded credit derivative features would be subject to analysis for potential bifurcation even if their effects are allocated to interests in tranches of securitized financial instruments in accordance with those subordination provisions.  The following circumstances would not qualify for the scope exception and are subject to the application of ASC Topic 815 requiring the embedded derivatives to be analyzed for potential bifurcation:

Ø  
An embedded derivative feature relating to another type of risk (including another type of credit risk) is present in the securitized financial instrument.
Ø  
The holder of an interest in a tranche of securitized financial instruments is exposed to the possibility of being required to make potential future payments because the possibility of those future payments is not created by subordination.
Ø  
The holder owns an interest in a single-tranche securitization vehicle; therefore, the subordination of one tranche to another is not relevant.

The amendments in ASU 2010-11 are effective for the first fiscal quarter beginning after June 15, 2010.  Early adoption is permitted. The Company will adopt ASU 2010-11 on July 1, 2010 and is still assessing the impact of this adoption.

In April 2010, the FASB issued ASU 2010-18, “Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset – a consensus of the FASB Emerging Issues Task Force,” which amends FASB ASC Topic 310, “Receivables.”  The amendments were made to eliminate diversity in practice in accounting for loans that undergo troubled debt restructuring for those loans that have been included in a pool of loans.  Under ASU 2010-18, debt modifications that were made for distressed loans included in a pool of loans do not trigger the criteria needed to allow for such loans to be accounted for separately outside of the pool.  Upon initial adoption, an entity may make a one-time election to terminate accounting for loans as a pool.  The election may be made on a pool-by-pool basis and does not prevent the entity from using pool accounting for loans that will be acquired in the future.  The amendments in ASU 2010-18 are effective for the first fiscal quarter ending on or after July 15, 2010.  Early adoption is permitted.  The Company will adopt ASU 2010-18 on September 30, 2010 and does not expect the adoption to have a material impact on the Company’s condensed consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, “Receivables (Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which amends FASB ASC Topic 310 to enhance disclosures and to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables.  The amendments require an entity to provide a greater level of disaggregated information about the credit quality of the entity’s financing receivables and allowance for credit losses.  ASU 2010-20 also requires an entity to disclose credit quality indicators, the aging of past due information and the modification of its financing receivables.  The amendments in ASU 2010-20 are effective for interim and annual reporting periods beginning on or after December 15, 2010. Comparative disclosures are required for reporting periods ending after initial adoption.  The Company will adopt ASU 2010-20 on January 1, 2011 and is assessing the impact of this adoption.



 
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)

2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES

The Company has significant transactions with affiliates.  Management believes inter-company 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.  Below is a summary of transactions with affiliates not included in these condensed consolidated financial statements.

Related Party Reinsurance Transactions

As more fully described in Note 6, the Company and its subsidiary, SLNY, are party to several reinsurance transactions with Sun Life Assurance Company of Canada (“SLOC”) and other affiliates.  Reinsurance premiums with related parties are based on market rates.

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.  The reinsurance agreement covered in-force policies on the effective date and new sales through December 31, 2009.  Effective January 1, 2010, the Company and BarbCo 3 amended the reinsurance agreement.  Refer to Note 6 for further information regarding the amendments and the impact of this agreement on the Company’s condensed consolidated financial statements.

Capital Transactions

During the six-month period ended June 30, 2010 and the year ended December 31, 2009, the Company received capital contributions totaling $400.0 million and $748.7 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 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.  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.

Effective December 31, 2009, the Company distributed all of the issued and outstanding common stock of Sun Life Vermont in the form of a dividend to the Parent.  The Company did not declare or pay any cash dividends during the six-month periods ending June 30, 2010 and 2009.

Debt Transactions

In 2002, the Company issued two promissory notes totaling $460.0 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 $380.0 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 $80.0 million remaining note and paid $64.3 million, including $2.3 million in accrued interest, to Sun Life (Hungary) LLC.  At June 30, 2010 and December 31, 2009, the Company had $18.0 million 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 $0.5 million for the three and six-month periods ended June 30, 2010 and 2009, respectively.

At June 30, 2010 and 2009, 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 $21.3 million for interest on these surplus notes for the three and six-month periods ended June 30, 2010 and 2009, respectively.



 
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)

2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

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”), which will mature on October 6, 2013.  On April 7, 2008, the Company issued an additional floating rate funding agreement totaling $5.8 million to LLC III. Total interest credited for the funding agreements was $1.4 million and $2.8 million for the three and six-month periods ended June 30, 2010, respectively, and $3.5 million and $7.6 million for the three and six-month periods ended June 30, 2009, respectively.  The Company also issued a $100 million floating rate demand note payable to LLC III on September 19, 2006.  The Company expensed $0.2 million and $0.3 million for the three and six-month periods ended June 30, 2010, respectively, and $0.4 million and $0.8 million for the three and six-month periods ended June 30, 2009, respectively, for interest on this demand note.

The Company 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”), which will mature on July 6, 2011.  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 $1.2 million and $2.4 million for the three and six-month periods ended June 30, 2010, respectively, and $3.3 million and $7.2 million for the three and six-month periods ended June 30, 2009, respectively.  The Company also issued a $100 million floating rate demand note payable to LLC II on May 24, 2006. The Company expensed $0.1 million and $0.3 million for the three and six-month periods ended June 30, 2010, respectively, and $0.4 million and $0.8 million for the three and six-month periods ended June 30, 2009, respectively, for interest on this demand note.

The Company 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”), which matured on July 6, 2010.  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 $1.4 million and $2.8 million for the three and six-month periods ended June 30, 2010, respectively, and $3.5 million and $7.7 million for the three and six-month periods ended June 30, 2009, respectively.  The Company also issued a $100.0 million floating rate demand note payable to LLC on June 10, 2005.  The Company expensed $0.2 million and $0.4 million for the three and six-month periods ended June 30, 2010, respectively, and $0.4 million and $0.8 million for the three and six-month periods ended June 30, 2009, respectively, for interest on this demand note.

The Company 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.

The account values related to these funding agreements issued to LLC III, LLC II, and LLC are reported in the Company’s condensed consolidated balance sheets as a component of contractholder deposit funds and other policy liabilities.





 
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 (CONTINUED)

Administrative service agreements, rent and other

Effective December 31, 2009, the Company transferred all of its employees to an affiliate, Sun Life Financial (U.S.) Services Company, Inc. (“Sun Life Services”), with the exception of 28 employees who were transferred to Sun Life Financial Distributors, Inc. (“SLFD”), another affiliate.  Neither Sun Life Services nor SLFD are included in the accompanying condensed consolidated financial statements.  Concurrent with this transaction, Sun Life Services assumed the sponsorship of the Company’s retirement plans.  As a result of this transaction, the Company transferred to Sun Life Services all employee-benefits related assets and liabilities, the associated deferred tax asset, and certain property, equipment and software.  For more details on these transactions, refer to Note 3 of the consolidated financial statements included in Part II, Item 8 of the Company’s annual report on Form 10-K for the year ended December 31, 2009.

The transfer of fixed assets from the Company to Sun Life Services discussed above, along with the administrative service agreement, resulted in a sale-leaseback transaction.  The Company recorded a deposit liability for $17.1 million which represents the cost of certain of the assets transferred.  The Company will amortize the liability over the remaining useful life of the assets that have been sold, which is estimated to be seven years.  As of June 30, 2010, the remaining deposit liability was $15.7 million.

Pursuant to an administrative service agreement between the Company and Sun Life Services, Sun Life Services provides human resource services (e.g., recruiting and maintaining appropriately trained and qualified personnel and equipment necessary for the performance of actuarial, financial, legal, administrative and other operational support functions) to the Company, and the Company reimburses Sun Life Services for the cost of such services, plus, with respect to certain of those services, pays an arms-length based profit margin agreed upon by the parties.  Total payments under this agreement were $28.1 million and $56.8 million for the three and six-month periods ending June 30, 2010, respectively.

Effective December 31, 2009, Sun Life Services and SLOC entered into an administrative service agreement, under which Sun Life Services provides to SLOC, as requested, personnel and certain services. Prior to December 31, 2009, the Company had an administrative service agreement with SLOC under which the Company provided personnel and certain services to SLOC, as requested.  Reimbursements under this agreement, which were recorded as a reduction of other operating expenses, were approximately $73.4 million and $154.2 million for the three and six-month periods ended June 30, 2009, respectively.  Effective December 31, 2009, the Company no longer provides personnel services to SLOC and SLOC no longer reimburses the Company for such services.

The Company has an administrative service agreement with Sun Life Assurance Company of Canada - U.S. Operations Holdings, Inc., 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 were approximately $3.2 million and $6.5 million for the three and six-month periods ended June 30, 2010, respectively, and $3.1 million and $5.8 million for the three and six-month periods ended June 30, 2009, 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 $3.2 million and $5.9 million for the three and six-month periods ended June 30, 2010, respectively, and $1.3 million and $2.1 million for the three and six-month periods ended June 30, 2009, respectively.

The Company paid $5.2 million and $10.5 million during the three and six-month periods ended June 30, 2010, respectively, and $3.9 million and $8.4 million during the three and six-month periods ended June 30, 2009, respectively, in investment management service fees to SCA.

The Company paid $11.2 million and $21.7 million during the three and six-month periods ended June 30, 2010, respectively, and $12.2 million and $21.2 million during the three and six-month periods ended June 30, 2009, respectively, in distribution fees to SLFD.

 
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)

Administrative service agreements, rent and other (continued)

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 were $4.9 million and $9.1 million for the three and six-month periods ended June 30, 2010, respectively, and $4.4 million and $7.9 million for the three and six-month periods ended June 30, 2009, 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 $6.0 million and $12.3 million for the three and six-month periods ended June 30, 2010, respectively, and $6.0 million and $12.0 million for the three and six-month periods ended June 30, 2009, respectively.

The Company leases office space to SLOC under lease agreements with terms expiring on December 31, 2014 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.  Rent received by the Company under the leases amounted to approximately $3.0 million and $6.1 million for the three and six-month periods ended June 30, 2010, respectively, and $2.7 million and $5.4 million for the three and six-month periods ended June 30, 2009, respectively.  Rental income is reported as a component of net investment income in the Company’s condensed consolidated statements of operations.

The Company records a tax benefit through paid-in-capital for SLF stock options issued to employees of the Company.  The Company recorded a tax benefit of approximately $0.2 million for the three and six-month periods ended June 30, 2010.  Related to these stock options, the Company recorded a tax benefit of approximately $0.02 million for the three and six-month periods ended June 30, 2009.

In 2004, the employees of the Company became participants in a restricted share unit (“RSU”) plan with SLF.  Under the RSU 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 $2.0 million and $4.0 million for the three and six-month periods ended June 30, 2010, respectively, and $1.7 million and $3.3 million for the three and six-month periods ended June 30, 2009, respectively.



 
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)

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.  As part of these agreements, SLNY received certain intangible assets totaling $31.3 million.  These assets included the value of distribution acquired, VOBA and VOCRA.  The value of distribution acquired 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. VOBA was fully amortized as of December 31, 2009. 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):

 
Six-month periods ended
 
Three-month periods ended
 
 
June 30,
 
June 30,
 
June 30,
 
June 30,
 
 
2010
 
2009
 
2010
 
2009
 
                         
Value of distribution
$
149 
 
$
149 
 
$
74 
 
$
74 
 
VOBA
 
   
863 
   
   
841 
 
VOCRA
 
579 
   
69 
   
282 
   
(657)
 















 
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)

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.








 
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)

3. SEGMENT INFORMATION (CONTINUED)

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

 
Six-month period ended June 30, 2010
   
                   
 
Wealth
 
Individual
 
Group
       
 
Management
 
Protection
 
Protection
 
Corporate
 
Totals
Total revenues
$      545,477 
 
$       27,671 
 
$          64,576 
 
$     (33,518)
 
$     604,206 
Total benefits and expenses
126,187 
 
26,308 
 
    61,992 
 
  11,914 
 
    226,401 
Income (loss) before income
tax expense (benefit)
 419,290 
 
1,363 
 
   2,584 
 
(45,432)
 
  377,805 
Net income (loss)
$      282,658 
 
$            971 
 
$            1,682 
 
$     (28,860)
 
$     256,451 
 
 
Six-month period ended June 30, 2009
   
                   
 
Wealth
 
Individual
 
Group
       
 
Management
 
Protection
 
Protection
 
Corporate
 
Totals
Total revenues
$   1,517,470 
 
$  31,527 
 
$   69,179 
 
$   (13,089)
 
$  1,605,087 
Total benefits and expenses
733,615 
 
33,105 
 
55,716 
 
14,060 
 
836,496 
Income (loss) from continuing
operations before income tax
expense (benefit)
783,855 
 
(1,578)
 
13,463 
 
(27,149)
 
768,591 
                   
Net income (loss) from
continuing operations
512,509 
 
(4,642)
 
8,751 
 
(21,910)
 
494,708 
Loss from discontinued
operations, net of tax
 
(3,784)
 
 
 
(3,784)
                   
Net income (loss)
$      512,509 
 
$   (8,426)
 
$     8,751 
 
$   (21,910)
 
$     490,924 


 
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)

3. SEGMENT INFORMATION (CONTINUED)

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

 
Three-month period ended June 30, 2010
   
                   
 
Wealth
 
Individual
 
Group
       
 
Management
 
Protection
 
Protection
 
Corporate
 
Totals
Total revenues
$          3,352 
 
$         12,445 
 
$          32,315 
 
$       (1,382)
 
$        46,730 
Total benefits and expenses
  (211,278)
 
   12,093 
 
  30,844 
 
1,040 
 
  (167,301)
Income (loss) before income
tax expense (benefit)
  214,630 
 
     352 
 
1,471 
 
(2,422)
 
  214,031 
Net income (loss)
$      144,523 
 
$              260 
 
$               959 
 
$         (942) 
 
$      144,800 
 
 
Three-month period ended June 30, 2009
   
                   
 
Wealth
 
Individual
 
Group
       
 
Management
 
Protection
 
Protection
 
Corporate
 
Totals
Total revenues
$   1,179,040 
 
$        19,012 
 
$       35,789 
 
$    (9,101)
 
$   1,224,740 
Total benefits and expenses
614,630 
 
18,884 
 
28,825 
 
7,789 
 
670,128 
Income (loss) from continuing
operations before income tax
expense (benefit)
564,410 
 
128 
 
6,964 
 
(16,890)
 
554,612 
                   
Net income (loss) from
continuing operations
364,646 
 
299 
 
4,527 
 
(16,040)
 
353,432 
Income from discontinued
operations, net of tax
 
87,878 
 
 
 
87,878 
                   
Net income (loss)
$      364,646 
 
$        88,177 
 
$         4,527 
 
$   (16,040)
 
$      441,310 



 
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)

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.  Fair value is defined 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.

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. During the six-month period ended June 30, 2010, there were no changes to these valuation techniques and the related inputs.



 
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)

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”), residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”), 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, CMO, RMBS, and CMBS, certain corporate debt, certain private equity investments, certain mutual fund holdings and certain derivatives, including derivatives embedded in annuity contracts and certain funding agreements.


 
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 (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 June 30, 2010 (in 000’s):

   
Level 1
 
Level 2
 
Level 3
 
Total
Assets
                       
Available-for-sale fixed maturity securities:
                       
Asset-backed securities
 
$
 
$
894 
 
$
22 
 
$
916 
Residential mortgage-backed securities
   
   
41,511 
   
   
41,511 
Commercial mortgage-backed securities
   
   
12,793 
   
1,371 
   
14,164 
Foreign government & agency securities
   
   
555 
   
   
555 
U.S. states and political subdivisions securities
   
   
220 
   
   
220 
U.S. treasury and agency securities
   
372,663 
   
   
   
372,663 
Corporate securities
   
   
1,104,646 
   
678 
   
1,105,324 
Total available-for-sale fixed maturity securities
   
372,663 
   
1,160,619 
   
2,071 
   
1,535,353 
                         
Trading fixed maturity securities:
                       
Asset-backed securities
   
   
355,772 
   
47,668 
   
403,440 
Residential mortgage-backed securities
   
   
942,964 
   
98,323 
   
1,041,287 
Commercial mortgage-backed securities
   
   
691,560 
   
62,793 
   
754,353 
Foreign government & agency securities
   
   
119,945 
   
14,638 
   
134,583 
U.S. states and political subdivisions securities
   
   
629 
   
   
629 
U.S. treasury and agency securities
   
818,782 
   
31,803 
   
   
850,585 
Corporate securities
   
   
8,835,546 
   
48,551 
   
8,884,097 
Total trading fixed maturity securities
   
818,782 
   
10,978,219 
   
271,973 
   
12,068,974 
                         
Derivative instruments - receivable:
                       
Interest rate contracts
   
   
206,101 
   
   
206,101 
Foreign currency contracts
   
   
29,511 
   
   
29,511 
Equity contracts
   
10,880 
   
21,050 
   
1,723 
   
33,653 
Futures
   
17,105 
   
   
   
17,105 
Total derivative instruments - receivable
   
27,985 
   
256,662 
   
1,723 
   
286,370 
                         
Other invested assets
   
1,154 
   
   
1,614 
   
2,768 
Short-term investments
   
75,086 
   
   
   
75,086 
Cash and cash equivalents
   
2,074,999 
   
   
   
2,074,999 
Total investments and cash
   
3,370,669 
   
12,395,500 
   
277,381 
   
16,043,550 
                         
Separate account assets:
                       
Mutual fund investments
   
18,422,259 
   
33,187 
   
   
18,455,446 
Equity investments
   
156,153 
   
69,886 
   
197 
   
226,236 
Fixed income investments
   
545,739 
   
4,930,857 
   
92,963 
   
5,569,559 
Alternative investments
   
6,584 
   
82,797 
   
269,757 
   
359,138 
Other investments
   
36 
   
   
   
36 
Total separate account assets (1) (2)
   
19,130,771 
   
5,116,727 
   
362,917 
   
24,610,415 
                         
Total assets measured at fair value on a recurring basis
 
$
22,501,440 
 
$
17,512,227 
 
$
640,298 
 
$
40,653,965 

 
(1) Pursuant to the conditions set forth in FASB ASC Topic 944, “Financial Services- Insurance,” the value of separate account liabilities is set to equal the fair value of the separate account assets.

 
(2) Excludes $1,006.0 million primarily related to investment purchases payable, net of investment sales receivable, that are not subject to FASB ASC Topic 820.

 
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)

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 June 30, 2010 (in 000’s):

   
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities
                       
Other policy liabilities:
                       
Guaranteed minimum withdrawal benefit liability
 
$
 
$
 
$
618,029 
 
$
618,029 
Guaranteed minimum accumulation benefit liability
   
   
   
231,911 
   
231,911 
Derivatives embedded in reinsurance contracts
   
   
51,055 
   
   
51,055 
Fixed index annuities
   
   
   
118,287 
   
118,287 
Total other policy liabilities
   
   
51,055 
   
968,227 
   
1,019,282 
                         
Derivative instruments – payable:
                       
Interest rate contracts
   
   
560,939 
   
   
560,939 
Foreign currency contracts
   
   
5,690 
   
   
5,690 
Credit contracts
   
   
   
33,726 
   
33,726 
Futures
   
2,435 
   
   
   
2,435 
Total derivative instruments – payable
   
2,435 
   
566,629 
   
33,726 
   
602,790 
                         
Other liabilities:
                       
Bank overdrafts
   
47,077 
   
   
   
47,077 
                         
Total liabilities measured at fair value on a recurring basis
 
$
49,512 
 
$
617,684 
 
$
1,001,953 
 
$
1,669,149 
 
                       





 
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 (continued)

The following table presents the Company's categories for its assets measured at fair value on a recurring basis as of December 31, 2009 (in 000’s):

   
Level 1
 
Level 2
 
Level 3
 
Total
Assets
                       
Available-for-sale fixed maturity securities:
                       
Asset-backed securities
 
$
-
 
$
952
 
$
37
 
$
989
Residential mortgage-backed securities
   
-
   
47,701
   
-
   
47,701
Commercial mortgage-backed securities
   
-
   
14,150
   
1,930
   
16,080
Foreign government & agency securities
   
-
   
760
   
-
   
760
U.S. treasury and agency securities
   
39,131
   
-
   
-
   
39,131
Corporate securities
   
-
   
1,062,919
   
7,936
   
1,070,855
Total available-for-sale fixed maturity securities
   
39,131
   
1,126,482
   
9,903
   
1,175,516
                         
Trading fixed maturity securities:
                       
Asset-backed securities
   
-
   
355,613
   
111,650
   
467,263
Residential mortgage-backed securities
   
-
   
886,340
   
154,551
   
1,040,891
Commercial mortgage-backed securities
   
-
   
624,845
   
14,084
   
638,929
Foreign government & agency securities
   
-
   
67,925
   
15,323
   
83,248
U.S. treasury and agency securities
   
503,123
   
34,407
   
-
   
537,530
Corporate securities
   
-
   
8,254,775
   
107,886
   
8,362,661
Total trading fixed maturity securities
   
503,123
   
10,223,905
   
403,494
   
11,130,522
                         
Derivative instruments - receivable
   
14,922
   
235,484
   
8,821
   
259,227
Other invested assets
   
20,242
   
206
   
-
   
20,448
Short-term investments
   
1,267,311
   
-
   
-
   
1,267,311
Cash and cash equivalents
   
1,804,208
   
-
   
-
   
1,804,208
Total investments and cash
   
3,648,937
   
11,586,077
   
422,218
   
15,657,232
                         
Other assets
                       
Separate account assets (1) (2)
   
18,045,908
   
5,233,602
   
547,841
   
23,827,351
                         
Total assets measured at fair value on a recurring basis
 
$
21,694,845
 
$
16,819,679
 
$
970,059
 
$
39,484,583

 
(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 of the separate account assets.

 
(2)Excludes $501.0 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 December 31, 2009 (in 000’s):

   
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities
                       
Other policy liabilities:
                       
Guaranteed minimum withdrawal benefit liability
 
$
-
 
$
 
$
168,786
 
$
168,786
Guaranteed minimum accumulation benefit liability
   
-
   
   
81,669
   
81,669
Derivatives embedded in reinsurance contracts
   
-
   
15,035
   
   
15,035
Fixed index annuities
   
-
   
   
140,966
   
140,966
Total other policy liabilities
   
-
   
15,035
   
391,421
   
406,456
                         
Derivative instruments – payable
   
5,256
   
533,305 
   
34,349
   
572,910
                         
Other liabilities:
                       
Bank overdrafts
   
60,037
   
   
-
   
60,037
                         
Total liabilities measured at fair value on a recurring basis
 
$
65,293
 
$
548,340 
 
$
425,770
 
$
1,039,403


Assets Measured at Fair Value on a Nonrecurring Basis

The following table presents the Company’s categories for its assets measured at fair value on a nonrecurring basis as of
December 31, 2009:

   
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
Total Gains
(Losses)
Asset
                             
VOCRA
 
$
 
$
 
$
5,766  
 
$
5,766 
 
$
(2,600) 

At December 31, 2009, the Company determined that the VOCRA asset was impaired and recorded an impairment charge of $2.6 million.  The impairment charge was allocated to the Group Protection Segment.  The fair value of VOCRA was calculated as the sum of the undiscounted cash flows the Company expects to realize, based on the segment’s anticipated long-term profit margins.


 
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 methods and assumptions that the Company uses in determining the estimated fair value of its financial instruments that are measured at fair value on a recurring basis are summarized below:

Fixed maturity securities: The Company determines the fair value of its publicly traded fixed maturity securities using three primary pricing methods: third-party pricing services, non-binding broker quotes and pricing models.  Prices are first sought from third-party pricing services; the remaining unpriced securities are priced using one of the remaining two 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 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 CMBS, RMBS and ABS, are priced using a fair value model or independent broker quotations.  CMBS securities are priced using the last sale price of the day or a broker quote, if no sales were transacted that day.  RMBS and ABS are priced using 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 CMBS, RMBS and ABS.  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 maturity securities, fair values are estimated using models 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 maturity securities are also priced using market prices or broker quotes.

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.  The Company uses credit valuation adjustments (“CVAs”) to properly reflect the component of fair value of certain derivative instruments that arise from default risk.  CVAs are based on a methodology that primarily uses published credit default swap spreads as a key input in determining an implied level of expected loss over the total life of the derivative contract.  When this information is not available, the Company may also utilize credit spreads implied from published bond yields, or published cumulative default experience data adjusted for current trends. CVAs may be calculated based on the credit risk of counterparties for asset positions or the Company's own credit risk for liability positions.  The counterparty or the Company’s credit spreads from bond yields are used where no observable credit default swap spreads are available.  The CVAs also takes into account contractual factors designed to reduce the Company’s credit exposure to each counterparty, such as collateral and legal rights of offset.

Other invested assets:  This financial instrument primarily consists of equity securities for which the fair value is based on quoted market prices.

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

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.


 
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)

Other policy liabilities:  The fair values of S&P 500 Index and other equity-linked embedded derivatives are produced using standard derivative valuation techniques.  Guaranteed minimum accumulation benefit (“GMAB”) or guaranteed minimum withdrawal benefit (“GMWB”) are considered to be derivatives under FASB ASC Topic 815 and are included in contractholder deposit funds and other policy liabilities in the Company’s condensed consolidated balance sheets.  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.

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.




 
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)

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 six-month period ended June 30, 2010 (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
Ending balance
Change in total 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 maturity securities:
             
Asset-backed securities
$        37 
$   (22)
$              7 
$                      - 
$                 - 
$                   22 
$                              - 
Residential mortgage-backed securities
Commercial mortgage-backed
securities
1,930 
(307)
(252)
1,371 
Foreign government & agency
     securities
U.S. states and political subdivisions
securities
U.S. treasury and agency securities
Corporate securities
7,936 
(12)
(5)
(57)
(7,184)
678 
Total available-for-sale fixed maturity
     securities
9,903 
(341)
(250)
(57) 
(7,184)
2,071 
               
Trading fixed maturity securities:
             
Asset-backed securities
111,650 
(8,524)
(18,975)
(36,483)
47,668 
7,159 
Residential mortgage-backed securities
154,551 
2,505 
(6,416)
(52,317)
98,323 
5,066 
Commercial mortgage-backed
     securities
14,084 
798 
48,607 
(696)
62,793 
1,670 
Foreign government & agency
     securities
15,323 
(685) 
14,638 
103 
U.S. states and political subdivisions
     securities
U.S. treasury and agency securities
Corporate securities
107,886 
(6,196)
2,187 
(55,326)
48,551 
1,635 
Total trading fixed maturity securities
403,494 
(12,102)
25,403 
(144,822)
271,973 
15,633 
               
Derivative instruments – receivable:
             
Interest rate contracts
Foreign currency contracts
Equity contracts
8,821 
(3,894)
(3,204)
1,723 
(3,894)
Futures
Total derivative instruments– receivable
8,821 
(3,894)
(3,204)
1,723 
(3,894)
               
Other invested assets
128 
1,486 
1,614 
127 
Short-term investments
Cash and cash equivalents
Total investments and cash
422,218 
(16,209)
(250)
23,628 
(152,006)
277,381 
11,866 
               
Separate account assets:
             
Mutual fund investments
-
Equity investments
7
11 
179 
197 
10 
Fixed income investments
276,530
4,140 
(78,387)
(109,320)
92,963 
1,313 
Alternative investments
267,196
(10,652)
16,182 
(2,969)
269,757 
(10,741)
Other investments
4,108
(4,108)
Total separate account assets (1)
547,841
(6,501)
-    
(62,026)
(116,397)
362,917 
(9,418)
               
Total assets measured at fair value on
a recurring basis
$970,059 
$(22,710)
$            (250)
$            (38,398)
$    (268,403)
$        640,298 
$                      2,448 

 
 
(1) 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)

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 six-month period ended June 30, 2010 (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 total (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
$168,786 
$385,563  
$                      - 
$63,680  
$                   - 
$        618,029 
$                  387,678 
Guaranteed minimum accumulation
benefit liability
81,669  
138,727  
11,515  
231,911 
139,536 
Derivatives embedded in reinsurance
contracts
-  
-  
-  
Fixed index annuities
140,966  
(27,126 )
4,447  
118,287 
(7,166)
Total other policy liabilities
391,421 
497,164 
79,642  
968,227 
520,048 
               
Derivative instruments – payable:
             
Interest rate contracts
Foreign currency contracts
Credit contracts
34,349 
(623)
33,726 
(623)
Futures
Total derivative instruments – payable
34,349 
(623)
33,726 
(623)
               
               
Other liabilities:
             
Bank overdrafts
               
Total liabilities measured at fair value on
a recurring basis
$425,770 
$ 496,541 
$               - 
$          79,642 
$               - 
$       1,001,953 
$     519,425 

Total realized and unrealized gains (losses), related to Level 3 assets and liabilities, included in the Company’s condensed consolidated statements of operations for the six-month period ended June 30, 2010, are reported as follows (in 000’s):

   
Total realized gains
(losses) included in
earnings
 
Change in
unrealized gains
(losses) related to
assets still held  at
the reporting date
Net investment (loss) income
$
(11,974)
$
15,760 
Net derivative loss
 
(500,435)
 
(523,319)
Net realized investment losses, excluding impairment
   losses on available-for-sale securities
 
(341)
 
Net losses
$
(512,750)
$
(507,559)



 
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 six-month period ended June 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 (2)
Ending
balance
Change in total 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 maturity securities:
             
Asset-backed and mortgage-backed
   securities
$              - 
$               -
$                -
$               -
$               - 
$             - 
$               - 
Collateralized mortgage obligations
3,046 
45 
(448)
2,643 
Commercial mortgage-backed
   securities
1,420 
(29)
(1,343)
55 
Foreign government & agency securities
U.S. states and political subdivisions
   securities
U.S. treasury and agency securities
Corporate securities
7,888 
242 
273 
3,036 
(1,414)
10,025 
Total available-for-sale fixed maturity securities
12,354 
258 
(168)
3,036 
(2,757)
12,723 
               
Trading fixed maturity securities:
             
Asset-backed and mortgage-backed
   securities
145,267 
16,417 
(4,371)
(8,148)
149,165 
27,738 
Collateralized mortgage obligations
116,572 
(6,792)
(6,448)
37,201 
140,533 
9,611 
Commercial mortgage-backed
   securities
200,414 
5,436 
(253)
205,597 
67,121 
Foreign government & agency
   securities
9,200 
305 
(105)
-  
9,400 
200 
U.S. states and political subdivisions
   securities
-  
U.S. treasury and agency securities
-  
Corporate securities
134,505 
10,377 
4,915 
(32,412)
117,385 
14,312 
Total trading fixed maturity securities
605,958 
25,743 
(6,262)
(3,359)
622,080 
118,982 
               
Derivative instruments – receivable
2,668 
46 
385 
3,099 
46 
Other invested assets
Short-term investments
Cash and cash equivalents
Total investments and cash
620,980 
26,047 
(168)
(2,841)
(6,116)
637,902 
119,028 
               
Other assets
             
Separate account assets (1)
801,873 
25,804  
(66,872)
(39,879)  
720,926 
125,100 
               
Total assets measured at fair value on a
recurring basis
$1,422,853 
$     51,851 
$          (168)
$     (69,713)
$    (45,995)
$1,358,828 
$    244,128 

 
(1) 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.

 
(2) Transfers in and/or (out) of level 3 during the six-month period ended June 30, 2009 are primarily attributable to changes in the observability of inputs used to price the securities.


 
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 six-month period ended June 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 total (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 
$   (82,247)
$            - 
$      27,124 
$       - 
$280,489 
$        (74,916)
   Guaranteed minimum accumulation
     benefit liability
358,604 
(170,707)
9,892 
197,789 
(165,068)
  Derivatives embedded in reinsurance contracts
   Fixed index annuities
106,619 
(1,151)
(2,677)
102,791 
(4,081)
Total other policy liabilities
800,835 
(254,105)
34,339 
581,069 
(244,065)
               
Derivative instruments – payable
42,066 
4,130 
46,196 
4,130 
               
Total liabilities measured at fair value on
    a recurring basis
$   842,901 
$ (249,975)
$             - 
$  34,339 
$      - 
$627,265 
$      (239,935)


Total realized and unrealized gains (losses), related to Level 3 assets and liabilities, included in the Company’s condensed consolidated statements of operations for the six-month period ended June 30, 2009, are reported as follows (in 000’s):

   
Total realized
gains (losses)
included in
earnings
 
Change in
unrealized gains
(losses) related to
assets still held  at
the reporting date
Net investment income
$
25,743 
$
118,982 
Net derivative income
 
250,021 
 
239,981 
Net realized investment gains, excluding
impairment losses on available-for-sale securities
 
258 
 
Net gains
$
276,022 
$
358,963 








 
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)

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 June 30, 2010 (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
Ending
balance
Change in total 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 maturity securities:
             
Asset-backed securities
$     29
$   (10) 
$         3 
$              - 
$        - 
$        22  
$                     - 
Residential mortgage-backed securities
-
Commercial mortgage-backed
    securities
1,135
(64) 
300  
1,371  
Foreign government & agency
    securities
-
U.S. states and political subdivisions
    securities
-
U.S. treasury and agency securities
-
-
-
-
-
-
Corporate securities
939
(6)
(1)
(254) 
678  
Total available-for-sale fixed maturity
    securities
 
2,103
(80) 
302  
(254) 
2,071   
               
Trading fixed maturity securities:
             
Asset-backed securities
48,924
769 
(261) 
(1,764) 
47,668 
921 
Residential mortgage-backed securities
105,554
473 
(3,268) 
(4,436) 
98,323 
1,388 
Commercial mortgage-backed
    securities
12,892
1,294 
48,607 
62,793 
2,439 
Foreign government & agency
    securities
15,093
(455) 
14,638 
(58)
U.S. states and political subdivisions
    securities
-  
U.S. treasury and agency securities
-  
Corporate securities
96,653 
(6,863)
4,416 
(45,655)
48,551 
979 
Total trading fixed maturity securities
279,116 
(4,782)
49,494 
(51,855)
271,973 
5,669 
               
Derivative instruments – receivable:
             
Interest rate contracts
Foreign currency contracts
Equity contracts
11,956 
(7,048)
(3,185)
1,723 
(7,049)
Futures
Total derivative instruments– receivable
11,956 
(7,048) 
(3,185)
1,723 
(7,049)
               
Other invested assets
128 
-   
1,486 
1,614 
128 
Short-term investments
Cash and cash equivalents
Total investments and cash
293,175 
(11,782) 
302 
47,795 
(52,109)
277,381 
(1,252)
               
Separate account assets:
             
Mutual fund investments
Equity investments
11 
179 
197 
10 
Fixed income investments
313,747 
(78)
(88,136)
(132,570)
92,963 
(2,723)
Alternative investments
259,762 
(10,187)
20,182 
269,757 
(9,519)
Other investments
725 
(725)
Total separate account assets (1)
$574,241 
$(10,254)
(67,775)
(133,295)
362,917 
(12,232)
               
Total assets measured at fair value on
a recurring basis
$867,416 
$(22,036)
$           302 
$              (19,980)
$ (185,404)
$   640,298 
$            (13,484)

 
(1) 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)

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 June 30, 2010 (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 total (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
$ 168,786
$ 385,563
$            -
$     63,680
$           -
$ 618,029
$        480,587
Guaranteed minimum accumulation
benefit liability
46,030
180,406
-
5,475
-
231,911
181,178
Derivatives embedded in reinsurance
contracts
-
-
-
-
-
-
-
Fixed index annuities
139,012
(21,771) )
-
1,046
-
118,287
(11,167)
Total other policy liabilities
353,828
544,198
-
70,201
-
968,227
650,598
     
-
       
Derivative instruments – payable:
             
Interest rate contracts
-
-
-
-
-
-
-
Foreign currency contracts
-
-
-
-
-
-
-
Credit contracts
34,612
(886)
-
-
-
33,726
(886)
Futures
-
-
-
-
-
-
-
Total derivative instruments – payable
34,612
(886)
-
-
-
33,726
(886)
               
               
Other liabilities:
             
Bank overdrafts
-
-
-
-
-
-
-
               
Total liabilities measured at fair value on a
recurring basis
$ 388,440
$543,312
$            -
$    70,201
$           -
$ 1,001,953
$          649,712


Total realized and unrealized gains (losses), related to Level 3 assets and liabilities, included in the Company’s condensed consolidated statements of operations for the three-month period ended June 30, 2010, are reported as follows (in 000’s):

   
Total realized gains
(losses) included in
earnings
 
Change in
unrealized gains
(losses) related to
assets still held  at
the reporting date
Net investment (loss) income
$
(4,654)
$
5,797 
Net derivative loss
 
(550,360)
 
(656,761)
Net realized investment losses, excluding impairment
    losses on available-for-sale securities
 
(80)
 
Net loss
$
(555,094)
$
(650,964)


 
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 June 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 (2)
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 maturity securities:
             
Asset-backed securities
$               - 
$          - 
$       - 
$          - 
$         - 
$            - 
$            - 
Collateralized mortgage obligations
2,523 
76 
44 
2,643 
Commercial mortgage-backed
    securities
65 
(14)
55 
Foreign government & agency securities
U.S. states and political subdivisions
    securities
U.S. treasury and agency securities
Corporate securities
1,749 
119 
1,972 
3,198 
2,987 
10,025 
Total available-for-sale fixed maturity securities
4,337 
181 
2,020 
3,198 
2,987 
12,723 
               
Trading fixed maturity securities:
             
Asset-backed and mortgage-backed
   securities
96,603 
39,850 
(1,700)
14,412 
149,165 
46,505 
Collateralized mortgage obligations
103,126 
6,443 
(3,266)
34,230 
140,533 
9,607 
Commercial mortgage-backed
   securities
177,827 
27,857 
(87)
205,597 
61,187 
Foreign government & agency
   securities
9,450 
55 
(105)
9,400 
(50)
U.S. states and political subdivisions
   securities
U.S. treasury and agency securities
Corporate securities
98,795 
9,719 
8,074 
797 
117,385 
13,581 
Total trading fixed maturity securities
485,801 
83,924 
2,916 
49,439 
622,080 
130,830 
               
Derivative instruments – receivable
2,361 
619 
119 
3,099 
619 
Other invested assets
Short-term investments
             
Cash and cash equivalents
Total investments and cash
492,499 
84,724 
2,020 
6,233 
52,426 
637,902 
131,449 
               
Other assets
             
Separate account assets (1)
558,767 
13,616 
178,970 
(30,427)
720,926 
101,168 
               
Total assets measured at fair value on a
recurring basis
$ 1,051,266 
$ 98,340 
$ 2,020 
$185,203 
$21,999 
$1,358,828
$232,617 

 
(1) 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.

 
(2) Transfers in and/or (out) of level 3 during the three-month period ended June 30, 2009 are primarily attributable to changes in the observability of inputs used to price the securities.

 
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 June 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
$ 377,589 
$ (113,203)
$     - 
$  16,103 
$     - 
$280,489 
$   (109,487)
   Guaranteed minimum accumulation
     benefit liability
326,105 
(133,626)
5,310 
197,789 
(131,035)
  Derivatives embedded in reinsurance
contracts
   Fixed index annuities
90,055 
8,759 
3,977 
102,791 
10,889 
Total other policy liabilities
793,749 
(238,070)
25,390 
581,069 
(229,633)
               
Derivative instruments – payable
39,143 
7,053 
46,196 
7,053 
               
Total liabilities measured at fair value on
    a recurring basis
$ 832,892 
$ (231,017)
$     - 
$   25,390 
$     - 
$627,265 
$ (222,580)


Total realized and unrealized gains (losses), related to Level 3 assets and liabilities, included in the Company’s condensed consolidated statements of operations for the three-month period ended June 30, 2009, are reported as follows (in 000’s):

   
Total realized
gains (losses)
included in
earnings
 
Change in
unrealized gains
(losses) related to
assets still held at
the reporting date
Net investment income
$
83,924 
$
130,830 
Net derivative income
 
231,636 
 
223,199 
Net realized investment gains, excluding
     impairment losses on available-for-sale securities
 
181 
 
Net gains
$
315,741 
$
354,029 



 
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)

Fair Value Hierarchy (continued)

The Company determines transfers between levels based on the fair value of each security as of the beginning of the reporting period.

During the six-month period ended June 30, 2010, the Company transferred the following assets into (out of) Levels 1, 2 and 3:

 
Level 1 Transfers
Level 2 Transfers
Level 3 Transfers
 
Into
(Out of)
Into
(Out of)
Into
(Out of)
Assets
           
Available-for-sale fixed maturity securities:
           
Asset-backed securities
$                   - 
$                -
$              - 
$                   - 
$             - 
$                 - 
Residential mortgage-backed securities
Commercial mortgage-backed securities
Foreign government & agency securities
U.S. states and political subdivisions
securities
U.S. treasury and agency securities
Corporate securities
7,184 
(7,184)
Total available-for-sale fixed maturity
    securities
7,184 
(7,184)
             
Trading fixed maturity securities:
           
Asset-backed securities
45,553 
(9,070)
9,070 
(45,553)
Residential mortgage-backed securities
91,399 
(39,082)
39,082 
(91,399)
Commercial mortgage-backed securities
696 
(696)
Foreign government & agency securities
 -
U.S. states and political subdivisions
securities
U.S. treasury and agency securities
Corporate securities
-
55,326 
(55,326)
Total trading fixed maturity securities
   
192,974 
(48,152)
48,152 
(192,974)
             
Derivative instruments – receivable:
           
Interest rate contracts
Foreign currency contracts
Equity contracts
Futures
Total derivative instruments– receivable
             
Separate account assets:
           
Mutual fund investments
Equity investments
Fixed income investments
109,320 
(109,320)
Alternative investments
2,969 
(2,969)
Other investments
4,108 
(4,108)
Total separate account assets
4,108 
112,289 
(116,397)
             
Total assets measured at fair value on a
recurring basis
$            4,108 
$              - 
$     312,447 
$          (48,152)
$       48,152 
$       (316,555)

The Company did not change the categorization of its financial instruments during the six-month period ended June 30, 2010.  The transfers into (out of) Level 2 and Level 3 were primarily due to changes in the level of observability of inputs used to price these securities.


 
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)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The Company determines transfers between levels based on the fair value of each security as of the beginning of the reporting period.

During the three-month period ended June 30, 2010, the Company transferred the following assets into (out of) Levels 1, 2 and 3:

 
Level 1 Transfers
Level 2 Transfers
Level 3 Transfers
 
Into
(Out of)
Into
(Out of)
Into
(Out of)
Assets
           
Available-for-sale fixed maturity securities:
           
Asset-backed securities
$               - 
$                - 
$             - 
$                    - 
$              - 
$                  - 
Residential mortgage-backed securities
  - 
Commercial mortgage-backed securities
  - 
Foreign government & agency securities
  - 
U.S. states and political subdivisions
securities
  - 
U.S. treasury and agency securities
  - 
Corporate securities
254 
(254)
Total available-for-sale fixed maturity
securities
- 
254 
-
- 
(254)
             
Trading fixed maturity securities:
           
Asset-backed securities
7,908 
(6,144)
6,144 
(7,908)
Residential mortgage-backed securities
57,646 
(53,210)
53,210 
(57,646)
Commercial mortgage-backed securities
Foreign government & agency securities
U.S. states and political subdivisions
securities
U.S. treasury and agency securities
Corporate securities
45,655 
(45,655)
Total trading fixed maturity securities
111,209 
(59,354)
59,354 
(111,209)
             
Derivative instruments – receivable:
           
Interest rate contracts
Foreign currency contracts
Equity contracts
Futures
Total derivative instruments– receivable
             
Separate account assets:
           
Mutual fund investments
Equity investments
Fixed income investments
132,570 
(132,570)
Alternative investments
Other investments
725 
(725)
Total separate account assets
725 
132,570 
(133,295)
             
Total assets measured at fair value on a
recurring basis
$            725 
$              - 
$     244,033 
$          (59,354)
$                59,354 
$       (244,758)

The Company did not change the categorization of its financial instruments during the three-month period ended June 30, 2010.  The transfers into (out of) Level 2 and Level 3 were primarily due to changes in the level of observability of inputs used to price these securities.


 
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)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value of Financial Instruments

FASB ASC Topic 825 “Financial Instruments” requires disclosure of the fair value of certain financial instruments including those that are not carried at fair value. FASB ASC Topic 825 also 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 Company's financial instruments whose carrying amounts and estimated fair values may differ (in 000’s) at:

     
June 30, 2010
 
December 31, 2009
     
Carrying
Estimated
 
Carrying
Estimated
     
Amount
Fair Value
 
Amount
Fair Value
Financial assets:
         
 
Mortgage loans
 $        1,844,572 
  $      1,760,625 
 
$        1,911,961 
$       1,937,199 
 
Policy loans
713,834 
874,430 
 
722,590 
837,029 
             
Financial liabilities:
         
 
Contractholder deposit funds and other
policy liabilities
13,907,754 
13,748,239 
 
14,104,892 
13,745,774 
 
Debt payable to affiliates
883,000 
883,000 
 
883,000 
883,000 

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

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

Mortgage loans: 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.

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.

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 (e.g., 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.

Debt payable to affiliates: The fair value of notes payable and other borrowings is based on future cash flows 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.


 
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

Fixed Maturity Securities

The amortized cost and fair value of fixed maturity securities at June 30, 2010, were as follows (in 000’s):

     
Gross
   
Available-for-sale fixed maturity securities
Amortized
Cost
Gross
Unrealized
Gains
Unrealized
Temporary
Losses
OTTI
Losses(1)
Fair
Value
Non-corporate securities:
         
Asset-backed securities
$           884 
$         44 
$             (12)
$            - 
$            916
Residential mortgage-backed securities
38,625 
2,887 
(1)
41,511 
Commercial mortgage-backed securities
16,237 
521 
(2,594)
14,164 
Foreign government & agency securities
507 
48 
555 
U.S. states and political subdivisions securities
218 
220 
U.S. treasury and agency securities
366,749 
5,914 
 
372,663 
Total non-corporate securities
423,220
9,416 
(2,607)
430,029 
           
Corporate securities
1,031,383 
100,335 
(13,205)
(13,189)
1,105,324 
           
Total available-for-sale fixed maturity securities
$ 1,454,603 
$109,751 
$      (15,812)
$ (13,189)
$  1,535,353 
           
           
Trading fixed maturity securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 
Non-corporate securities:
         
Asset-backed securities
$     564,687 
$     7,295 
$     (168,542)
$    403,440 
 
Residential mortgage-backed securities
1,383,018 
19,386 
(361,117)
1,041,287 
 
Commercial mortgage-backed securities
961,108 
31,319 
(238,074)
754,353 
 
Foreign government & agency securities
124,158 
10,425 
134,583 
 
U.S. states and political subdivisions securities
606 
23 
629 
 
U.S. treasury and agency securities
845,094 
5,491 
850,585 
 
Total non-corporate securities
3,878,671 
73,939 
(767,733)
3,184,877 
 
           
Corporate securities
8,649,882 
419,573 
(185,358)
8,884,097 
 
           
Total trading fixed maturity securities
$ 12,528,553 
$ 493,512 
$     (953,091)
$12,068,974 
 

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



 
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)

Fixed Maturity Securities (Continued)

The amortized cost and fair value of fixed maturity securities at December 31, 2009, were as follows (in 000’s):

     
Gross
   
 
Available-for-sale fixed maturity securities
Amortized
Cost
Gross
Unrealized
Gains
Unrealized
Temporary
Losses
OTTI
Losses (1)
Fair
Value
Non-corporate securities:
         
Asset-backed securities
$           966 
$             42 
$            (19)
$             - 
$             989 
Residential mortgage-backed securities
45,531 
2,170 
47,701 
Commercial mortgage-backed securities
18,566 
114 
(2,600)
16,080 
Foreign government & agency securities
728 
39 
(7)
760 
U.S. treasury and agency securities
38,063 
1,156 
(88)
39,131 
Total non-corporate securities
103,854 
3,521 
(2,714)
104,661 
           
Corporate securities
1,017,570 
86,026 
(18,993)
(13,748)
1,070,855 
           
Total available-for-sale fixed maturity securities
$ 1,121,424 
$      89,547 
$     (21,707)
$  (13,748)
$   1,175,516 
           
           
Trading fixed maturity securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 
Non-corporate securities:
         
Asset-backed securities
$      658,864 
$       6,766 
$   (198,367)
$   467,263
 
Collateralized mortgage obligations
-
 
Residential mortgage-backed securities
1,437,147 
13,051 
(409,307)
1,040,891
 
Commercial mortgage-backed securities
972,971 
23,199 
(357,241)
638,929
 
Foreign government & agency securities
76,971 
6,277 
83,248
 
U.S. treasury and agency securities
525,758 
14,122 
(2,350)
537,530
 
Total non-corporate securities
3,671,711
63,415 
(967,265)
2,767,861
 
           
Corporate securities
8,371,250
300,777 
(309,366)
8,362,661
 
           
Total trading fixed maturity securities
$  12,042,961
$   364,192 
$(1,276,631)
$11,130,522
 

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


 
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)

Fixed Maturity Securities (Continued)

The amortized cost and estimated fair value by maturity periods for fixed maturity securities held at June 30, 2010 are shown below (in 000’s).  Actual maturities may differ from contractual maturities on structured securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

       
Amortized Cost
Fair Value
Maturities of available-for-sale fixed securities:
   
 
Due in one year or less
$     10,418 
$         10,545 
 
Due after one year through five years
708,653 
769,137 
 
Due after five years through ten years
86,699 
97,159 
 
Due after ten years
   
593,087 
601,922 
            Subtotal – Maturities of available-for-sale fixed securities
 
1,398,857 
1,478,763 
ABS, RMBS and CMBS securities(1)
 
55,746 
56,590 
          Total available-for-sale fixed securities
 
$    1,454,603 
$    1,535,353 
       
Maturities of trading fixed securities:
   
 
Due in one year or less
$    1,458,931 
$      1,472,028 
 
Due after one year through five years
4,506,225 
4,660,436 
 
Due after five years through ten years
2,288,341 
2,410,246 
 
Due after ten years
1,366,243 
1,327,185
 
Subtotal – Maturities of trading fixed securities
9,619,740 
9,869,895 
ABS, RMBS and CMBS securities(1)
2,908,813 
2,199,079 
 
Total trading fixed securities
$  12,528,553 
$    12,068,974 

(1)  
ABS, RMBS and CMBS securities are shown separately in the table as they are not due at a single maturity date.

Gross gains of $70.6 million and gross losses of $24.0 million were realized on the sale of available-for-sale fixed maturity securities for the six-month period ended June 30, 2010.






 
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)

Unrealized Losses

The following table shows the fair value and gross unrealized losses of the Company’s available-for-sale fixed maturity investments, which includes temporary unrealized losses and the portion of non-credit OTTI losses recognized in AOCI.  These fair value and gross unrealized losses are aggregated by investment category and length of time that the individual securities had been in an unrealized loss position at June 30, 2010 (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
             
Non-corporate securities:
           
Asset-backed securities
$          - 
$         - 
$          22
$      (12)
$        22 
$       (12)
Residential mortgage-backed securities
195 
(1)
195 
(1)
Commercial mortgage-backed securities
4,287 
(2,594)
4,287 
(2,594)
Foreign government & agency securities
U.S. states and political subdivisions
U.S. treasury and agency securities
Total non-corporate securities
195 
(1) 
4,309 
(2,606)
4,504 
(2,607)
             
Corporate securities
64,350 
(1,849)
154,727 
(24,545)
219,077 
(26,394)
             
 Total
$ 64,545 
$(1,850)
$ 159,036 
$ (27,151)
$223,581 
$(29,001)

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, 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
             
Non-corporate securities:
           
Asset-backed securities
$              - 
$              - 
$            37
$           (19)
$          37 
$          (19)
Commercial mortgage-backed securities
499 
(1)
6,597 
(2,599)
7,096 
(2,600)
Foreign government & agency securities
212 
(7)
212 
(7)
U.S. treasury and agency securities
16,942 
(88)
16,942 
(88)
Total non-corporate securities
17,441 
(89)
6,846 
(2,625)
24,287 
(2,714)
             
Corporate securities
83,967 
(6,208)
183,430 
(26,533)
267,397 
(32,741)
             
Total
$   101,408 
$     (6,297)
$  190,276 
$    (29,158)
$ 291,684 
$   (35,455)



 
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

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 OTTI.  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 based on 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: 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 an available-for-sale 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, the difference is recorded as a credit loss.  The difference between the estimates of the credit related loss and the overall OTTI is 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 decrease accumulated other comprehensive income (loss) with a corresponding increase to retained earnings (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 utilizes a Credit Committee comprised of investment and finance professionals which meets at least quarterly to review individual issues or issuers that are 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.

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.


 
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)

Other-Than-Temporary Impairment (continued)

“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 losses on securities related to these issuers.

“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, those rated single A or below in particular, are subject to certain provisions in FASB ASC Topic 325 “Investments–Other.”  These provisions require the Company to periodically update its best estimate of cash flows over the life of the security.  In the event that the fair value is less than the 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 portfolios are based on expected loss models, not incurred loss models.  Expected cash flows include assumptions about key systematic risks and loan-specific information.

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.



 
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)

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 $0.9 million for the six-month period ended June 30, 2010 for OTTI on its available-for-sale fixed maturity securities.  The $0.9 million credit loss OTTI recorded during the six-month period ended June 30, 2010 was concentrated in corporate debt of financial institutions.  These impairments were driven primarily by adverse financial conditions of the issuers.

The following tables roll forward the amount of credit losses recognized in earnings on debt securities, for which a portion of the OTTI was also recognized in other comprehensive income (in 000’s):

   
Six-month
Period Ended
June 30, 2010
     
Beginning balance, at January 1, 2010
$
9,148 
Add: Credit losses remaining in accumulated deficit related
to the adoption of FASB ASC Topic 320
 
Add: Credit losses on OTTI not previously recognized
 
885 
Less: Credit losses on securities sold
 
(1,699)
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
 
(1,276)
Ending balance, at June 30, 2010
$
7,058 


   
Three-month
Period Ended
June 30, 2009
     
Beginning balance, at April 1, 2009
$
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
 
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
 
(127)
Ending balance, at June 30, 2009
$
32,512 


 
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)

Leveraged Leases

The Company was an owner participant in a trust that is a lessor in a leveraged lease agreement entered into on October 21, 1994, under which equipment having an estimated economic life of 25-40 years was originally leased through a VIE for a term of 9.78 years.  The master lessee had the option to purchase the equipment at the expiration of the lease term.  The Company's equity investment in this VIE represented 8.33% of the partnership that provided 22.9% of the purchase price of the equipment.  The Company was not the primary beneficiary of this VIE and therefore did not consolidate this trust in its condensed consolidated financial statements.  The balance of the purchase price was furnished by third-party long-term debt financing, collateralized by the equipment, and was non-recourse to the Company.  The leveraged lease investment was included as a part of other invested assets in the Company’s consolidated balance sheets.

On June 1, 2010, the master lessee elected to exercise a fixed price purchase option to purchase the equipment and the Company received $22.9 million in cash for its investment in the VIE and realized a $3.4 million gain in its condensed consolidated statement of operations.


 
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

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, 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 or loss.

Credit enhancements such as mutual put features and collateral are used to improve the credit risk of longer term derivative contracts.

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) income in the Company’s 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.

On September 6, 2006, the Company entered into an agreement with the CARS Trust.  Pursuant to 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.


 
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)

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 GMDB and guaranteed minimum 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.


 
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)

5. INVESTMENTS (CONTINUED)

Derivative Instruments and Hedging Activities (continued)

Embedded Derivatives

The Company performs a quarterly analysis of its new contracts, agreements and financial instruments for embedded derivatives.  No embedded derivatives require bifurcation from financial assets.  However, the Company issues certain annuity contracts and enters into reinsurance agreements that contain derivatives 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.  Refer to Note 6 for further information regarding derivatives embedded in reinsurance contracts; see Note 9 for further information regarding derivatives embedded in annuity contracts.

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

 
At June 30, 2010
At December 31, 2009
   
Number of
 
Principal
Notional
 
Number of
 
Principal
Notional
   
Contracts
 
Contracts
 
Contracts
 
Contracts
                 
Interest rate swaps
 
79 
 
$    8,063,000 
 
102 
 
 $      8,883,000 
Currency swaps
 
13 
 
355,419 
 
10 
 
351,740 
Credit default swaps
 
 
55,000 
 
 
        55,000 
Equity swaps
 
 
 
 
4,908 
Swaptions
 
 
350,000 
 
 
1,150,000
Futures (1)
 
(22,999)
 
3,060,425 
 
(13,811)
 
2,378,216 
Index call options
 
7,536 
 
1,471,410 
 
7,345 
 
1,313,381 
Index put options
 
2,600 
 
254,523 
 
7,100 
 
682,499 
Total
     
$   13,609,777 
     
$    14,818,744 

(1)  Amount represents the Company’s short position






 
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)

5. INVESTMENTS (CONTINUED)

Derivative Instruments and Hedging Activities (continued)

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.  The following is a summary of the Company’s derivative asset and liability positions by primary risk exposure (in 000’s).

 
At June 30, 2010
At December 31, 2009
 
    Asset Derivatives
    Liability
     Derivatives
    Asset Derivatives
                  Liability
                    Derivatives
   
Fair Value (a)
 
Fair Value (a)
 
Fair Value (a)
 
Fair Value (a)
                 
Interest rate contracts
 
$   206,101 
 
$   560,939 
 
$   130,178 
 
$   532,401 
Foreign currency contracts
 
29,511 
 
5,690 
 
56,032 
 
905 
Equity contracts
 
33,653 
 
 
58,692 
 
Credit contracts
 
 
33,726 
 
 
34,349 
Futures (b)
 
17,105 
 
2,435 
 
14,325 
 
5,255 
Total derivative instruments
 
286,370 
 
602,790 
 
259,227 
 
572,910 
Embedded derivatives (c)
 
 
1,019,282 
 
11,308 
 
417,764 
Total
 
$   286,370 
 
$   1,622,072 
 
$   270,535 
 
$   990,674 

(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) income included in the Company’s condensed consolidated statements of operations.  The following is a summary of the Company’s realized and unrealized gains and losses by derivative type (in 000’s):

 
   
For the six-month periods
ended June 30,
 
For the three-month periods
ended June 30,
   
2010
 
2009
 
2010
 
2009
                 
Interest rate contracts
 
$        (78,669)
 
$   172,834 
 
$        (36,225)
 
$   104,868 
Foreign currency contracts
 
(5,425)
 
(2,209)
 
(1,966)
 
(6,871)
Equity contracts
 
(14,012)
 
(41,488)
 
(8,783)
 
(49,194)
Credit contracts
 
623 
 
(4,130)
 
886 
 
(7,053)
Futures
 
140,402 
 
(103,895)
 
212,177 
 
(142,145)
Embedded derivatives
 
(610,084)
 
142,540 
 
(691,804)
 
134,201 
Net derivative (loss) income from
continuing operations
 
$      (567,165)
 
$   163,652 
 
$      (525,715)
 
$     33,806 
Net derivative income from
discontinued operations
 
$                   - 
 
$   137,938 
 
$                   - 
 
$   124,485 

 

 
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)

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, the contractual requirements for transacting with counterparties and collateral support agreements, and the limitations on counterparty concentrations.  Exposures by counterparty and counterparty credit ratings are monitored closely.  The majority of the contracts are held with counterparties rated A- or higher.  As of June 30, 2010, the Company’s liability positions were linked to a total of 15 counterparties, of which the largest single unaffiliated counterparty payable, net of collateral, had credit exposure of $37.3 million to the Company.  As of June 30, 2010, the Company’s asset positions were linked to a total of 18 counterparties, of which the largest single unaffiliated counterparty receivable, net of collateral, had credit exposure of $7.8 million.

Credit-related Contingent Features

All derivative transactions are covered under standardized contractual agreements with counterparties, 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 and 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 June 30, 2010 was approximately $602.8 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 June 30, 2010, the Company would be expected to settle a net obligation of approximately $125.7 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 by the Company.

At June 30, 2010, the Company had collateral of $292.8 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 $102.1 million.


 
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)

6. 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 at both June 30, 2010 and December 31, 2009.  This entire block of business is reinsured on a funds-withheld basis with SLOC, an affiliate.

The Company received regulatory approval on May 20, 2010 to amend the reinsurance agreement between the Company and SLOC, effective January 1, 2010.  The amended agreement contains a loss carryforward provision which mitigates the impact of temporary experience losses on the experience refund between the Company and SLOC.

Pursuant to this reinsurance agreement, the Company held the following assets and liabilities (in 000’s) at:

 
June 30,
 
December 31,
 
2010
 
2009
Assets
Reinsurance receivable
$
1,520,894
 
$
1,540,697
           
Liabilities
Contractholder deposit funds and other policy liabilities
 
1,496,944
   
1,493,145
Future contract and policy benefits
 
2,104
   
2,104
Reinsurance payable
 
1,565,278
   
1,603,711

The funds-withheld assets of $1.6 billion and $1.5 billion at June 30, 2010 and December 31, 2009, respectively, are comprised of bonds, mortgage loans, policy loans, derivative instruments, 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 change in value of this embedded derivative decreased derivative income by $13.5 million and $23.9 million for the three and six-month periods ended June 30, 2010, respectively, and by $57.5 million and $57.9 million for the three and six-month periods ended June 30, 2009, respectively.

By reinsuring the SPWL product, the Company increased (reduced) net investment income by $15.0 million and $(2.6) million for the three and six-month periods ended June 30, 2010, respectively, and by $(41.8) million and $(69.0) million for the three and six-month periods ended June 30, 2009, respectively.  The Company also reduced interest credited by $17.9 million and $35.4 million for the three and six-month periods ended June 30, 2010, respectively, and by $18.6 million and $37.6 million for the three and six-month periods ended June 30, 2009, 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)

6. 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.  The reinsurance agreement covered in-force policies on the effective date and new sales through December 31, 2009.

Effective January 1, 2010, the Company and BarbCo 3 amended the agreement to include coverage of certain corporate and bank-owned variable universal life and private placement variable universal life insurance cases sold between December 31, 2009 and March 31, 2010, inclusive.  Reinsurance coverage continues for all cases sold prior to April 1, 2010.  However, cases sold on or after April 1, 2010 will not be reinsured.  This amendment also enabled the Company to discontinue reinsuring a portion of the covered business that was previously reinsured on a modified coinsurance basis, effective April 1, 2010.  The discontinuance of the business reinsured on a modified coinsurance basis did not have a material impact on the Company’s condensed consolidated financial statements.

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 000’s) at:

 
June 30,
 
December 31,
 
2010
 
2009
Assets
Reinsurance receivable
$
413,221
 
$
422,486
           
Liabilities
Contractholder deposit funds and other policy liabilities
 
462,279
   
466,899
Reinsurance payable
 
428,738
   
430,528
           

At June 30, 2010 and December 31, 2009, reinsurance payable includes a funds-withheld liability of $313.7 million and $307.8 million, respectively, and a deferred gain of $115.1 million and $118.9 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.  At June 30, 2010 and December 31, 2009, the fair value of the embedded derivative increased contractholder deposit funds and other policy liabilities by $29.5 million and $26.3 million, respectively.

The change in fair value of the embedded derivative reduced derivative income by $0.5 million and $3.2 million for the three and six-month periods ended June 30, 2010, respectively, and by $14.9 million and $11.6 million for the three and six-month periods ended June 30, 2009, respectively.  During the three and six-month periods ended June 30, 2010, the reinsurance agreement reduced revenues by $7.9 million and $16.3 million, respectively, and decreased expenses by $12.4 million and $22.7 million, respectively.  During the three and six-month periods ended June 30, 2009, the reinsurance agreement reduced revenues by $12.8 million and $20.9 million, respectively, and decreased expenses by $5.2 million and $14.5 million, respectively.



 
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)

6. REINSURANCE (CONTINUED)

Individual Protection Segment (continued)

Effective December 31, 2007, the Company’s subsidiary, SLNY, entered into a reinsurance agreement with SLOC pursuant to which SLOC funds 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 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 will also be reinsured under this agreement.  Pursuant to this agreement, SLNY held the following assets and liabilities at (in 000’s):

 
June 30,
 
December 31,
 
2010
 
2009
Assets
Reinsurance receivable
$
121,772 
 
$
103,802 
           
Liabilities
Contractholder deposit funds and other policy liabilities
 
105,721 
   
84,606 
Future contract and policy benefits
 
13,582 
   
10,518 
Reinsurance payable
 
198,771 
   
182,000 

Reinsurance payable includes a funds-withheld liability of $150.5 million and $128.4 million at June 30, 2010 and December 31, 2009, respectively; and a deferred gain of $47.5 million and $50.3 million at June 30, 2010 and December 31, 2009, respectively.  The funds-withheld assets comprised of trading fixed maturity securities and mortgage loans are being 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 (decreased) contractholder deposit funds and other policy liabilities by $8.2 million and $(0.7) million at June 30, 2010 and December 31, 2009, respectively.  The change in fair value of this embedded derivative (decreased) increased derivative income by $7.5 million and $8.9 million for the three and six-month periods ended June 30, 2010, respectively, and $5.6 million and $4.1 million for the three and six-month periods ended June 30, 2009, respectively.

The reinsurance agreement between SLOC and SLNY decreased revenues by approximately $13.3 million and $20.2 million for the three and six-month periods ended June 30, 2010, respectively, and $9.4 million and $11.7 million for the three and six-month periods ended June 30, 2009, respectively.  This agreement also decreased benefits and expenses by approximately $9.2 million and $13.8 million for the three and six-month periods ended June 30, 2010, respectively, and $3.9 million and $9.2 million for the three and six-month periods ended June 30, 2009, 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 $41.3 million and $80.3 million for the three and six-month periods ended June 30, 2010, respectively, and $44.6 million and $87.7 million for the three and six-month periods ended June 30, 2009, respectively. These agreements have also decreased expenses by approximately $39.7 million and $81.3 million for the three and six-month periods ended June 30, 2010, respectively, and $31.9 million and $61.9 million for the three and six-month periods ended June 30, 2009, 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)

6. REINSURANCE (CONTINUED)

Group Protection Segment

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

SLNY has an agreement, effective May 31, 2007, to assume the net risks of SLHIC’s New York issued contracts.  At June 30, 2010 and December 31, 2009, SLNY held policyholder liabilities related to this agreement of $28.8 million and $30.3 million, respectively.  In addition, the reinsurance agreement increased revenues by $12.2 million and $24.6 million for the three and six-month periods ended June 30, 2010, respectively, and by $13.1 million and $27.1 million for the three and six-month periods ended June 30, 2009, respectively.  This agreement also increased benefits and expenses by $12.0 million and $22.6 million for the three and six-month periods ended June 30, 2010, respectively, and by $12.9 million and $23.6 million for the three and six-month periods ended June 30, 2009, respectively.

7. 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.  The Company recorded benefits of $4.1 million and $8.2 million for the three and six-month periods ended June 30, 2010, respectively, and $4.1 million and $8.2 million for the three and six-month periods ended June 30, 2009, respectively, related to the separate account DRD.

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.


 
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. 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.

8.  RETIREMENT PLANS

Effective December 31, 2009, the Company transferred all of its employees to an affiliate, Sun Life Services, with the exception of 28 employees who were transferred to SLFD, another affiliate.  As a result of this transaction, the Company transferred pension and other employee benefit liabilities, accumulated other comprehensive losses related to pension and other postretirement plans, and cash to Sun Life Services.  Concurrent with this transaction, Sun Life Services became the sponsor of the retirement plans described below.  The employee transfer did not change the provisions of the related retirement plans.  The annual cost to the Company of these benefits is allocated by Sun Life Services and charged to the Company in a manner consistent with the allocation of employee compensation expenses.

Prior to the December 31, 2009 employee transfer, the Company sponsored the staff qualified pension plan and the staff nonqualified pension plan (collectively, the “Pension Plans”) for its employees and certain affiliated employees.  Expenses related to the Pension Plans were allocated to participating companies in a manner consistent with the allocation of employee compensation expenses.

Prior to the December 31, 2009 employee transfer, the Company sponsored 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 related to the Other Benefit Plan were allocated to participating companies based on the number of participants.

For the three-month period ended June 30, 2010, Sun Life Services allocated to the Company expenses of $0.8 million and $1.1 million for the Pension Plans and the Other Benefit Plan, respectively.  For the six-month period ended June 30, 2010, expenses of $1.6 million and $2.2 million for the Pension Plans and the Other Benefit Plan, respectively, were allocated to 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)

9.  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 June 30, 2010 (in 000’s, except for age data):

Benefit Type
Account Balance
Net Amount 
at Risk 1
Average 
   Attained Age
Minimum death
$           17,147,816
$           2,877,440
66.6
Minimum income
$                171,714
$                88,837
  61.8
Minimum accumulation or
       
withdrawal
$             9,827,580
$              482,953
63.6

The table below represents information regarding the Company’s variable annuity contracts with guarantees at December 31, 2009:

 
Benefit Type
 
Account Balance
Net Amount
at Risk 1
Average
Attained Age
Minimum death
$           16,947,362
$           2,459,360
66.2
Minimum income
$                194,780
$                84,591
61.5
Minimum accumulation or
withdrawal
$             8,866,525
$              212,371
63.0
1 Net amount at risk represents the difference between guaranteed benefits and the account balance.

The following roll-forward summarizes the change in reserves for the Company’s guaranteed minimum death and income benefits at June 30, 2010 (in 000’s):

 
Guaranteed
Minimum
Death Benefit
 
Guaranteed
Minimum
Income Benefit
 
Total
Balance at December 31, 2009
$             96,267 
 
$           10,058 
 
$      106,325 
           
Benefit ratio change /
Assumption changes
 15,471 
 
2,651 
 
18,122 
Incurred guaranteed benefits
4,536 
 
755 
 
   5,291 
Paid guaranteed benefits
 (16,678)
 
 (1,997)
 
  (18,675)
Interest
13,687 
 
  336 
 
  14,023 
           
Balance at June 30, 2010
$           113,283 
 
$            11,803 
 
$      125,086 


 
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.  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 June 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
(13,051)
 
(634)
 
(13,685)
Incurred guaranteed benefits
22,778 
 
1,703 
 
24,481 
Paid guaranteed benefits
(64,957)
 
(2,366)
 
(67,323)
Interest
6,820 
 
767 
 
7,587 
           
Balance at June 30, 2009
$               153,238 
 
$          18,243 
 
$          171,481

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.  The Company incorporates 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 $849.9 million and $250.5 million at June 30, 2010 and December 31, 2009, respectively.  The Company records GMAB and GMWB reserves in its condensed consolidated balance sheets as part of contractholder deposit funds and other policy liabilities.


 
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. GOODWILL

The Company’s goodwill represents the intangible asset related to the transfer of goodwill to SLNY, based on agreements between SLNY and SLHIC pursuant to which the existing and future New York issued business of SLHIC was transferred to SLNY (collectively the “SLHIC to SLNY asset transfer”).  Goodwill is allocated to the Group Protection Segment.  In accordance with FASB ASC Topic 350, “Intangibles-Goodwill and Other,” goodwill is tested for impairment on an annual basis.  The Company completed the required impairment tests of goodwill during the second quarter of 2010 and concluded that this asset was not impaired.

11. 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.”

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 performs the required recoverability (realizability) test in terms of its ability to realize its recorded net deferred tax assets.  In making this determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.  In projecting future taxable income and sources of capital gains, the Company utilizes historical and current operating results and incorporates assumptions including the amount of future federal and state pre-tax operating income, the reversal of temporary differences, and the implementation of prudent and feasible tax planning strategies.

The Company’s net deferred tax asset at June 30, 2010 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, actuarial liabilities and net operating loss (“NOL”) carryforwards, as well as capital loss carryforwards.  If unutilized, the NOL carryforwards and a majority of the capital loss carryforwards will begin to expire in 2023 and 2014, respectively.  The Company’s net deferred tax asset was $396.7 million and $549.8 million at June 30, 2010 and December 31, 2009, respectively.

As of June 30, 2010, no valuation allowance has been recorded against deferred tax assets for investment losses 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 related to certain MBS, 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.

12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The following Condensed Consolidating financial statements are provided in compliance with Regulation S-X of the 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.


 
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)

12.  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 stand alone 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 six-month period ended June 30, 2010

 
SLUS
as Parent
 
SLNY
 
Other
Subs
 
Elimination
 
Consolidated
Company
                             
Revenues
                           
                             
Premiums and annuity considerations
$
8,307 
 
$
59,935 
 
$
 
$
 
$
68,242 
Net investment income (1)
 
771,636 
   
78,304 
   
1,507 
   
   
851,447 
Net derivative loss
 
(520,184)
   
(46,981)
   
   
   
(567,165)
Net realized investment gains (losses), excluding
impairment losses on available-for-sale securities
 
16,382 
   
600 
   
(643)
   
   
16,339 
Other-than-temporary impairment losses
 
(735)
   
(150)
   
   
   
(885)
Fee and other income
 
218,342 
   
13,499 
   
4,387 
   
   
236,228 
                             
Total revenues
 
493,748 
   
105,207 
   
5,251 
   
   
604,206 
                             
Benefits and Expenses
                           
                             
Interest credited
 
151,353 
   
25,011 
   
447 
   
   
176,811 
Interest expense
 
26,495 
   
(43)
   
   
   
26,452 
Policyowner benefits
 
71,083 
   
45,374 
   
120 
   
   
116,577 
Amortization of DAC, VOBA and VOCRA
 
 (294,707) 
   
41,475 
   
   
   
(253,232)
Other operating expenses
 
136,147 
   
19,509 
   
4,137 
   
   
159,793 
                             
Total benefits and expenses
 
90,371 
   
131,326 
   
4,704 
   
   
226,401
                             
Income (loss) before income tax expense (benefit)
 
403,377 
   
(26,119)
   
547 
   
   
377,805 
                             
Income tax expense (benefit)
 
130,618 
   
(9,411)
   
147 
   
   
121,354 
Equity in the net loss of subsidiaries
 
(16,308)
   
   
   
16,308 
   
                             
Net income (loss)
$
256,451
 
$
(16,708)
 
$
400 
 
$
16,308 
 
$
256,451 

    (1)   SLUS as Parent, SLNY’s and Other Subs’ net investment income includes an increase in market value of trading fixed maturity securities of $415.0 million, $34.9 million and $0.0 million, respectively, for the six-month period ended June 30, 2010.

 
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)

12.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Operations
For the six-month period ended June 30, 2009

 
SLUS
as Parent
 
SLNY
 
Other
Subs
 
Elimination
 
Consolidated
Company
                             
Revenues
                           
                             
Premiums and annuity considerations
$
4,946 
 
$
60,549 
 
$
 
$
 
$
65,495 
Net investment income (1)
 
1,092,664 
   
121,827 
   
2,452 
   
   
1,216,943 
Net derivative income
 
152,789 
   
10,863 
   
   
   
163,652 
Net realized investment (losses) gains, excluding
  impairment losses on available-for-sale
  securities
 
(2,392)
   
44 
   
(489)
   
   
(2,837)
Other-than-temporary impairment losses
 
(4,450)
   
(181)
   
(203)
   
   
(4,834)
Fee and other income
 
160,966 
   
3,405 
   
2,297 
   
   
166,668 
                             
Total revenues
 
1,404,523 
   
196,507 
   
4,057 
   
   
1,605,087 
                             
Benefits and Expenses
                           
                             
Interest credited
 
198,014 
   
26,164 
   
980 
   
   
225,158 
Interest expense
 
24,937 
   
801 
   
   
   
25,738 
Policyowner benefits
 
49,909 
   
38,712 
   
1,415 
   
   
90,036 
Amortization of DAC, VOBA and VOCRA
 
378,340 
   
23,480 
   
   
   
401,820 
Other operating expenses
 
74,089 
   
17,962 
   
1,693 
   
   
93,744 
                             
Total benefits and expenses
 
725,289 
   
107,119 
   
4,088 
   
   
836,496 
                             
Income (loss) from continuing operations before
    income tax expense
 
679,234 
   
89,388 
   
(31)
   
   
768,591 
                             
Income tax expense
 
242,528 
   
31,018 
   
337 
   
   
273,883 
Equity in the net income of subsidiaries
 
54,218 
   
   
   
(54,218)
   
                             
Net income (loss) from continuing operations
 
490,924 
   
58,370
   
(368)
   
(54,218)
   
494,708 
                             
Loss from discontinued operations, net of tax
 
   
   
(3,784)
   
   
(3,784)
                             
Net income (loss)
$
490,924 
 
$
58,370 
 
$
(4,152)
 
$
(54,218)
 
$
490,924 

 
(1)  SLUS as Parent, SLNY’s and Other Subs’ net investment income includes an increase in market value of trading fixed maturity securities of $848.1 million, $93.3 million and $0.0 million, respectively, for the six-month period ended June 30, 2009.

 
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)

12.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Operations
For the three-month period ended June 30, 2010

 
SLUS
as Parent
 
 
SLNY
 
Other
Subs
 
 
Elimination
 
Consolidated
Company
                             
Revenues
                           
                             
Premiums and annuity considerations
$
3,216 
 
$
29,962 
 
$
 
$
 
$
33,178 
Net investment income (1)
 
367,226 
   
40,005 
   
387 
   
   
407,618 
Net derivative loss
 
(472,235) 
   
(53,480) 
   
- 
   
   
(525,715) 
Net realized investment gains (losses), excluding
  impairment losses on available-for-sale securities
 
12,012 
   
204 
   
(1,042) 
   
   
11,174 
Other-than-temporary impairment losses
 
- 
   
   
   
   
Fee and other income
 
109,625 
   
8,492 
   
2,358 
   
   
120,475 
   
 
                       
Total revenues
 
19,844 
   
25,183 
   
1,703 
   
   
46,730 
                             
Benefits and Expenses
                           
                             
Interest credited
 
74,697 
   
12,478 
   
253 
   
   
87,428 
Interest expense
 
9,383 
   
(28) 
   
   
   
9,355 
Policyowner benefits
 
60,497 
   
21,390 
   
87 
   
   
81,974 
Amortization of DAC, VOBA and VOCRA
 
(430,028) 
   
5,087 
   
   
   
(424,941) 
Other operating expenses
 
66,161 
   
10,527 
   
2,195 
   
   
78,883 
                             
Total benefits and expenses
 
(219,290) 
   
49,454 
   
2,535 
   
   
(167,301) 
                             
Income (loss) before income tax expense (benefit)
 
239,134 
   
(24,271) 
   
(832) 
   
   
214,031 
                             
Income tax expense (benefit)
 
78,133 
   
(8,628) 
   
(274) 
   
   
69,231 
Equity in the net loss of subsidiaries
 
(16,201) 
   
   
   
16,201 
   
-
                             
Net income (loss)
$
144,800 
 
$
 (15,643) 
 
$
 (558) 
 
$
16,201 
 
$
144,800 



 
 (1) SLUS as parent, SLNY’s and Other Subs’ net investment income includes an increase in market value of trading fixed maturity securities of $161.7 million, $17.8 million and $0.0 million, respectively, for the three-month period ended June 30, 2010.


 
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)

12.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

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

 
SLUS
as Parent
 
 
SLNY
 
Other
Subs
 
 
Elimination
 
Consolidated
Company
                             
Revenues
                           
                             
Premiums and annuity considerations
$
3,433 
 
$
29,522 
 
$
 
$
 
$
32,955 
Net investment income (1)
 
967,097 
   
105,031 
   
1,158 
   
   
1,073,286
Net derivative income
 
23,539 
   
10,267 
   
   
   
33,806 
Net realized investment (losses) gains, excluding
    impairment losses on available-for-sale
    securities
 
(446)
   
45 
   
(539)
   
   
(940)
Other-than-temporary impairment losses
 
(4,450)
   
(181)
   
(203)
   
   
(4,834)
Fee and other income
 
84,852 
   
4,392 
   
1,223 
   
   
90,467 
                             
Total revenues
 
1,074,025 
   
149,076 
   
1,639 
   
   
1,224,740 
                             
Benefits and Expenses
                           
                             
Interest credited
 
97,907 
   
13,952 
   
515 
   
   
112,374 
Interest expense
 
13,659 
   
(1)
   
   
   
13,658 
Policyowner benefits
 
(32,645)
   
19,624 
   
1,070 
   
   
(11,951)
Amortization of DAC, VOBA and VOCRA
 
475,058 
   
34,186 
   
   
   
509,244 
Other operating expenses
 
37,731 
   
8,160 
   
912 
   
   
46,803 
                             
Total benefits and expenses
 
591,710 
   
75,921 
   
2,497 
   
   
670,128 
                             
Income (loss) from continuing operations before
     income tax expense (benefit)
 
482,315 
   
73,155 
   
(858)
   
   
554,612 
                             
Income tax expense (benefit)
 
174,134 
   
27,060 
   
(14)
   
   
201,180 
Equity in the net income of subsidiaries
 
133,129 
   
   
   
(133,129)
   
                             
Net income (loss) from continuing operations
 
441,310 
   
46,095 
   
(844)
   
(133,129)
   
353,432 
                             
Income from discontinued operations, net of tax
 
   
   
87,878 
   
   
87,878 
                             
Net income
$
441,310 
 
$
46,095 
 
$
87,034 
 
$
(133,129)
 
$
441,310 

 
 
 (1) SLUS as parent, SLNY’s and Other Subs’ net investment income includes an increase in market value of trading fixed maturity securities of $819.4 million, $92.1 million and $0.0 million, respectively, for the three-month period ended June 30, 2009.



 
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)

12.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Balance Sheets at June 30, 2010

 
SLUS
as Parent
 
 
SLNY
 
Other
Subs
 
 
Elimination
 
Consolidated
Company
ASSETS
                           
                             
Investments
                           
Available-for-sale fixed maturity securities at fair value
$
1,245,552 
 
$
237,809 
 
$
51,992 
 
$
 
$
1,535,353 
Trading fixed maturity securities at fair value
 
10,582,486 
   
1,486,488 
   
   
   
12,068,974 
Investment in subsidiaries
 
527,003 
   
   
   
(527,003)
   
Mortgage loans
 
1,633,567 
   
183,526 
   
27,479 
   
   
1,844,572 
Derivative instruments – receivable
 
286,370 
   
   
   
   
286,370 
Limited partnerships
 
46,418 
   
   
   
   
46,418 
Real estate
 
159,184 
   
   
45,208 
   
   
204,392 
Policy loans
 
691,294 
   
1,499 
   
21,041 
   
   
713,834 
Other invested assets
 
6,831 
   
1,110 
   
   
   
7,941 
Short-term investments
 
75,086 
   
   
   
   
75,086 
Cash and cash equivalents
 
1,892,969 
   
166,766 
   
15,264 
   
   
2,074,999 
Total investments and cash
 
17,146,760 
   
2,077,198 
   
160,984 
   
(527,003)
   
18,857,939 
                             
Accrued investment income
 
204,279 
   
19,843 
   
1,746 
   
   
225,868 
Deferred policy acquisition costs
 
2,400,451 
   
159,424 
   
   
   
2,559,875 
Value of business and customer renewals acquired
 
167,189 
   
5,188 
   
   
   
172,377 
Net deferred tax asset
 
381,229 
   
11,097 
   
4,403 
   
   
396,729 
Goodwill
 
   
7,299 
   
   
   
7,299 
Receivable for investments sold
 
549,850 
   
3,014 
   
   
   
552,864 
Reinsurance receivable
 
2,226,183 
   
142,796 
   
35 
   
   
2,369,014 
Other assets
 
99,788 
   
41,404 
   
2,524 
   
(14,316)
   
129,400 
Separate account assets
 
22,522,319 
   
1,044,851 
   
37,214 
   
   
23,604,384 
                             
Total assets
$
45,698,048 
 
$
3,512,114 
 
$
206,906 
 
$
(541,319)
 
$
48,875,749 
                             
LIABILITIES
                           
                             
Contractholder deposit funds and other policy liabilities
$
15,185,730 
 
$
1,654,396 
 
$
24,580 
 
$
 
$
16,864,706 
Future contract and policy benefits
 
722,728 
   
104,410 
   
207 
   
   
827,345 
Payable for investments purchased
 
169,730 
   
25,817 
   
   
   
195,547 
Accrued expenses and taxes
 
107,478 
   
10,489 
   
1,806 
   
(14,316)
   
105,457 
Debt payable to affiliates
 
883,000 
   
   
   
   
883,000 
Reinsurance payable
 
2,001,443 
   
217,983 
   
35 
   
   
2,219,461 
Derivative instruments – payable
 
602,790 
   
   
   
   
602,790 
Other liabilities
 
222,498 
   
44,790 
   
25,439 
   
   
292,727 
Separate account liabilities
 
22,522,319 
   
1,044,851 
   
37,214 
   
   
23,604,384 
                             
Total liabilities
$
42,417,716 
 
$
3,102,736 
 
$
89,281 
 
$
(14,316)
 
$       ,488
45,595,417 
                             
STOCKHOLDER’S EQUITY
                           
                             
Common stock
$
6,437 
 
$
2,100 
 
$
2,542 
 
$
(4,642)
 
$
6,437 
Additional paid-in capital
 
3,927,875 
   
389,963 
   
95,929 
   
(485,892)
   
3,927,875 
Accumulated other comprehensive income (loss)
 
52,475 
   
3,307 
   
1,582 
   
(4,889)
   
52,475 
(Accumulated deficit) retained earnings
 
(706,455) 
   
14,008 
   
17,572 
   
(31,580)
   
(706,455) 
                             
Total stockholder’s equity
 
3,280,332 
   
409,378 
   
117,625 
   
(527,003)
   
3,280,332 
                             
Total liabilities and stockholder’s equity
$
45,698,048 
 
$
3,512,114 
 
$
206,906 
 
$
(541,319)
 
$
48,875,749 


 
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)

12.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Balance Sheets at December 31, 2009

 
SLUS
as Parent
 
 
SLNY
 
Other
Subs
 
 
Elimination
 
Consolidated
Company
ASSETS
                           
                             
Investments
                           
Available-for-sale fixed maturity securities at fair value
$
959,156 
 
$
164,158 
 
$
52,202 
 
$
 
$
1,175,516 
Trading fixed maturity securities at fair value
 
9,724,195 
   
1,406,327 
   
   
   
11,130,522 
Investment in subsidiaries
 
518,560 
   
   
   
(518,560)
   
Mortgage loans
 
1,736,358 
   
161,498 
   
14,105 
   
   
1,911,961 
Derivative instruments – receivable
 
259,227 
   
   
   
   
259,227 
Limited partnerships
 
51,656 
   
   
   
   
51,656 
Real estate
 
158,170 
   
   
44,107 
   
   
202,277 
Policy loans
 
700,974 
   
270 
   
21,346 
   
   
722,590 
Other invested assets
 
46,410 
   
542 
   
469 
   
   
47,421 
Short-term investments
 
1,208,320 
   
58,991 
   
   
   
1,267,311 
Cash and cash equivalents
 
1,616,991 
   
175,322 
   
11,895 
   
   
1,804,208 
Total investments and cash
 
16,980,017 
   
1,967,108 
   
144,124 
   
(518,560)
   
18,572,689 
                             
Accrued investment income
 
211,725 
   
17,051 
   
1,815 
   
   
230,591 
Deferred policy acquisition costs
 
1,989,676 
   
183,966 
   
   
   
2,173,642 
Value of business and customer renewals acquired
 
163,079 
   
5,766 
   
   
   
168,845 
Net deferred tax asset
 
539,323 
   
5,830 
   
4,611 
   
   
549,764 
Goodwill
 
   
7,299 
   
   
   
7,299 
Receivable for investments sold
 
11,969 
   
642 
   
   
   
12,611 
Reinsurance receivable
 
2,232,651 
   
117,460 
   
96 
   
   
2,350,207 
Other assets
 
114,177 
   
69,161 
   
1,975 
   
(1,350)
   
183,963 
Separate account assets
 
22,293,989 
   
989,939 
   
42,395 
   
   
23,326,323 
                             
Total assets
$
44,536,606 
 
$
3,364,222 
 
$
195,016 
 
$
(519,910)
 
$
47,575,934 
                             
LIABILITIES
                           
                             
Contractholder deposit funds and other policy liabilities
$
15,078,201 
 
$
1,605,038 
 
$
26,350 
 
$
 
$
16,709,589 
Future contract and policy benefits
 
716,176 
   
99,255 
   
207 
   
   
815,638 
Payable for investments purchased
 
87,554 
   
577 
   
   
   
88,131 
Accrued expenses and taxes
 
51,605 
   
10,202 
   
1,446 
   
(1,350)
   
61,903 
Debt payable to affiliates
 
883,000 
   
   
   
   
883,000 
Reinsurance payable
 
2,040,864 
   
190,863 
   
37 
   
   
2,231,764 
Derivative instruments – payable
 
572,910 
   
   
   
   
572,910 
Other liabilities
 
205,855 
   
48,608 
   
25,761 
   
   
280,224 
Separate account liabilities
 
22,293,989 
   
989,939 
   
42,395 
   
   
23,326,323 
                             
Total liabilities
$
41,930,154 
 
$
2,944,482 
 
$
96,196 
 
$
(1,350)
 
$
44,969,482 
                             
STOCKHOLDER’S EQUITY
                           
                             
Common stock
$
6,437 
 
$
2,100 
 
$
2,542 
 
$
(4,642)
 
$
6,437 
Additional paid-in capital
 
3,527,677 
   
389,963 
   
78,409 
   
(468,372)
   
3,527,677 
Accumulated other comprehensive income (loss)
 
35,244 
   
(3,039)
   
701 
   
2,338 
   
35,244 
(Accumulated deficit) retained earnings
 
(962,906)
   
30,716 
   
17,168 
   
(47,884)
   
(962,906)
                             
Total stockholder’s equity
 
2,606,452 
   
419,740 
   
98,820 
   
(518,560)
   
2,606,452 
                             
Total liabilities and stockholder’s equity
$
44,536,606 
 
$
3,364,222 
 
$
195,016
 
$
(519,910)
 
$
47,575,934 





 
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)

12.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Cash Flow
For the six-month period ended June 30, 2010

 
SLUS
as Parent
 
 
SLNY
 
Other
Subs
 
 
Elimination
 
Consolidated
Company
                             
Cash Flows From Operating Activities:
                           
Net income (loss)
$
256,451 
 
$
(16,708)
 
$
400 
 
$
16,308 
 
$
256,451 
Adjustments to reconcile net income (loss) to net
       cash provided by operating activities:
                           
Net amortization of premiums on investments
 
8,356 
   
1,597 
   
412 
   
   
10,365 
Amortization of DAC, VOBA and VOCRA
 
(294,707)
   
41,475 
   
   
   
(253,232)
Depreciation and amortization
 
1,858 
   
156 
   
416 
   
   
2,430 
Net losses on derivatives
 
462,688 
   
46,981 
   
   
   
509,669 
Net realized (gains) losses and OTTI credit losses
on available-for-sale investments
 
(15,647)
   
(450)
   
643 
   
   
(15,454)
Net increase in fair value of trading investments
 
(414,928)
   
(34,926)
   
   
   
(449,854)
Net realized losses (gains) on trading investments
 
37,643 
   
(6,821)
   
   
   
30,822 
Undistributed loss on private equity limited
partnerships
 
492 
   
   
   
   
492 
Interest credited to contractholder deposits
 
151,353 
   
25,011 
   
447 
   
   
176,811 
Deferred federal income taxes
 
152,706 
   
(8,684)
   
(266)
   
   
143,756 
Equity in net loss of subsidiaries
 
16,308 
   
   
   
(16,308)
   
Changes in assets and liabilities:
                           
Additions to DAC, VOBA and VOCRA
 
(104,733)
   
(13,213)
   
   
   
(117,946)
Accrued investment income
 
7,446 
   
(2,792)
   
69 
   
   
4,723 
Net change in reinsurance receivable/payable
 
32,707 
   
4,023 
   
59 
   
   
36,789 
Future contract and policy benefits
 
6,552 
   
5,155 
   
   
   
11,707 
Other, net
 
110,812 
   
27,657 
   
(441)
   
   
138,028 
                             
Net cash provided by operating activities
 
415,357 
   
68,461 
   
1,739 
   
   
485,557 
                             
Cash Flows From Investing Activities:
                           
Sales, maturities and repayments of:
                           
Available-for-sale fixed maturity securities
 
263,284 
   
15,673 
   
5,695 
   
   
284,652 
Trading fixed maturity securities
 
1,085,123 
   
403,321 
   
   
   
1,488,444 
Mortgage loans
 
103,022 
   
5,428 
   
178 
   
(16,208)
   
92,420 
Real estate
 
   
1,000 
   
   
(1,000)
   
Other invested assets
 
151,609 
   
790 
   
501 
   
   
152,900 
Purchases of:
                           
Available-for-sale fixed maturity securities
 
(519,345)
   
(79,282)
   
(3,665)
   
   
(602,292)
Trading fixed maturity securities
 
(2,050,758)
   
(421,351)
   
   
   
(2,472,109)
Mortgage loans
 
(43)
   
(28,440)
   
(16,276)
   
16,208 
   
(28,551)
Real estate
 
(2,627)
   
   
(347)
   
1,000 
   
(1,974)
Other invested assets
 
(27,963)
   
(292)
   
   
   
(28,255)
Net change in other investments
 
   
   
   
   
Net change in policy loans
 
9,680 
   
(1,229)
   
305 
   
   
8,756 
Net change in short-term investments
 
1,133,234 
   
58,991 
   
   
   
1,192,225 
                             
Net cash provided by (used in) investing activities
$
145,216 
 
$
(45,391)
 
$
(13,609) 
 
$
-  
 
$
86,216 

Continued on next page

 
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)

12.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Cash Flow (continued)
For the six-month period ended June 30, 2010

 
SLUS
as Parent
 
 
SLNY
 
Other
Subs
 
 
Elimination
 
Consolidated
Company
                             
Cash Flows From Financing Activities:
                           
Additions to contractholder deposit funds
$
552,828 
 
$
95,073 
 
$
 
$
 
$
647,901 
Withdrawals from contractholder deposit funds
 
(1,210,817)
   
(123,089)
   
(2,216)
   
   
(1,336,122)
Additional capital contributed to subsidiaries
 
(17,520)
   
   
   
17,520 
   
Capital contribution from Parent
 
400,000 
   
   
17,520
   
(17,520)
   
400,000
Debt proceeds
 
   
   
   
   
Other, net
 
(9,086)
   
(3,610)
   
(65)
   
   
(12,761)
                             
Net cash (used in) provided by financing activities
 
(284,595)
   
(31,626)
   
15,239 
   
   
(300,982)
                             
Net change in cash and cash equivalents
 
275,978 
   
(8,556)
   
3,369 
   
   
270,791 
                             
Cash and cash equivalents, beginning of period
 
1,616,991 
   
175,322 
   
11,895 
   
   
1,804,208 
                             
Cash and cash equivalents, end of period
$
1,892,969 
 
$
166,766 
 
$
15,264 
 
$
 
$
2,074,999 
                             




 
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)

12.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Cash Flow
For the six-month period ended June 30, 2009

 
SLUS
as Parent
 
 
SLNY
 
Other
Subs
 
 
Elimination
 
Consolidated
Company
                             
Cash Flows From Operating Activities:
                           
Net income (loss)
$
490,924 
 
$
58,370 
 
$
(4,152)
 
$
(54,218)
 
$
490,924 
Adjustments to reconcile net income (loss) to net
     cash provided by (used in) operating activities:
                           
Net amortization of premiums on investments
 
8,042 
   
307 
   
   
   
8,356 
Amortization of DAC, VOBA and VOCRA
 
378,340 
   
23,480 
   
   
   
401,820 
Depreciation and amortization
 
2,250 
   
156 
   
400 
   
   
2,806
Net gains on derivatives
 
(217,839)
   
(10,863)
   
   
   
(228,702)
Net realized losses and OTTI credit losses on
     available-for-sale investments
 
6,842 
   
137 
   
692 
   
   
7,671 
Net increase in fair value of trading investments
 
(848,138)
   
(93,295)
   
   
   
(941,433)
Net realized losses (gains) on trading investments
 
131,142 
   
4,671 
   
(1)
   
   
135,812 
Undistributed losses in private equity limited
     partnerships
 
11,750 
   
   
   
   
11,750 
Interest credited to contractholder deposits
 
198,014 
   
26,164 
   
980 
   
   
225,158 
Deferred federal income taxes
 
249,270 
   
32,639 
   
(400)
   
   
281,509 
Equity in net loss of subsidiaries
 
(54,218)
   
   
   
54,218 
   
Changes in assets and liabilities:
                           
Additions to DAC, VOBA and VOCRA
 
(173,266)
   
(27,287)
   
   
   
(200,553)
Accrued investment income
 
(277)
   
1,251 
   
(11)
   
   
963 
Net change in reinsurance receivable/payable
 
101,044 
   
2,161 
   
958 
   
   
104,163 
Future contract and policy benefits
 
(52,199)
   
1,460 
   
(1)
   
   
(50,740)
Other, net
 
(10,920)
   
(123,699)
   
219 
   
   
(134,400)
Adjustments related to discontinued operations
 
   
   
137,204 
   
   
137,204 
                             
Net cash provided by (used in) operating activities
 
220,761 
   
(104,348)
   
135,895 
   
   
252,308 
                             
Cash Flows From Investing Activities:
                           
Sales, maturities and repayments of:
                           
Available-for-sale fixed maturity securities
 
23,038 
   
3,406 
   
222 
   
   
26,666 
Trading fixed maturity securities
 
509,915 
   
65,176 
   
14,731 
   
   
589,822 
Mortgage loans
 
110,608 
   
4,999 
   
   
   
115,607 
Other invested assets
 
74,825 
   
1,595 
   
   
   
76,420 
Purchases of:
                           
Available-for-sale fixed maturity securities
 
(390,687)
   
(1,626)
   
(311)
   
   
(392,624)
Trading fixed maturity securities
 
(20,183)
   
(111,299)
   
194 
   
   
(131,288)
Mortgage loans
 
(49,774)
   
   
(5,563)
   
   
(55,337)
Real estate
 
166 
   
   
(211)
   
   
(45)
Other invested assets
 
(57,784)
   
(15)
   
   
   
(57,799)
Net change in other investments
 
(96,445)
   
10,250 
   
   
   
(86,195)
Net change in policy loans
 
7,331 
   
(52)
   
2,462 
   
   
9,741 
Net change in short-term investments
 
104,149 
   
69,977 
   
(56,297)
   
   
117,829 
                             
Net cash provided by (used in) investing activities
$
215,159 
 
$
42,411 
 
$
(44,773)
 
$
 
$
212,797 

Continued on next page

 
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)

12.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

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

 
SLUS
as Parent
 
 
SLNY
 
Other
Subs
 
 
Elimination
 
Consolidated
Company
                             
Cash Flows From Financing Activities:
                           
Additions to contractholder deposit funds
$
1,294,570 
 
$
296,642 
 
$
22,115 
 
$
 
$
1,613,327 
Withdrawals from contractholder deposit funds
 
(1,395,483)
   
(129,392)
   
(7,427)
   
   
(1,532,302)
Additional capital contributed to subsidiaries
 
(45,551)
   
   
   
45,551 
   
Capital contribution from Parent
 
748,652 
   
   
45,551 
   
(45,551)
   
748,652 
Debt proceeds
 
   
   
100,000 
   
   
100,000 
Other, net
 
(34,258)
   
(6,074)
   
176 
   
   
(40,156)
                             
Net cash provided by financing activities
 
567,930 
   
161,176 
   
160,415 
   
   
889,521 
                             
Net change in cash and cash equivalents
 
1,003,850 
   
99,239 
   
251,537 
   
   
1,354,626 
                             
Cash and cash equivalents, beginning of period
 
733,518 
   
261,989 
   
29,161 
   
   
1,024,668 
                             
Cash and cash equivalents, end of period
$
1,737,368 
 
$
361,228 
 
$
280,698 
 
$
 
$
2,379,294 
                             

13. SUBSEQUENT EVENTS

On July 1 and July 8, 2010, the Company paid $900.0 million and $10.0 million, respectively, to LLC due to the maturity of the floating rate funding agreements that the Company issued to LLC on June3, 2005 and April 7, 2008.




 
72

 

 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 six-month periods ended June 30, 2010 and June 30, 2009.

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, 2009.

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:

Ø  
Deferred policy acquisition costs (“DAC”);
Ø  
Value of business acquired (“VOBA”);
Ø  
Value of customer renewals acquired (“VOCRA”);
Ø  
Derivative instruments;
Ø  
Fair value of financial instruments;
Ø  
Policy liabilities and accruals;
Ø  
Other-than-temporary impairments (“OTTI”) of investments;
Ø  
Goodwill valuation;
Ø  
Allowance for loan loss;
Ø  
Valuation allowance on deferred tax assets; and
Ø  
 Provisions for 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 additional information concerning 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, 2009.




 
73

 

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

RESULTS OF OPERATIONS

Six-month period ended June 30, 2010 compared to the six-month period ended June 30, 2009:

Net Income

The Company’s net income was $256.5 million and $490.9 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The significant changes are described below.

Discontinued Operations

On December 31, 2009, the Company paid a dividend of all of the issued and outstanding common stock of the Company’s wholly-owned subsidiary, Sun Life Financial (U.S.) Reinsurance Company (“Sun Life Vermont”), to Sun Life of Canada (U.S.) Holdings, Inc. (the “Parent”).  As a result of this transaction, Sun Life Vermont is no longer the Company’s wholly-owned subsidiary and is not included in the Company’s condensed consolidated balance sheets at June 30, 2010 and December 31, 2009, or the condensed consolidated statements of operations for the six-month period ended June 30, 2010.  In addition, Sun Life Vermont’s net loss for the six-month period ended June 30, 2009 is separately presented as a loss from discontinued operations.  The following table provides a summary of operations of Sun Life Vermont for the six-month period ended June 30, 2009 (in 000’s):

     
Total revenues
$
(4,010)
Total benefits and expenses
 
8,908 
Loss before income tax benefit
 
(12,918)
     
Net loss
$
(3,784)

Continuing Operations

The significant changes in the Company’s condensed consolidated statements of operations during the six-month period ending June 30, 2010 and 2009, respectively, excluding Sun Life Vermont are described below:

REVENUES

Total revenues were $604.2 million and $1,605.1 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The decrease of $1,000.9 million was primarily due to the following:

Premium and annuity considerations - were $68.2 million and $65.5 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The $2.7 million change was primarily due to an increase in annuity considerations.

Net investment income - was $851.4 million and $1,216.9 million for the six-month periods ended June 30, 2010 and 2009, respectively.  Investment income, excluding the mark-to-market of the trading portfolio, partnership income and ceded investment income, was $414.7 million and $368.7 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The increase of $46.0 million during 2010, as compared to 2009, was primarily the result of higher average investment yields which increased investment income by $45.8 million.


 
74

 


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

RESULTS OF OPERATIONS (CONTINUED)

Net investment income (continued)

The change in investment income related to the mark-to-market of the trading portfolio was $(490.2) million.  The Company earned $449.8 million and $937.0 million of investment income during the six-month periods ended June 30, 2010 and 2009.  The decrease in investment income related to the change in market value of the Company’s trading portfolio during the six-month period ended June 30, 2010, as compared to the six-month period ended June 30, 2009, was primarily due to significant tightening of credit spreads as market conditions improved during the six-month period ended June 30, 2009, resulting in a significant increase in market value and the recovery of loss in the portfolio from 2008.  Credit spread tightening was less significant during the six-month period ended June 30, 2010, which resulted in a smaller increase in the market value of the Company’s trading portfolio.  The $(490.2) million change in the trading portfolio was partially offset by a $14.8 million increase in the fair value of the Company’s limited partnership investments.

Investment income on the funds-withheld reinsurance portfolio is included as a component of net investment income in the Company’s condensed consolidated statements of operations.  The Company ceded net investment income of $13.3 million and $77.2 million for the six-month periods ended June 30, 2010 and 2009, respectively, related to the funds-withheld reinsurance agreements between the Company and certain of its affiliates related to the Company’s single premium whole life (“SPWL”) and certain universal life (“UL”) policies.  The decrease in ceded net investment income was primarily due to a loss on interest rate swaps related to SPWL.

Net derivative (loss) income - was $(567.2) million and $163.7 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The Company’s realized and unrealized gains and losses by derivative type for the six-month periods ended June 30 consisted of the following (in 000’s):

   
2010
 
2009
         
Interest rate contracts
 
$        (78,669)
 
$       172,834 
Foreign currency contracts
 
(5,425)
 
(2,209)
Equity contracts
 
(14,012)
 
(41,488)
Credit contracts
 
623 
 
(4,130)
Futures
 
140,402 
 
(103,895)
Embedded derivatives
 
(610,084)
 
142,540 
Net derivative (loss) income
 
$      (567,165)
 
$       163,652 

The $730.9 million change in net derivative (loss) income in the six-month period ended June 30, 2010, as compared to the same period in 2009, was primarily due to a $(752.6) million change in net unrealized (losses) gains related to embedded derivatives and $(222.4) million related to swap contracts.  These changes were partially offset by a $244.3 million change in net unrealized gains related to futures contracts.




 
75

 

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

RESULTS OF OPERATIONS (CONTINUED)

Net derivative (loss) income (continued)

The $(752.6) million change in embedded derivative net unrealized (losses) gains in the six-month period ended June 30, 2010, as compared to the six-month period ended June 30, 2009, was primarily due to a increase in the fair value liability for guaranteed minimum accumulation benefits (“GMAB”) and guaranteed minimum withdrawal benefits (“GMWB”) on certain of the Company’s variable annuity products during the six-month ended June 30, 2010, as opposed to a decrease in the fair value liability for GMAB and GMWB during the six-month period ended June 30, 2009.  The change in the liability for GMAB and GMWB resulted from updates to projected benefits related to changes in equity markets and interest rate swap and market volatility.

The $(222.4) million change in net derivative (loss) income related to swap contracts, was primarily due to interest rate swaps.  Changes in the fair value of interest rate swaps result from changes in notional amounts, duration and the overall swap curve.  The decrease in the fair value of interest rate swap agreements for the six-month period ended June 30, 2010, as compared to the six-month period ended June 30, 2009, was primarily a result of a change in interest rates.

The $244.3 million change in net derivative (loss) income related to futures contracts for the six-month periods ending June 30, 2010 and 2009 was primarily related to the Company’s short exposure to the change in equity markets. The Company’s derivative instruments portfolio includes short future positions to hedge against potential adverse movements in the stock market.

Net realized investment gains (losses), excluding impairment losses on available-for-sale securities - were $16.3 million and $(2.8) million for the six-month periods ended June 30, 2010 and 2009, respectively.  The $16.3 million in realized gains during the six-month period ended June 30, 2010 were primarily due to the sale of available-for-sale fixed maturity securities.  The $2.8 million in realized losses for the six-month period ended June 30, 2009 primarily related to impairments on the Company’s mortgage loan assets.

Other-than-temporary impairment losses - were $0.9 million and $4.8 million for the six-month periods ended June 30, 2010 and 2009, respectively, related to available-for-sale fixed maturity securities.  The OTTI losses relate to credit losses and were recorded to earnings in accordance with certain aspects of FASB ASC Topic 320, “Investments-Debt and Equity Securities,” that the Company adopted on April 1, 2009, as described in the Company’s annual report on Form 10-K for the year ended December 31, 2009.  The Company did not incur any OTTI losses related to other factors during the six-month period ended June 30, 2010 and 2009, respectively, and therefore did not recognize OTTI losses in other comprehensive income (loss) for these periods.




 
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 (CONTINUED)

Fees and other income – were $236.2 million and $166.7 million for the six-month periods ended June 30, 2010 and 2009, respectively.  Fees and other income consist primarily of mortality and expense charges, rider fees, marketing and distribution fees on mutual funds (“12b-1 fees”), surrender charges and other income.  Mortality and expense charges, rider fees and 12b-1 fees are based on the market values of the assets in the separate accounts supporting the contract.  Mortality and expense charges, rider fees and 12b-1 fees combined were $181.4 million and $137.5 million for the six-month periods ended June 30, 2010 and 2009, respectively.  Variable product fees represented 1.53% and 1.33% of the average variable annuity separate account balances for the six-month periods ended June 30, 2010 and 2009, respectively.  Average separate account assets were $23.7 billion and $20.7 billion for the six-month periods ended June 30, 2010 and 2009, respectively.

Surrender charges represent revenues earned on the early withdrawal of fixed, fixed index, variable annuity, 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 $8.2 million and $12.3 million for the six-month periods ended June 30, 2010 and 2009, respectively.

Other income represents fees charged for the cost of insurance, investment advisory services, asset participation fees, benefit fees and administrative service fees.  Other income was $46.6 million and $16.9 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The $29.7 million increase was primarily due to an increase in benefit fees and administrative services fees from affiliates.  The increase in benefit fees was attributable to an increase in the sale of certain variable annuity products with optional living benefit features.

BENEFITS AND EXPENSES

Total benefits and expenses were $226.4 million and $836.5 million for the six-month periods ended June 30, 2010 and 2009, respectively. The decrease of $610.1 million was primarily due to the following:

Interest credited - to policyholders was $176.8 million and $225.2 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The decrease of $48.4 million was primarily the result of a lower average crediting rate, decreasing interest credited by $28.7 million, coupled with lower average policyholder balances, which decreased interest credited by $1.0 million.

Interest expense - was $26.5 million and $25.7 million for the six-month periods ended June 30, 2010 and 2009, respectively.

Policyowner benefits - were $116.6 million and $90.0 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The $26.6 million increase in 2010 compared to 2009 was primarily due to a $77.0 million increase related to changes in reserves and a $3.1 million increase in health benefits, offset by a $45.3 million decrease in death benefits and a $7.4 million decrease in annuity payments.  Reserves increased (decreased) by $12.5 million and $(64.5) million during the six-month periods ended June 30, 2010 and 2009, respectively.  The change in reserves was mainly attributable to reserves for guaranteed minimum death benefits (“GMDB”) on variable annuity products.  The increase (decrease) in GMDB reserves represents the change in the difference between guaranteed benefits and variable annuity account values.  The decrease in GMDB reserves during the six-month period ended June 30, 2009 was due to the increase in the difference between guaranteed benefits and variable annuity account value which increased primarily due to the improvement in equity markets during that period.



 
77

 

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

RESULTS OF OPERATIONS (CONTINUED)

Other operating expenses - were $159.8 million and $93.7 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The change in 2010 as compared to 2009 was primarily due to a $27.7 million increase in non-deferrable commission expense related to an increase in the sale of certain variable annuity products and a $12.7 million increase in general expenses primarily attributable to an increase in advertising expenses related to the Company’s branding campaign.

Amortization of DAC - DAC relates to the 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 $(249.7) million and $387.4 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The $637.1 million change in amortization expense during the six-month period ended June 30, 2010, as compared to the six-month period ended June 30, 2009, was primarily attributable to a decrease in current period amortization expense and interest on the DAC asset.

Of the $637.1 million decrease, $552.2 million was primarily due to a decrease in actual gross profits in 2010 relative to 2009.  The decrease in actual gross profits during the six-month period ended June 30, 2010 primarily related to an increase in the liabilities held for guaranteed minimum benefits on certain variable annuity products resulting in negative amortization expense.  The increase in the guaranteed minimum benefit reserves was attributable to the decrease in equity markets during the six-month period ended June 30, 2010.  During the six-month period ended June 30, 2009, actual gross profits improved due primarily to a decrease in guaranteed minimum benefit reserves and an increase in fair value of fixed maturity securities held in the trading portfolio, resulting in positive amortization expense.  The Company tests its DAC asset for loss recognition on a quarterly basis.  Amortization expense for the six-month periods ended June 30, 2010 and 2009 includes an expense of $36.5 million and $12.6 million, respectively, due to loss recognition expense recorded for certain annuity products.

The remaining $84.9 million decrease in amortization expense was primarily driven by updates to profitability projections resulting from actual changes to in-force policies and assumption changes primarily related to variable annuity products.

Amortization of VOBA and VOCRA - relates to the actuarially-determined value of in-force business from the Company’s acquisition of Keyport Life Insurance Company (“Keyport”) and a series of agreements between Sun Life and Health Insurance Company (U.S.) (“SLHIC”), an affiliate, and the Company’s subsidiary, Sun Life Insurance and Annuity Company of New York (“SLNY”), whereby SLNY agreed to assume direct responsibility for all sales and administration of existing and new business issued by SLHIC 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 underlying contracts.  Amortization was $(3.5) million and $14.4 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The change was primarily due to adjustments related to a methodology change in the calculation of VOBA assets for certain fixed annuity products during the six-month period ended June 30, 2009.

Income tax expense (benefit) - was $121.4 million and $273.9 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The effective tax rates for the same periods were 32.1% and 35.6 %, respectively.  The effective tax rate for the six-month period ended June 30, 2010 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 six-month period ended June 30, 2009 differs from the U.S. federal statutory tax rate of 35% primarily due to an increase in the valuation allowance against deferred tax assets, offset by tax benefits from the separate account dividends received deduction and tax credits.


 
78

 

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

RESULTS 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, excluding Sun Life Vermont.

Wealth Management Segment

The Wealth Management Segment sells a full range of retirement-oriented insurance products that provide variable, fixed or indexed 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.

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., there continues to be a block of U.S. group retirement business in-force.  A significant portion of these pension contracts are non-surrenderable, resulting in limited liquidity exposure to the Company.

The Company had 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 funding agreements is described in Note 2 of the Company’s condensed consolidated financial statements, included in Part I, Item I of this quarterly report, on Form 10-Q.



 
79

 

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

RESULTS OF OPERATIONS (CONTINUED)

Other - The Wealth Management Segment 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 at both June 30, 2010 and December 31, 2009, respectively.  This entire block of business is reinsured on a funds-withheld, coinsurance basis with Sun Life Assurance Company of Canada (“SLOC”), an affiliate.

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”), whereby 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 I of this quarterly report on Form 10-Q.

The following is a summary of operations for the Wealth Management Segment for the six-month periods ended June 30 (in 000’s):

 
2010
 
2009
           
Total revenues
$
      545,477 
 
$
1,517,470 
Total benefits and expenses
 
        126,187 
   
733,615 
Income before income tax expense
 
        419,290 
   
783,855 
           
Net income
$
      282,658 
 
$
512,509 

Pre-tax income was $419.3 million and $783.9 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The significant changes are described below.

Total revenues were $545.5 million and $1,517.5 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The $972.0 million change was primarily due to decreases of $715.6 million in net derivative income and $326.9 million in net investment income.  These decreases were offset by a $61.1 million increase in fee and other income, a $5.4 million increase in net realized investment gains (losses) and a $3.8 million increase in premiums and annuity considerations.

The $715.6 million decrease in net derivative income in 2010, as compared to 2009, primarily related to an increase in the fair value of the GMAB and GMWB liabilities, primarily due to changes in equity markets and interest rate swap and market volatility during the six-month period ended June 30, 2010, as compared to the six-month period ended June 30, 2009.  The decrease was also due to changes in the fair value of interest rate swap agreements.  These decreases were partially offset by an increase in income related to changes in the fair value of equity futures which was positively impacted by the decrease in equity markets during the six-month period ended June 30, 2010.

The decrease of $326.9 million in net investment income resulted primarily from a $479.7 million decrease in the fair market value of fixed maturity securities in the trading portfolio, primarily due to a decline in the market conditions in the six-month period ended June 30, 2010, as compared to the six-month period ended June 30, 2009.  The decrease was offset by a $86.4 million increase in net investment income primarily related to higher average investment yields in 2010, as compared to 2009, and by a $66.4 million decrease in ceded investment income related to the reinsurance of the SPWL policies to SLOC.

The $61.1 million increase in fee and other income was primarily due to increases in mortality and expense charges, rider fees and 12b-1 fees which related to an increase in the average variable annuity separate account balances during the six-month period ended June 30, 2010, as compared to the six-month period ended June 30, 2009.


 
80

 

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

RESULTS OF OPERATIONS (CONTINUED)

Wealth Management Segment (continued)

Total benefits and expenses were $126.2 million and $733.6 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The decrease of $607.4 million was primarily due to a $662.5 million decrease in DAC and VOBA amortization expense and a $46.5 million decrease in interest credited.  These decreases were offset by increases of $52.1 million, $32.3 million and $17.2 million related to other operating expenses, policyowner benefits and interest expense, respectively.

The $662.5 million decrease in DAC and VOBA amortization was attributable to a $557.4 million change in amortization expense and interest on the DAC asset.  The change in amortization expense was primarily due to a decrease in actual gross profit during the six-month period ended June 30, 2010, as compared to an increase in gross profit during the six-month period ended June 30, 2009.  The decrease in amortization expense was also due to a $105.1 million decrease in expenses primarily driven by updates to profitability projections and assumption changes in certain annuity products.  The amortization expense also includes $23.9 million change related to loss recognition increasing DAC amortization expense.  The $46.5 million decrease in interest credited was primarily the result of a lower average crediting rate.

The $52.1 million increase in other operating expenses was primarily due to an increase in non-deferrable commission expense which was attributable to an increase in sales in certain variable annuity products.

The $32.3 million increase in policyowner benefits for the six-month period ended June 30, 2010, as compared to 2009, was primarily due to an $86.8 million increase in reserves, offset by decreases of $47.8 million in death benefits paid and $7.4 million in annuity payments.  The increase in reserves was mainly related to changes in reserves for GMDB on certain variable annuity products which were attributable to changes in equity markets.

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 bank-owned life insurance (“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.

In this segment, the Company maintains funds-withheld reinsurance agreements with affiliates.  Pursuant to a reinsurance agreement with Sun Life Reinsurance (Barbados) No. 3 Corp. (“BarbCo 3”), the Company has ceded all risks associated with certain in-force VUL policies.  In addition, the Company’s subsidiary, SLNY, has a reinsurance agreement with SLOC, under which SLOC funded AXXX reserves attributable to certain UL policies sold by SLNY.  Further detail on these agreements are disclosed in Notes 1 and 6 of the Company’s condensed consolidated financial statements, included in Part I, Item I of the quarterly report on Form 10-Q.



 
81

 

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

RESULTS OF OPERATIONS (CONTINUED)

The following provides a summary of the operations for the Individual Protection Segment, excluding the discontinued operations of Sun Life Vermont, for the six-month periods ended June 30 (in 000’s):

 
 2010
 
 2009
Total revenues
$              27,671 
 
$             31,527 
Total benefits and expenses
26,308 
 
33,105 
 
Income (loss) before income tax
  expense (benefit)
1,363 
 
(1,578)
       
Net income (loss)
$                   971 
 
$              (4,642)

Total revenues were $27.7 million and $31.5 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The $3.8 million decrease in total revenues primarily resulted from a decrease of $9.1 million in net investment income, offset by increases of $3.6 million in embedded derivative income and $1.3 million in fee and other income.

The decrease of $9.1 million in net investment income resulted from a $7.9 million change in the fair value of securities in the trading portfolio, a $2.5 million decrease in investment income related to the segment’s ceding of investment income, and a $1.6 million decrease in interest income.  These decreases were offset by a $2.9 million increase in realized gains in the trading portfolio.  The $7.9 million change in the fair value of securities in the trading portfolio resulted from the portfolio having a greater recovery in value in the second quarter of 2009 as compared to the second quarter of 2010.

The increase of $3.6 million in embedded derivative income resulted from the embedded derivative liabilities increasing less in 2010 as compared to 2009, primarily driven by a decrease in equity markets and an increase in market volatility in the second quarter of 2010.

Total benefits and expenses were $26.3 million and $33.1 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The $6.8 million decrease in benefits and expenses primarily resulted from policyowner benefits and interest credited decreasing by $11.5 million and $2.0 million, respectively, offset by an increase in DAC amortization of $7.8 million.  The increase in DAC amortization resulted from an increase in unrealized gains in the trading portfolio associated with the DAC asset.


 
82

 

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

RESULTS OF OPERATIONS (CONTINUED)

Group Protection Segment

The Group Protection Segment markets and administers group life insurance, group stop loss insurance, group dental and group short-term and 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.

The Company maintains through SLNY and its Group Protection Segment a reinsurance agreement with SLHIC.  The reinsurance agreement between SLNY, the assuming company, and SLHIC, the ceding company, is a 100% coinsurance agreement for all existing and future new business issued by SLHIC in New York.  In addition, SLNY and SLHIC are parties to a renewal rights agreement under which SLNY has exclusive rights to renew SLHIC in-force business assumed under the reinsurance agreement.

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

 
2010
 
2009
Total revenues
$               64,576 
 
$            69,179 
Total benefits and expenses
61,992 
 
55,716 
Income before income tax expense
2,584 
 
13,463 
       
Net income
$                 1,682 
 
$              8,751 

The Group Protection Segment had pretax income of $2.6 million and $13.5 million for the six-month periods ended June 30, 2010 and 2009, respectively.  Total revenues for the six-month period ended June 30, 2010 decreased by $4.6 million in comparison to the six-month period ended June 30, 2009.  The decrease in revenues resulted primarily from a $3.6 million decrease in net investment income, driven by a decrease in the fair value of the trading portfolio, as well as a decrease in premiums of $1.0 million, due to a decrease in assumed business.

Total benefits and expenses in 2010 increased by $6.3 million in comparison to 2009.  The increase in benefits and expenses resulted primarily from an increase in policyowner benefits of $5.8 million, mostly in stop loss and disability, resulting from unfavorable claims experience in 2010.


 
83

 

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

RESULTS OF OPERATIONS (CONTINUED)

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 Company maintains the Corporate Segment to provide for the capital needs of the three operating segments and to engage in other financing related activities.  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.

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

 
2010
 
2009
Total revenues
$             (33,518)
 
$           (13,089)
Total benefits and expenses
11,914 
 
14,060 
Loss before income tax benefit
(45,432)
 
(27,149)
       
Net loss
$             (28,860)
 
$           (21,910)

The Corporate Segment had a pretax loss of $45.4 million and $27.1 million for the six-month periods ended June 30, 2010 and 2009, respectively.  The $18.3 million decrease in pre-tax income was primarily attributable to a decrease in total revenues of $20.4 million.  The $20.4 million decrease in total revenues consists of the following components: decreases of $25.9 million and $18.8 million in net investment income and derivative income, respectively, offset by increases of $13.3 million and $7.2 million in net realized gains on available-for-sale investments and fee and other income, respectively.  Additionally, the Corporate Segment had a $3.7 million decrease in OTTI credit losses.

The decrease in net investment income of $25.9 million resulted primarily from the change in allocation of net investment income to the operating segments, decreasing net investment income by $47.1 million.  This decrease was offset by increases of $13.5 million and $6.8 million in limited partnership investment income and interest income from available-for-sale fixed maturity securities, respectively.

The decrease in derivative income of $18.8 million was primarily related to the decrease in fair value of interest rate swap agreements as a result of changes in the applicable interest rate and currency exchange rates.

Benefits and expenses decreased by $2.1 million due to a $16.4 million change in interest expense allocated to the operating segments, offset by an increase in other operating expenses of $14.3 million primarily due to an increase in advertising for the Company’s branding campaign.



 
84

 

 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 4. 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)) and concluded that they were effective as of the end of the period covered by this report based on such evaluation.  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 quarter ended June 30, 2010 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, 2009.

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. (Removed and Reserved).

Item 5. Other Information.

(a)  Not applicable.

(b)  Not applicable.




 
85

 

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

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



 
86

 

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)




August 13, 2010
/s/ Westley V. Thompson
Date
Westley V. Thompson, President, SLF U.S.
 
(Principal Executive Officer)


August 13, 2010
/s/ Ronald H. Friesen
Date
Ronald H. Friesen, Senior Vice President and Chief Financial Officer
 
(Principal Financial Officer)




 
87