Attached files
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
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For the quarterly period ended
March 31, 2011
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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, 333-333-155726, 333-155791, 333-155792, 333-155793, 333-155797, 333-156303, 333-156304, 333-156308, 333-160605, 333-160606, 333-160607, 333-169558-01, 333-169559-01, 333-169560-01, and 333-169561-01
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SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Exact name of registrant as specified in its charter)
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Delaware
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04-2461439
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.)
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One Sun Life Executive Park, Wellesley Hills, MA
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02481
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(Address of principal executive offices)
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(Zip Code)
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(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.
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Large accelerated filer ¨
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Accelerated filer ¨
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Non-accelerated filer þ
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(Do not check if a smaller reporting company)
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Smaller reporting company ¨
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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 as of May 13, 2011, 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 BY GENERAL 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 MARCH 31, 2011
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Page
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PART I - FINANCIAL INFORMATION
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Item 1.
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3
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4
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5
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6
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7
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9
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Item 2.
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62
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Item 3.
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74
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Item 4.
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74
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PART II -OTHER INFORMATION
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Item 1.
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74
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Item 1A.
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74
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Item 2.
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74
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Item 3.
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74
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Item 4.
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74
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Item 5.
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74
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Item 6.
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75
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PART I – FINANCIAL INFORMATION
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
(in thousands)
For the three-month periods ended March 31,
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Unaudited
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|||||
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2011
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2010
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||||
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Revenues
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|||||
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Premiums and annuity considerations
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$
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34,277
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$
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35,064
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|
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Net investment income (1)
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291,998
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443,829
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|||
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Net derivative income (loss) (Note 5)
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27,770
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(41,450)
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|||
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Net realized investment gains, excluding impairment losses on
available-for-sale securities
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4,083
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5,165
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|||
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Other-than-temporary impairment losses (2) (Note 5)
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(71)
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(885)
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|||
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Fee and other income
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148,021
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115,753
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|||
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Total revenues
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506,078
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557,476
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|||
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Benefits and Expenses
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|||||
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Interest credited
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87,876
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89,383
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|||
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Interest expense
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11,092
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17,097
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|||
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Policyowner benefits
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44,967
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34,603
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|||
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Amortization of deferred policy acquisition costs, value of
business and customer renewals acquired
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248,114
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171,709
|
|||
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Other operating expenses
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89,485
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80,910
|
|||
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Total benefits and expenses
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481,534
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393,702
|
|||
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Income before income tax expense
|
24,544
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163,774
|
|||
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Income tax expense
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4,159
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52,123
|
|||
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Net income
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$
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20,385
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$
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111,651
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(1)
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Net investment income includes an increase in market value of trading fixed maturity securities of $121.3 million and $270.4 million for the three-month periods ended March 31, 2011 and 2010, respectively.
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(2)
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The other-than-temporary impairment (“OTTI”) losses for the three-month periods ended March 31, 2011 and 2010 represent solely credit losses. The Company incurred no non-credit OTTI losses during the three-month periods ended March 31, 2011 and 2010 as such, no non-credit OTTI losses were recognized in other comprehensive income for the periods.
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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
(in thousands, except share data)
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Unaudited
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|||||
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ASSETS
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March 31, 2011
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December 31, 2010
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|||
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Investments
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|||||
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Available-for-sale fixed maturity securities at fair value (amortized cost of $1,519,833
and $1,422,951 in 2011 and 2010, respectively) (Note 5)
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$
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1,579,255
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$
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1,495,923
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Trading fixed maturity securities at fair value (amortized cost of $11,531,390 and
$11,710,416 in 2011 and 2010, respectively) (Note 5)
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11,409,870
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11,467,118
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|||
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Mortgage loans (Note 5)
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1,685,060
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1,737,528
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|||
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Derivative instruments – receivable (Note 5)
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205,910
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198,064
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|||
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Limited partnerships
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39,000
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41,622
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|||
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Real estate
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216,449
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214,665
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|||
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Policy loans
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714,322
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717,408
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|||
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Other invested assets
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46,536
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27,456
|
|||
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Short-term investments
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261,958
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832,739
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|||
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Cash and cash equivalents
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1,054,028
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736,323
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|||
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Total investments and cash
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17,212,388
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17,468,846
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|||
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Accrued investment income
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202,757
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188,786
|
|||
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Deferred policy acquisition costs and sales inducement asset
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1,506,460
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1,682,559
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|||
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Value of business and customer renewals acquired
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108,522
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134,985
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|||
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Net deferred tax asset (Note 10)
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376,693
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394,297
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|||
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Goodwill (Note 9)
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7,299
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7,299
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Receivable for investments sold
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34,431
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5,328
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Reinsurance receivable
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2,332,613
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2,347,086
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|||
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Other assets
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171,089
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125,529
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|||
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Separate account assets
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27,887,322
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26,880,421
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|||
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Total assets
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$
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49,839,574
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$
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49,235,136
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LIABILITIES
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|||||
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Contractholder deposit funds and other policy liabilities
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$
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14,143,364
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$
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14,593,228
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Future contract and policy benefits
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829,867
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849,514
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|||
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Payable for investments purchased
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154,008
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44,827
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|||
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Accrued expenses and taxes
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45,086
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52,628
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|||
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Debt payable to affiliates
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783,000
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783,000
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|||
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Reinsurance payable
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2,216,725
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2,231,835
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|||
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Derivative instruments – payable (Note 5)
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311,765
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362,023
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|||
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Other liabilities
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303,304
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285,056
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|||
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Separate account liabilities
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27,887,322
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26,880,421
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|||
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Total liabilities
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46,674,441
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46,082,532
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Commitments and contingencies (Note 7)
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|||||
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STOCKHOLDER’S EQUITY
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|||||
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Common stock, $1,000 par value – 10,000 shares authorized; 6,437 shares
issued and outstanding in 2011 and 2010
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$
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6,437
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$
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6,437
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Additional paid-in capital
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3,929,012
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3,928,246
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|||
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Accumulated other comprehensive income
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37,931
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46,553
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|||
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Accumulated deficit
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(808,247)
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(828,632)
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|||
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Total stockholder’s equity
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3,165,133
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3,152,604
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|||
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Total liabilities and stockholder’s equity
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$
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49,839,574
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$
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49,235,136
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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
(in thousands)
For the three-month periods ended March 31,
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Unaudited
|
|||||
|
2011
|
2010
|
||||
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Net income
|
$
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20,385
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$
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111,651
|
|
|
Other comprehensive (loss) income:
|
|||||
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Change in unrealized holding (losses) gains on available-for-sale
fixed maturity securities, net of tax (1)
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(4,705)
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8,168
|
|||
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Reclassification adjustment for OTTI losses, net of tax (2)
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-
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104
|
|||
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Reclassification adjustments of realized investment losses into net
income, net of tax (3)
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(3,917)
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(2,383)
|
|||
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Other comprehensive (loss) income
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(8,622)
|
5,889
|
|||
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Comprehensive income
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$
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11,763
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$
|
117,540
|
|
|
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(1)
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Net of tax benefit (expense) of $2.5 million and $(4.4) million for the three-month periods ended March 31, 2011 and 2010, respectively.
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|
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(2)
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Represents an adjustment to OTTI losses due to the sale of other-than-temporarily impaired available-for-sale fixed maturity securities.
|
|
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(3)
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Net of tax benefit of $2.1 million and $1.3 million for the three-month periods ended March 31, 2011 and 2010, respectively.
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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
(in thousands)
For the three-month periods ended March 31, 2011 and 2010
Unaudited
|
Common
Stock
|
Additional
Paid-In
Capital
|
Accumulated
Other
Comprehensive
Income (1)
|
Accumulated
Deficit
|
Total
Stockholder’s
Equity
|
||||||||||
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Balance at December 31, 2009
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$
|
6,437
|
$
|
3,527,677
|
$
|
35,244
|
$
|
(962,906)
|
$
|
2,606,452
|
||||
|
Net income
|
-
|
-
|
-
|
111,651
|
111,651
|
|||||||||
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Tax benefit from stock options
|
-
|
168
|
-
|
-
|
168
|
|||||||||
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Capital contribution from Parent
|
-
|
400,000
|
-
|
-
|
400,000
|
|||||||||
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Other comprehensive income
|
-
|
-
|
5,889
|
-
|
5,889
|
|||||||||
|
Balance at March 31, 2010
|
$
|
6,437
|
$
|
3,927,845
|
$
|
41,133
|
$
|
(851,255)
|
$
|
3,124,160
|
||||
|
Balance at December 31, 2010
|
$
|
6,437
|
$
|
3,928,246
|
$
|
46,553
|
$
|
(828,632)
|
$
|
3,152,604
|
||||
|
Net income
|
-
|
-
|
-
|
20,385
|
20,385
|
|||||||||
|
Tax benefit from stock options
|
-
|
766
|
-
|
-
|
766
|
|||||||||
|
Other comprehensive loss
|
-
|
-
|
(8,622)
|
-
|
(8,622)
|
|||||||||
|
Balance at March 31, 2011
|
$
|
6,437
|
$
|
3,929,012
|
$
|
37,931
|
$
|
(808,247)
|
$
|
3,165,133
|
||||
|
|
(1) As of March 31, 2011, the total amount of after tax non-credit OTTI losses recorded in the Company’s accumulated other comprehensive income was $8.0 million.
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
(in thousands)
For the three-month periods ended March 31,
|
Unaudited
|
|||||
|
2011
|
2010
|
||||
|
Cash Flows From Operating Activities:
|
|||||
|
Net income
|
$
|
20,385
|
$
|
111,651
|
|
|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
|||||
|
Net amortization of premiums on investments
|
10,288
|
2,587
|
|||
|
Amortization of deferred policy acquisition costs and value of
business and customer renewals acquired
|
248,114
|
171,709
|
|||
|
Depreciation and amortization
|
4,916
|
1,214
|
|||
|
Net (gain) loss on derivatives
|
(40,770)
|
6,121
|
|||
|
Net realized gains and OTTI credit losses on available-for-sale
investments
|
(4,012)
|
(4,280)
|
|||
|
Net increase in fair value of trading investments
|
(121,321)
|
(270,435)
|
|||
|
Net realized (gains) losses on trading investments
|
(2,221)
|
33,927
|
|||
|
Undistributed loss on private equity limited partnerships
|
694
|
1,631
|
|||
|
Interest credited to contractholder deposits
|
87,876
|
89,383
|
|||
|
Deferred federal income taxes
|
22,247
|
54,531
|
|||
|
Changes in assets and liabilities:
|
|||||
|
Additions to deferred policy acquisition costs, sales inducement asset
and value of business and customer renewals acquired
|
(42,855)
|
(56,139)
|
|||
|
Accrued investment income
|
(13,971)
|
12,545
|
|||
|
Net change in reinsurance receivable/payable
|
32,349
|
28,868
|
|||
|
Future contract and policy benefits
|
(19,647)
|
(20,539)
|
|||
|
Other, net
|
48,210
|
81,228
|
|||
|
Net cash provided by operating activities
|
230,282
|
244,002
|
|||
|
Cash Flows From Investing Activities:
|
|||||
|
Sales, maturities and repayments of:
|
|||||
|
Available-for-sale fixed maturity securities
|
61,096
|
70,492
|
|||
|
Trading fixed maturity securities
|
761,065
|
737,625
|
|||
|
Mortgage loans
|
50,056
|
25,096
|
|||
|
Other invested assets
|
(121,031)
|
(64,561)
|
|||
|
Purchases of:
|
|||||
|
Available-for-sale fixed maturity securities
|
(151,392)
|
(46,399)
|
|||
|
Trading fixed maturity securities
|
(595,288)
|
(1,332,465)
|
|||
|
Mortgage loans
|
(1,495)
|
(15,431)
|
|||
|
Real estate
|
(6,461)
|
(904)
|
|||
|
Other invested assets
|
(32,224)
|
(16,616)
|
|||
|
Net change in policy loans
|
3,086
|
12,298
|
|||
|
Net change in short-term investments
|
570,781
|
(784,436)
|
|||
|
Net cash provided by (used in) investing activities
|
$
|
538,193
|
$
|
(1,415,301)
|
|
Continued on next page
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 three-month periods ended March 31,
|
Unaudited
|
|||||
|
2011
|
2010
|
||||
|
Cash Flows From Financing Activities:
|
|||||
|
Additions to contractholder deposit funds
|
$
|
251,867
|
$
|
328,615
|
|
|
Withdrawals from contractholder deposit funds
|
(688,440)
|
(610,810)
|
|||
|
Capital contribution from Parent
|
-
|
400,000
|
|||
|
Other, net
|
(14,197)
|
(17,617)
|
|||
|
Net cash (used in) provided by financing activities
|
(450,770)
|
100,188
|
|||
|
Net change in cash and cash equivalents
|
317,705
|
(1,071,111)
|
|||
|
Cash and cash equivalents, beginning of period
|
736,323
|
1,804,208
|
|||
|
Cash and cash equivalents, end of period
|
$
|
1,054,028
|
$
|
733,097
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
1. DESCRIPTION OF BUSINESS
GENERAL
Sun Life Assurance Company of Canada (U.S.) (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.”
The Company and its subsidiaries are engaged in the sale of a variety of wealth accumulation products, protection products and institutional investment contracts. These products include funding agreements, individual and group fixed and variable annuities, individual and group variable life insurance, individual universal life insurance, and 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.
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 three-month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. 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, 2010.
The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. As of March 31, 2011, the Company directly or indirectly owned all of the outstanding shares of SLNY, a New York life insurance company which issues individual fixed and variable annuity contracts, individual life insurance, and group life, group disability, group dental and stop loss 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.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. DESCRIPTION OF BUSINESS (CONTINUED)
BASIS OF PRESENTATION (CONTINUED)
On September 6, 2006 the Company entered into an agreement with Credit and Repackaged Securities Limited Series 2006-10 Trust (the “CARS Trust”). Pursuant to this agreement, the Company purchased a funded note from the CARS Trust which, through a credit default swap entered into by the CARS Trust, is exposed to the credit performance of a portfolio of corporate reference entities. The Company entered into this agreement for yield enhancement related to the fee earned on the credit default swap which adds to the return earned on the funded note.
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 trust was required to make any payments under the swap, the underlying assets held by the trust would be liquidated to fund the payment. If the disposition of these assets is insufficient to fund the payment calculated, then under the terms of the agreement, the cash settlement amount would be capped at the amount of the proceeds from the sale of the underlying assets. As of March 31, 2011, the maximum future payments of the CARS Trust could be required to make is $37.4 million. The CARS Trust made no payment during the three-month period ended March 31, 2011. As of March 31, 2011 and December 31, 2010, the fair value of the credit default swap was a liability of $23.8 million and $27.3 million, respectively. As of March 31, 2011 and December 31, 2010, the fair value of the assets held as collateral by the CARS Trust was $36.9 million and $36.3 million, respectively. The carrying amount of the interest in this variable interest entity (“VIE”) is included in trading fixed maturity security annuities in the Company’s condensed consolidated balance sheets.
To determine the nature of the Company's interest in a variable interest entity, the Company performs an assessment of each party’s interest in the VIE beyond any voting interest it may have. This assessment looks to sufficiency of an equity investment at risk in terms of the entity's ability to self-finance its activities, as well as other indicators of control including the power to direct activities that impact economic performance, the obligation to absorb expected losses and the right to receive expected returns. The Company is deemed to control a VIE when it has both the ability to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. If the Company determines that it is the VIE’s primary beneficiary, the VIE must be consolidated in the Company’s condensed consolidated financial statements. At March 31, 2011, other than the CARS Trust, the Company had no interest in significant VIE’s for which consolidation is required under FASB ASC Topic 810.
All inter-company 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”), including sales inducement asset (“SIA”), value of business acquired (“VOBA”), value of customer renewals acquired (“VOCRA”), liabilities for future contract and policyholder benefits, accruals, 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.
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)
SIGNIFICANT ACCOUNTING POLICIES
For a description of the Company’s significant accounting policies, refer to Note 1 to 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, 2010, which should be read in conjunction with the accompanying condensed consolidated financial statements.
ACCOUNTING PRONOUNCEMENTS
New and Adopted Accounting Pronouncements
In December 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-28, “Intangibles–Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force).” The amendments of ASU 2010-28 require reporting units with zero or negative carrying amounts to perform Step 2 of goodwill impairment test if it is more likely than not that a goodwill impairment exists and to consider adverse qualitative factors when performing the impairment test. The amendments in ASU 2010-28 are effective for interim periods and fiscal years beginning after December 15, 2010. Early adoption is not permitted. The Company adopted ASU 2010-28 on January 1, 2011 and the adoption did not have a significant impact on the Company’s condensed consolidated financial statements.
In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force).” The amendments of ASU 2010-29 provide guidance to clarify the acquisition date that should be used for reporting the pro forma financial information disclosures when comparative financial statements are presented. ASU 2010-29 requires a public entity that presents comparative financial statements to disclose revenue and earnings of the combined entity as if the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The amendments also require the supplemental pro forma disclosure to include a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly related to the business combination. The amendments in ASU 2010-29 are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted ASU 2010-29 on January 1, 2011 and will apply this guidance to future business combinations.
In April 2010, the FASB issued ASU 2010-15, “Financial Services–Insurance (Topic 944): How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments–a consensus of the FASB Emerging Issues Task Force,” to provide guidance regarding accounting for investment funds determined to be VIE’s. Under this guidance, an insurance entity would not be required to consolidate a voting-interest investment fund when it holds the majority of the voting interests of the fund through its separate accounts. In addition, an insurance entity would not consider the interests held through separate accounts for the benefit of policyholders in the insurer’s evaluation of its controlling interest in a VIE, unless the separate account contract holder is a related party. The guidance is effective, on a retrospective basis, for fiscal years and interim periods within those fiscal years, beginning after December 15, 2010. The Company adopted ASU 2010-15 on January 1, 2011 and the adoption did not have a significant 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, 2010 for other accounting pronouncements that the Company adopted during the year ended December 31, 2010.
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 April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” which clarifies when a loan modification or restructuring is considered a troubled debt restructuring (“TDR”). In evaluating whether a restructuring constitutes a TDR a creditor must use judgment to determine whether the following exist:
|
|
1.
|
The borrower is experiencing financial difficulties and
|
|
|
2.
|
The lender has granted a concession to the borrower.
|
ASU 2011-02 amends ASC Topic 310 to include financial difficulty indicators (such as debtor default, debtor bankruptcy or concerns about the future as a going concern) that the lender should consider in determining whether a borrower is experiencing financial difficulties. The amendments also clarify that a borrower could be experiencing financial difficulties even though the borrower is not currently in payment default but default is probable in the foreseeable future.
ASU 2011-02 provides guidance on whether the lender has granted a concession to the borrower and notes that:
|
|
·
|
A borrower’s inability to access funds at a market rate for a new loan with similar risk characteristics as the modified loan indicates that the modification was executed at a below-market rate and therefore may indicate that a concession was granted.
|
|
|
·
|
A temporary or permanent increase in the contractual interest rate as a result of restructuring does not preclude the restructuring from being considered a concession because the rate may still be below market.
|
|
|
·
|
A restructuring that results in an insignificant delay in contractual cash flow is not considered to be a concession.
|
The amendments in ASU 2011-2 are effective for the first interim or annual period beginning on or after June 15, 2011. These amendments are to be applied retrospectively to modifications occurring on or after the beginning of the annual period of adoption. The Company will adopt ASU 2011-2 on July 1, 2011 and is assessing the impact of this adoption.
In October 2010, the FASB issued ASU 2010-26, “Financial Services–Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (a consensus of the FASB Emerging Issues Task Force),” which amends FASB ASC Topic 944 to modify the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. The amendments specify that only incremental costs of successful contract acquisition that result directly from and are essential to the contract transactions can be capitalized as deferred acquisition costs. The incremental direct costs are those costs that would not have been incurred by the insurance entity if the contract transactions did not occur. The amendments in ASU 2010-26 are effective for interim periods and fiscal years beginning after December 15, 2011. The Company will adopt ASU 2010-20 on January 1, 2012 and is assessing the impact of this adoption.
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 non-consolidated affiliates.
Related Party Reinsurance Transactions
As more fully described in Note 6 to the Company’s condensed consolidated financial statements, 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.
Capital Transactions
The Company did not receive any capital contribution from the Parent during the three-month period ended March 31, 2011. During the year ended December 31, 2010, the Company received capital contributions totaling $400.0 million from the Parent. The cash contributions were recorded as additional paid-in capital and were made to ensure the Company continues to exceed certain capital requirements, as prescribed by the National Association of Insurance Comissioners (“NAIC”). The NAIC has established regulations that provide minimum capitalization requirements based on risk-based capital formulas for life insurance companies. The risk-based capital formulas for life insurance companies establishes capital requirements relating to insurance, business, asset and interest rate risks, including equity, interest rate and expense recovery risks associated with variable annuities that contain death benefits or certain living benefits.
The Company did not declare or pay any dividends during the three-month period ending March 31, 2011 or the year ending December 31, 2010.
Debt Transactions
At March 31, 2011 and December 31, 2010, the Company had $18.0 million in promissory notes issued to Sun Life (Hungary) Group Financing Limited Company (“Sun Life (Hungary) LLC”), an affiliate. The Company pays interest semi-annually to Sun Life (Hungary) LLC. Related to these promissory notes, the Company incurred interest expense of $0.3 million for each of the three-month periods ended March 31, 2011 and 2010, respectively.
At March 31, 2011 and 2010, the Company had $565.0 million of surplus notes issued to Sun Life Financial (U.S.) Finance, Inc, an affiliate. The Company expensed $10.6 million for interest on these surplus notes for each of the three-month periods ended March 31, 2011 and 2010, respectively.
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 $900.0 million to Sun Life Financial Global Funding III, L.L.C. (“LLC III”), an affiliate, due 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 $1.5 million and $1.3 million for the three-month periods ended March 31, 2011 and 2010, respectively. The Company also issued a $100.0 million floating rate demand note payable to LLC III on September 19, 2006. The Company expensed $0.2 million for each of the three-month periods ended March 31, 2011 and 2010, respectively, for interest on this demand note.
The Company has entered into an interest rate swap agreement with LLC III with an aggregate notional amount of $900.0 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 $900.0 million to Sun Life Financial Global Funding II, L.L.C. (“LLC II”), an affiliate, due 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 the funding agreements was $1.3 million and $1.1 million for the three-month periods ended March 31, 2011 and 2010. The Company also issued a $100.0 million floating rate demand note payable to LLC II on May 24, 2006. The Company expensed $0.1 million for each of the three-month periods ended March 31, 2011 and 2010, respectively, for interest on this demand note.
The Company has entered into an interest rate swap agreement with LLC II with an aggregate notional amount of $900.0 million that effectively converts the floating rate payment obligations under the funding agreements to fixed rate obligations.
On July 1 and July 8, 2010, the Company paid $900.0 million and $10.0 million, respectively, to Sun Life Financial Global Funding, LLC (“LLC”) due to the maturity of funding agreements. Total interest credited for these funding agreements was $1.4 million for the three-month period ended March 31, 2010. On August 6, 2010, the Company also paid $100.1 million to LLC including $140 thousand in interest due to the maturity of a $100.0 million floating rate demand note. The Company expensed $0.2 million for the three-month period ended March 31, 2010 for interest on this demand note. The related $900.0 million interest rate swap agreement expired on July 6, 2010 due to the maturity of the underlying floating rate funding agreements with LLC.
The account values related to the funding agreements issued to LLC III and LLC II are reported in the Company’s condensed consolidated balance sheets as a component of contract holder deposit funds and other policy liabilities.
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. The tax benefits, associated with SLF stock options that had been granted to employees of the Company prior to the employee transfer, is recognized by the Company in stockholder’s equity when these benefits vest. 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, see 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, 2010.
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 of $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 March 31, 2011, the remaining deposit liability was $13.5 million.
Pursuant to an administrative services agreement between the Company and Sun Life Services, Sun Life Services provides human resources 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. 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 $34.8 million and $28.7 million for the three-month periods ended March 31, 2011 and 2010, respectively.
The Company also participated in pension and other retirement plans sponsored by Sun Life Services. The cost of these benefits to the Company were allocated and charged to the Company in a manner consistent with the allocation of employee compensation expenses and the number of participants. For the three-month periods ended March 31, 2011 and 2010, expenses of $1.4 million and $1.9 million, respectively, were allocated to the Company by Sun Life Services for the pension and other benefits plans.
The Company has an administrative services 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 $3.3 million for each of the three-month periods ended March 31, 2011 and 2010, respectively.
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 services agreement with Sun Capital Advisers LLC (“SCA”), an affiliate and 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 $4.0 million and $2.8 million for the three-month periods ended March 31, 2011 and 2010, respectively. The Company also paid $5.6 million and $5.3 million for the three-month periods ended March 31, 2011 and 2010, respectively, in investment management services fees to SCA.
The Company has an administrative service agreement with Sun Life Information Services Canada, Inc. (“SLISC”), an affiliate, under which SLISC provides administrative and support services to the Company in connection with the Company’s insurance and annuity business. Expenses under this agreement amounted to approximately $4.5 million and $4.2 million for the three-month periods ended March 31, 2011 and 2010, respectively.
The Company has a service agreement with Sun Life Information Services Ireland Limited (“SLISIL”), an affiliate, under which SLISIL provides various insurance related and information systems services to the Company. Expenses under this agreement amounted to approximately $6.1 million and $5.7 million for the three-month periods ended March 31, 2011 and 2010, respectively.
During the three-month periods March 31, 2011 and 2010, the Company paid $10.0 million and $10.5 million, respectively, in distribution fees to SLFD.
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 $3.0 million for each of the three-month periods ended March 31, 2011 and 2010 respectively. Rental income is reported as a component of net investment income on the Company’s condensed consolidated statements of operations.
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 insurance 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 and items not otherwise attributable to the other segments.
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 Company’s four segments (in 000’s):
|
Three-month period ended March 31, 2011
|
||||||||||
|
Wealth
|
Individual
|
Group
|
||||||||
|
Management
|
Protection
|
Protection
|
Corporate
|
Total
|
||||||
|
Total revenues
|
$ 459,888
|
$ 19,506
|
$ 31,307
|
$ (4,623)
|
$ 506,078
|
|||||
|
Total benefits and expenses
|
424,528
|
21,893
|
30,418
|
4,695
|
481,534
|
|||||
|
Income (loss) before income
tax expense (benefit)
|
35,360
|
(2,387)
|
889
|
(9,318)
|
24,544
|
|||||
|
Net income (loss)
|
$ 27,963
|
$ (1,489)
|
$ 583
|
$ (6,672)
|
$ 20,385
|
|||||
|
Three-month period ended March 31, 2010
|
||||||||||
|
Wealth
|
Individual
|
Group
|
||||||||
|
Management
|
Protection
|
Protection
|
Corporate
|
Total
|
||||||
|
Total revenues
|
$ 542,125
|
$ 15,226
|
$ 32,261
|
$ (32,136)
|
$ 557,476
|
|||||
|
Total benefits and expenses
|
337,465
|
14,215
|
31,148
|
10,874
|
393,702
|
|||||
|
Income (loss) before income
tax expense (benefit)
|
204,660
|
1,011
|
1,113
|
(43,010)
|
163,774
|
|||||
|
Net income (loss)
|
$ 138,135
|
$ 711
|
$ 723
|
$ (27,918)
|
$ 111,651
|
|||||
4. FAIR VALUE MEASUREMENT
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 that are carried at fair value into a three-level hierarchy based on the priority of the inputs to the valuation technique. 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 which indicate that 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 three-month period ended March 31, 2011, there were no changes to these valuation techniques and the related inputs.
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
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 asset-backed securities (“ABS”), including collateralized debt obligations, residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”), certain corporate debt, certain private equity investments and certain derivatives, including derivatives embedded in insurance contracts.
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 ABS, 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.
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 March 31, 2011 (in 000’s):
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||
|
Assets
|
||||||||||||
|
Available-for-sale fixed maturity securities:
|
||||||||||||
|
Asset-backed securities
|
$
|
-
|
$
|
207
|
$
|
7
|
$
|
214
|
||||
|
Residential mortgage-backed securities
|
-
|
31,966
|
-
|
31,966
|
||||||||
|
Commercial mortgage-backed securities
|
-
|
12,905
|
2,089
|
14,994
|
||||||||
|
Foreign government & agency securities
|
-
|
559
|
-
|
559
|
||||||||
|
U.S. states and political subdivisions securities
|
-
|
214
|
-
|
214
|
||||||||
|
U.S. treasury and agency securities
|
481,313
|
-
|
-
|
481,313
|
||||||||
|
Corporate securities
|
-
|
1,042,609
|
7,386
|
1,049,995
|
||||||||
|
Total available-for-sale fixed maturity securities
|
481,313
|
1,088,460
|
9,482
|
1,579,255
|
||||||||
|
Trading fixed maturity securities:
|
||||||||||||
|
Asset-backed securities
|
-
|
313,228
|
90,706
|
403,934
|
||||||||
|
Residential mortgage-backed securities
|
-
|
756,408
|
145,035
|
901,443
|
||||||||
|
Commercial mortgage-backed securities
|
-
|
777,162
|
81,994
|
859,156
|
||||||||
|
Foreign government & agency securities
|
-
|
115,236
|
13,165
|
128,401
|
||||||||
|
U.S. states and political subdivisions securities
|
-
|
609
|
-
|
609
|
||||||||
|
U.S. treasury and agency securities
|
805,007
|
9,271
|
1,096
|
815,374
|
||||||||
|
Corporate securities
|
-
|
8,194,416
|
106,537
|
8,300,953
|
||||||||
|
Total trading fixed maturity securities
|
805,007
|
10,166,330
|
438,533
|
11,409,870
|
||||||||
|
Derivative instruments - receivable:
|
||||||||||||
|
Interest rate contracts
|
-
|
65,086
|
-
|
65,086
|
||||||||
|
Foreign currency contracts
|
-
|
40,208
|
-
|
40,208
|
||||||||
|
Equity contracts
|
35,595
|
39,228
|
20,459
|
95,282
|
||||||||
|
Futures
|
5,334
|
-
|
-
|
5,334
|
||||||||
|
Total derivative instruments - receivable
|
40,929
|
144,522
|
20,459
|
205,910
|
||||||||
|
Other invested assets
|
3,810
|
27,555
|
10,156
|
41,521
|
||||||||
|
Short-term investments
|
261,958
|
-
|
-
|
261,958
|
||||||||
|
Cash and cash equivalents
|
1,054,028
|
-
|
-
|
1,054,028
|
||||||||
|
Total investments and cash
|
2,647,045
|
11,426,867
|
478,630
|
14,552,542
|
||||||||
|
Separate account assets:
|
||||||||||||
|
Mutual fund investments
|
23,265,062
|
26,851
|
-
|
23,291,913
|
||||||||
|
Equity investments
|
190,475
|
134
|
64
|
190,673
|
||||||||
|
Fixed income investments
|
368,800
|
5,759,915
|
66,935
|
6,195,650
|
||||||||
|
Alternative investments
|
9,665
|
74,646
|
348,076
|
432,387
|
||||||||
|
Other investments
|
3,300
|
-
|
-
|
3,300
|
||||||||
|
Total separate account assets (1) (2)
|
23,837,302
|
5,861,546
|
415,075
|
30,113,923
|
||||||||
|
Total assets measured at fair value on a recurring basis
|
$
|
26,484,347
|
$
|
17,288,413
|
$
|
893,705
|
$
|
44,666,465
|
||||
|
|
(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 $2,226.6 million, primarily related to investment purchases payable, net of investment sales receivable, that are not subject to FASB ASC Topic 820, “Fair Value Measurement.”
|
|
|
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 March 31, 2011 (in 000’s):
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||
|
Liabilities
|
||||||||||||
|
Other policy liabilities:
|
||||||||||||
|
Guaranteed minimum withdrawal benefit liability (1)
|
$
|
-
|
$
|
-
|
$
|
(122,682)
|
$
|
(122,682)
|
||||
|
Guaranteed minimum accumulation benefit liability (1)
|
-
|
-
|
(34,560)
|
(34,560)
|
||||||||
|
Derivatives embedded in reinsurance contracts(1)
|
-
|
62,712
|
20,459
|
83,171
|
||||||||
|
Fixed index annuities(1)
|
-
|
-
|
139,577
|
139,577
|
||||||||
|
Total other policy liabilities
|
-
|
62,712
|
2,794
|
65,506
|
||||||||
|
Derivative instruments – payable:
|
||||||||||||
|
Interest rate contracts
|
-
|
281,475
|
-
|
281,475
|
||||||||
|
Foreign currency contracts
|
-
|
3,990
|
-
|
3,990
|
||||||||
|
Credit contracts
|
-
|
-
|
23,846
|
23,846
|
||||||||
|
Futures contracts
|
2,454
|
-
|
-
|
2,454
|
||||||||
|
Total derivative instruments – payable
|
2,454
|
285,465
|
23,846
|
311,765
|
||||||||
|
Other liabilities:
|
||||||||||||
|
Bank overdrafts
|
46,265
|
-
|
-
|
46,265
|
||||||||
|
Total liabilities measured at fair value on a recurring basis
|
$
|
48,719
|
$
|
348,177
|
$
|
26,640
|
$
|
423,536
|
||||
|
|
(1) The balances are included within the contractholder deposits funds and other policy liabilities in the Company’s condensed consolidated balance sheets. At March 31, 2011, the net balances of guaranteed minimum withdrawal and accumulation benefits were in an asset position.
|
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, 2010:
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||
|
Assets
|
||||||||||||
|
Available-for-sale fixed maturity securities:
|
||||||||||||
|
Asset-backed securities
|
$
|
-
|
$
|
704
|
$
|
11
|
$
|
715
|
||||
|
Residential mortgage-backed securities
|
-
|
34,614
|
-
|
34,614
|
||||||||
|
Commercial mortgage-backed securities
|
-
|
13,003
|
2,047
|
15,050
|
||||||||
|
Foreign government & agency securities
|
-
|
563
|
-
|
563
|
||||||||
|
U.S. states and political subdivisions securities
|
-
|
214
|
-
|
214
|
||||||||
|
U.S. treasury and agency securities
|
375,233
|
-
|
-
|
375,233
|
||||||||
|
Corporate securities
|
-
|
1,068,399
|
1,135
|
1,069,534
|
||||||||
|
Total available-for-sale fixed maturity securities
|
375,233
|
1,117,497
|
3,193
|
1,495,923
|
||||||||
|
Trading fixed maturity securities:
|
||||||||||||
|
Asset-backed securities
|
-
|
321,129
|
90,851
|
411,980
|
||||||||
|
Residential mortgage-backed securities
|
-
|
834,074
|
88,719
|
922,793
|
||||||||
|
Commercial mortgage-backed securities
|
-
|
737,024
|
82,171
|
819,195
|
||||||||
|
Foreign government & agency securities
|
-
|
116,986
|
13,790
|
130,776
|
||||||||
|
U.S. states and political subdivisions securities
|
-
|
613
|
-
|
613
|
||||||||
|
U.S. treasury and agency securities
|
737,936
|
8,582
|
1,101
|
747,619
|
||||||||
|
Corporate securities
|
-
|
8,301,586
|
132,556
|
8,434,142
|
||||||||
|
Total trading fixed maturity securities
|
737,936
|
10,319,994
|
409,188
|
11,467,118
|
||||||||
|
Derivative instruments - receivable:
|
||||||||||||
|
Interest rate contracts
|
-
|
97,060
|
-
|
97,060
|
||||||||
|
Foreign currency contracts
|
-
|
32,504
|
-
|
32,504
|
||||||||
|
Equity contracts
|
14,873
|
30,739
|
13,785
|
59,397
|
||||||||
|
Futures contracts
|
9,103
|
-
|
-
|
9,103
|
||||||||
|
Total derivative instruments - receivable
|
23,976
|
160,303
|
13,785
|
198,064
|
||||||||
|
Other invested assets
|
2,890
|
11,120
|
8,343
|
22,353
|
||||||||
|
Short-term investments
|
832,739
|
-
|
-
|
832,739
|
||||||||
|
Cash and cash equivalents
|
736,323
|
-
|
-
|
736,323
|
||||||||
|
Total investments and cash
|
2,709,097
|
11,608,914
|
434,509
|
14,752,520
|
||||||||
|
Separate account assets:
|
||||||||||||
|
Mutual fund investments
|
21,892,209
|
30,517
|
-
|
21,922,726
|
||||||||
|
Equity investments
|
188,216
|
277
|
-
|
188,493
|
||||||||
|
Fixed income investments
|
317,713
|
5,812,900
|
56,323
|
6,186,936
|
||||||||
|
Alternative investments
|
24,094
|
78,164
|
293,254
|
395,512
|
||||||||
|
Other investments
|
900
|
-
|
-
|
900
|
||||||||
|
Total separate account assets (1) (2)
|
22,423,132
|
5,921,858
|
349,577
|
28,694,567
|
||||||||
|
Total assets measured at fair value on a recurring basis
|
$
|
25,132,229
|
$
|
17,530,772
|
$
|
784,086
|
$
|
43,447,087
|
||||
|
|
(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 $1,814.1 million, primarily related to investment purchases payable, net of investment sales receivable, that are not subject to FASB ASC Topic 820.
|
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, 2010 (000’s):
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||
|
Liabilities
|
||||||||||||
|
Other policy liabilities:
|
||||||||||||
|
Guaranteed minimum withdrawal benefit liability
|
$
|
-
|
$
|
-
|
$
|
2,245
|
$
|
2,245
|
||||
|
Guaranteed minimum accumulation benefit liability
|
-
|
-
|
49
|
49
|
||||||||
|
Derivatives embedded in reinsurance contracts
|
-
|
41,272
|
-
|
41,272
|
||||||||
|
Fixed index annuities
|
-
|
-
|
131,608
|
131,608
|
||||||||
|
Total other policy liabilities
|
-
|
41,272
|
133,902
|
175,174
|
||||||||
|
Derivative instruments – payable:
|
||||||||||||
|
Interest rate contracts
|
-
|
329,214
|
-
|
329,214
|
||||||||
|
Foreign currency contracts
|
-
|
3,878
|
-
|
3,878
|
||||||||
|
Credit contracts
|
-
|
-
|
27,341
|
27,341
|
||||||||
|
Futures contracts
|
1,590
|
-
|
-
|
1,590
|
||||||||
|
Total derivative instruments – payable
|
1,590
|
333,092
|
27,341
|
362,023
|
||||||||
|
Other liabilities:
|
||||||||||||
|
Bank overdrafts
|
61,227
|
-
|
-
|
61,227
|
||||||||
|
Total liabilities measured at fair value on a recurring basis
|
$
|
62,817
|
$
|
374,364
|
$
|
161,243
|
$
|
598,424
|
||||
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 ABS, RMBS and CMBS, are priced using third-party pricing services, a fair value model or independent broker quotations. ABS and RMBS are priced using models and 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. Typical inputs used by these three pricing methods include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids and/or estimated cash flows and prepayment speeds. In addition, estimates of expected future prepayments are factors in determining the price of ABS, RMBS and CMBS. 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 also may 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 CVAs also take 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. The fair value of the Company’s equity securities is first based on quoted market prices. Similar to fixed maturity securities, the Company uses pricing services and broker quotes to price the equity securities for which the quoted market price is not available.
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.
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 “Derivatives and Hedging,” 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. Similar to cash, the carrying value for other liabilities approximates fair value due to the liquidity of the balance.
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 March 31, 2011 (in 000’s):
|
Assets
|
Beginning
balance
|
Total realized and
unrealized gains
(losses)
|
Purchases
|
Sales
|
Issuances
|
Settlements
|
Transfers
into
level 3
|
Transfers
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 OCI
|
||||||||||
|
Available-for-sale fixed maturity securities:
|
|||||||||||
|
Asset-backed
|
$ 11
|
$ (7)
|
$ 3
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 7
|
$ -
|
|
Residential mortgage-backed
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Commercial mortgage-backed
|
2,047
|
(133)
|
175
|
-
|
-
|
-
|
-
|
-
|
-
|
2,089
|
-
|
|
Foreign government & agency
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
U.S. states & political subdivisions
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
U.S. treasury and agency
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Corporate
|
1,135
|
5
|
178
|
6,102
|
-
|
-
|
(34)
|
-
|
-
|
7,386
|
-
|
|
Total available-for-sale fixed
maturity securities
|
3,193
|
(135)
|
356
|
6,102
|
-
|
-
|
(34)
|
-
|
-
|
9,482
|
-
|
|
Trading fixed maturity securities:
|
|||||||||||
|
Asset-backed
|
90,851
|
9,233
|
-
|
-
|
-
|
-
|
(2,069)
|
10,033
|
(17,342)
|
90,706
|
8,980
|
|
Residential mortgage-backed
|
88,719
|
9,405
|
-
|
-
|
-
|
-
|
(6,696)
|
87,338
|
(33,731)
|
145,035
|
11,690
|
|
Commercial mortgage-backed
|
82,171
|
758
|
-
|
-
|
-
|
-
|
(935)
|
-
|
-
|
81,994
|
1,151
|
|
Foreign government & agency
|
13,790
|
(625)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
13,165
|
(212)
|
|
U.S. states & political subdivisions
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
U.S. treasury and agency
|
1,101
|
(5)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,096
|
3
|
|
Corporate
|
132,556
|
6,999
|
-
|
6,932
|
(3,404)
|
-
|
(4,127)
|
3,202
|
(35,621)
|
106,537
|
6,431
|
|
Total trading fixed maturity
securities
|
409,188
|
25,765
|
-
|
6,932
|
(3,404)
|
-
|
(13,827)
|
100,573
|
(86,694)
|
438,533
|
28,043
|
|
Derivative instruments – receivable:
|
|||||||||||
|
Interest rate contracts
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Foreign currency contracts
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Equity contracts
|
13,785
|
6,204
|
-
|
1,496
|
-
|
-
|
(1,026)
|
-
|
-
|
20,459
|
6,204
|
|
Futures Contracts
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Total derivative instruments –
receivable
|
13,785
|
6,204
|
-
|
1,496
|
-
|
-
|
(1,026)
|
-
|
-
|
20,459
|
6,204
|
|
Other invested assets
|
8,343
|
633
|
180
|
1,000
|
-
|
-
|
-
|
-
|
-
|
10,156
|
633
|
|
Short-term investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Cash and cash equivalents
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Total investments and cash
|
434,509
|
32,467
|
536
|
15,530
|
(3,404)
|
-
|
(14,887)
|
100,573
|
(86,694)
|
478,630
|
34,880
|
|
Separate account assets:
|
|||||||||||
|
Mutual fund investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Equity investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
64
|
-
|
64
|
-
|
|
Fixed income investments
|
56,323
|
27
|
-
|
69,387
|
(67,214)
|
-
|
(6,856)
|
32,401
|
(17,133)
|
66,935
|
(265)
|
|
Alternative investments
|
293,254
|
13,676
|
-
|
59,978
|
(19,556)
|
-
|
(2,476)
|
3,200
|
-
|
348,076
|
13,014
|
|
Other investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Total separate account assets (1)
|
349,577
|
13,703
|
-
|
129,365
|
(86,770)
|
-
|
(9,332)
|
35,665
|
(17,133)
|
415,075
|
12,749
|
|
Total assets measured at fair value on a recurring basis
|
$784,086
|
$ 46,170
|
$ 536
|
$144,895
|
$(90,174)
|
$ -
|
$ (24,219)
|
$136,238
|
$(103,827)
|
$893,705
|
$ 47,629
|
|
|
(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.
|
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 March 31, 2011 (in 000’s):
|
Liabilities
|
Beginning
balance
|
Total realized and unrealized
(gains) losses
|
Purchases
|
Sales
|
Issuances
|
Settlements
|
Transfers
into
level 3
|
Transfers
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
OCI
|
|||||||||||
|
Other policy liabilities:
|
||||||||||||
|
Guaranteed minimum withdrawal
benefit liability (1)
|
$ 2,245
|
$ (175,977)
|
$ -
|
$ -
|
$ -
|
$ 51,050
|
$ -
|
$ -
|
$ -
|
$ (122,682)
|
$ (177,433)
|
|
|
Guaranteed minimum accumulation
benefit liability (1)
|
49
|
(40,508)
|
-
|
-
|
-
|
5,899
|
-
|
-
|
-
|
(34,560)
|
(40,903)
|
|
|
Derivatives embedded in
reinsurance contracts(1)
|
-
|
-
|
-
|
-
|
-
|
20,459
|
-
|
-
|
-
|
20,459
|
-
|
|
|
Fixed index annuities(1)
|
131,608
|
5,524
|
-
|
-
|
-
|
2,445
|
-
|
-
|
-
|
139,577
|
15,834
|
|
|
Total other policy liabilities
|
133,902
|
(210,961)
|
-
|
-
|
-
|
79,853
|
-
|
-
|
-
|
2,794
|
(202,502)
|
|
|
Derivative instruments – payable:
|
||||||||||||
|
Interest rate contracts
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
Foreign currency contracts
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
Credit contracts
|
27,341
|
(3,495)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
23,846
|
(3,495)
|
|
|
Futures Contracts
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
Total derivative instruments – payable
|
27,341
|
(3,495)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
23,846
|
(3,495)
|
|
|
Other liabilities:
|
||||||||||||
|
Bank overdrafts
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
Total liabilities measured at fair value on a recurring basis
|
$161,24
|
$ (214,456)
|
$ -
|
$ -
|
$ -
|
$ 79,853
|
$ -
|
$ -
|
$ -
|
$ 26,640
|
$ (205,997)
|
|
|
(1)
|
The balances are included within the contractholder deposits funds and other policy liabilities in the Company’s condensed consolidated balance sheets. At March 31, 2011, the net balances of guaranteed minimum withdrawal and accumulation benefits were in an asset position.
|
Gains and losses related to Level 3 assets and liabilities, included in the Company’s condensed consolidated statements of operations for the three-month period ended March 31, 2011, are reported as follows (in 000’s):
|
Total gains (losses)
included in
earnings
|
Change in unrealized
gains (losses) related to
assets and liabilities
still held at the
reporting date
|
|||
|
Net investment income
|
$
|
26,398
|
$
|
28,676
|
|
Net derivative income
|
220,660
|
212,201
|
||
|
Net realized investment losses, excluding impairment
losses on available-for-sale securities |
(135)
|
-
|
||
|
Net gains
|
$
|
246,923
|
$
|
240,877
|
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 March 31, 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 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
|
$ 37
|
$ (12)
|
$ 4
|
$ -
|
$ -
|
$ 29
|
$ -
|
||
|
Residential mortgage-backed securities
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||
|
Commercial mortgage-backed
securities
|
1,930
|
(243)
|
(552)
|
-
|
-
|
1,135
|
-
|
||
|
Foreign government & agency securities
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||
|
U.S. states and political subdivisions securities
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||
|
U.S. treasury and agency securities
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||
|
Corporate securities
|
7,936
|
(5)
|
(4)
|
196
|
(7,184)
|
939
|
-
|
||
|
Total available-for-sale fixed maturity
securities
|
9,903
|
(260)
|
(552)
|
196
|
(7,184)
|
2,103
|
-
|
||
|
Trading fixed maturity securities:
|
|||||||||
|
Asset-backed securities
|
111,650
|
(8,909)
|
-
|
(15,660)
|
(38,157)
|
48,924
|
8,858
|
||
|
Residential mortgage-backed securities
|
154,551
|
(242)
|
-
|
(3,226)
|
(45,529)
|
105,554
|
2,279
|
||
|
Commercial mortgage-backed
securities
|
14,084
|
(496)
|
-
|
-
|
(696)
|
12,892
|
(769)
|
||
|
Foreign government & agency
securities
|
15,323
|
(230)
|
-
|
-
|
-
|
15,093
|
161
|
||
|
U.S. states and political subdivisions
securities
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||
|
U.S. treasury and agency securities
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||
|
Corporate securities
|
107,886
|
1,571
|
-
|
4,620
|
(17,424)
|
96,653
|
1,475
|
||
|
Total trading fixed maturity securities
|
403,494
|
(8,306)
|
-
|
(14,266)
|
(101,806)
|
279,116
|
12,004
|
||
|
Derivative instruments – receivable:
|
|||||||||
|
Interest rate contracts
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||
|
Foreign currency contracts
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||
|
Equity contracts
|
8,821
|
1,531
|
-
|
1,604
|
-
|
11,956
|
1,531
|
||
|
Futures
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||
|
Total derivative instruments– receivable
|
8,821
|
1,531
|
-
|
1,604
|
-
|
11,956
|
1,531
|
||
|
Other invested assets
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||
|
Short-term investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||
|
Cash and cash equivalents
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||
|
Total investments and cash
|
422,218
|
(7,035)
|
(552)
|
(12,466)
|
(108,990)
|
293,175
|
13,535
|
||
|
Separate account assets:
|
|||||||||
|
Mutual fund investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||
|
Equity investments
|
7
|
-
|
-
|
-
|
-
|
7
|
-
|
||
|
Fixed income investments
|
276,530
|
6,667
|
-
|
30,550
|
-
|
313,747
|
5,752
|
||
|
Alternative investments
|
267,196
|
(465)
|
-
|
(4,000)
|
(2,969)
|
259,762
|
(1,013)
|
||
|
Other investments
|
4,108
|
(2,355)
|
-
|
(1,028)
|
-
|
725
|
(3,383)
|
||
|
Total separate account assets (1)
|
547,841
|
3,847
|
-
|
25,522
|
(2,969)
|
574,241
|
1,356
|
||
|
Total assets measured at fair value on
a recurring basis
|
$970,059
|
$(3,188)
|
$ (552)
|
$ 13,056
|
$ (111,959)
|
$ 867,416
|
$ 14,891
|
||
|
|
(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 March 31, 2010 are primarily attributable to changes in the observability of inputs used to price the securities.
|
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 March 31, 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 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
|
$168,786
|
$(92,939)
|
$ -
|
$ 30,754
|
$ -
|
$106,601
|
$ (92,908)
|
|
Guaranteed minimum accumulation benefit
liability
|
81,669
|
(41,679) )
|
-
|
6,040
|
-
|
46,030
|
(41,642)
|
|
Derivatives embedded in reinsurance
contracts
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Fixed index annuities
|
140,966
|
(5,355)
|
-
|
3,401
|
-
|
139,012
|
4,001
|
|
Total other policy liabilities
|
391,421
|
(139,973)
|
-
|
40,195
|
-
|
291,643
|
(130,549)
|
|
Derivative instruments – payable:
|
|||||||
|
Interest rate contracts
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Foreign currency contracts
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Credit contracts
|
34,349
|
263
|
-
|
-
|
-
|
34,612
|
263
|
|
Futures
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Total derivative instruments – payable
|
34,349
|
263
|
-
|
-
|
-
|
34,612
|
263
|
|
Other liabilities:
|
|||||||
|
Bank overdrafts
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Total liabilities measured at fair value on a
recurring basis
|
$ 425,770
|
$(139,710)
|
$ -
|
$ 40,195
|
$ -
|
$ 326,255
|
$ (130,286)
|
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 March 31, 2010, are reported as follows (in 000’s):
|
Total realized
gains (losses)
included in
earnings
|
Change in
unrealized gains
(losses) related to
assets and
liabilities still held
at the reporting
date
|
|||
|
Net investment (loss) income
|
$
|
(8,306)
|
$
|
12,004
|
|
Net derivative income
|
141,241
|
131,817
|
||
|
Net realized investment losses, excluding impairment
losses on available-for-sale securities
|
(260)
|
-
|
||
|
Net gains
|
$
|
132,675
|
$
|
143,821
|
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. FAIR VALUE MEASUREMENT (CONTINUED)
The 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 March 31, 2011, 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
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Total available-for-sale fixed maturity
securities
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Trading fixed maturity securities:
|
||||||
|
Asset-backed securities
|
-
|
-
|
17,342
|
(10,033)
|
10,033
|
(17,342)
|
|
Residential mortgage-backed securities
|
-
|
-
|
33,731
|
(87,338)
|
87,338
|
(33,731)
|
|
Commercial mortgage-backed securities
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Foreign government & agency securities
|
-
|
-
|
-
|
-
|
-
|
-
|
|
U.S. states and political subdivisions
securities |
-
|
-
|
-
|
-
|
-
|
-
|
|
U.S. treasury and agency securities
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Corporate securities
|
-
|
-
|
35,621
|
(3,202)
|
3,202
|
(35,621)
|
|
Total trading fixed maturity securities
|
-
|
-
|
86,694
|
(100,573)
|
100,573
|
(86,694)
|
|
Separate account assets:
|
||||||
|
Mutual fund investments
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Equity investments
|
-
|
-
|
-
|
(64)
|
64
|
-
|
|
Fixed income investments
|
(1,244)
|
-
|
18,377
|
(32,401)
|
32,401
|
(17,133)
|
|
Alternative investments
|
-
|
-
|
-
|
(3,200)
|
3,200
|
-
|
|
Other investments
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Total separate account assets
|
(1,244)
|
-
|
18,377
|
(35,665)
|
35,665
|
(17,133)
|
|
Total assets measured at fair value on a
recurring basis
|
$ (1,244)
|
$ -
|
$ 105,071
|
$ (136,238)
|
$ 136,238
|
$ (103,827)
|
The Company did not change the categorization of its financial instruments during the three-month period ended March 31, 2011. 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.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. FAIR VALUE MEASUREMENT (CONTINUED)
The 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 March 31, 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
|
-
|
-
|
47,432
|
(9,275)
|
9,275
|
(47,432)
|
|
|
Residential mortgage-backed securities
|
-
|
-
|
80,597
|
(35,068)
|
35,068
|
(80,597)
|
|
|
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
|
-
|
-
|
17,424
|
-
|
-
|
(17,424)
|
|
|
Total trading fixed maturity securities
|
-
|
-
|
146,149
|
(44,343)
|
44,343
|
(146,149)
|
|
|
Separate account assets:
|
|||||||
|
Mutual fund investments
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
Equity investments
|
3,764
|
-
|
-
|
(3,764)
|
-
|
-
|
|
|
Fixed income investments
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
Alternative investments
|
-
|
-
|
2,969
|
-
|
-
|
(2,969)
|
|
|
Other investments
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
Total separate account assets
|
3,764
|
-
|
2,969
|
(3,764)
|
-
|
(2,969)
|
|
|
Total assets measured at fair value on a
recurring basis
|
$ 3,764
|
$ -
|
$ 156,302
|
$ (48,107)
|
$ 44,343
|
$ (156,302)
|
|
The Company did not change the categorization of its financial instruments during the three-month period ended March 31, 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.
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 Instruments Not Considered at Fair Value
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:
|
March 31, 2011
|
December 31, 2010
|
||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
||||
|
Amount
|
Fair Value
|
Amount
|
Fair Value
|
||||
|
Financial assets:
|
|||||||
|
Mortgage loans
|
$ 1,685,060
|
$ 1,749,104
|
$ 1,737,528
|
$ 1,811,567
|
|||
|
Policy loans
|
$ 714,322
|
$ 850,872
|
$ 717,408
|
$ 859,668
|
|||
|
Financial liabilities:
|
|||||||
|
Contractholder deposit funds and other
policy liabilities
|
$ 11,471,531
|
$ 11,141,684
|
$ 11,944,058
|
$ 11,490,525
|
|||
|
Debt payable to affiliates
|
$ 783,000
|
$ 783,000
|
$ 783,000
|
$ 783,000
|
|||
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 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.
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 March 31, 2011, 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
|
$ 210
|
$ 7
|
$ (3)
|
$ -
|
$ 214
|
|
Residential mortgage-backed securities
|
29,794
|
2,172
|
-
|
-
|
31,966
|
|
Commercial mortgage-backed securities
|
15,759
|
483
|
(1,248)
|
-
|
14,994
|
|
Foreign government & agency securities
|
506
|
53
|
-
|
-
|
559
|
|
U.S. states and political subdivisions
securities
|
216
|
-
|
(2)
|
-
|
214
|
|
U.S. treasury and agency securities
|
479,160
|
3,589
|
(1,436)
|
-
|
481,313
|
|
Total non-corporate securities
|
525,645
|
6,304
|
(2,689)
|
-
|
529,260
|
|
Corporate securities
|
994,188
|
69,099
|
(988)
|
(12,304)
|
1,049,995
|
|
Total available-for-sale fixed maturity securities
|
$ 1,519,833
|
$ 75,403
|
$ (3,677)
|
$ (12,304)
|
$ 1,579,255
|
|
Trading fixed maturity securities
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|
|
Non-corporate securities:
|
|||||
|
Asset-backed securities
|
$ 523,772
|
$ 10,854
|
$ (130,692)
|
$ 403,934
|
|
|
Residential mortgage-backed securities
|
1,117,269
|
16,163
|
(231,989)
|
901,443
|
|
|
Commercial mortgage-backed securities
|
900,858
|
59,948
|
(101,650)
|
859,156
|
|
|
Foreign government & agency securities
|
120,994
|
7,407
|
-
|
128,401
|
|
|
U.S. states and political subdivisions
securities
|
604
|
5
|
-
|
609
|
|
|
U.S. treasury and agency securities
|
815,149
|
2,309
|
(2,084)
|
815,374
|
|
|
Total non-corporate securities
|
3,478,646
|
96,686
|
(466,415)
|
3,108,917
|
|
|
Corporate securities
|
8,052,744
|
356,332
|
(108,123)
|
8,300,953
|
|
|
Total trading fixed maturity securities
|
$ 11,531,390
|
$ 453,018
|
$ (574,538)
|
$ 11,409,870
|
|
|
(1) Represents the pre-tax non-credit OTTI loss recorded as a component of accumulated other comprehensive income (“AOCI”) for assets still held at the reporting date.
|
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 held at December 31, 2010, were as follows (000’s):
|
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
|
$ 694
|
$ 27
|
$ (6)
|
$ -
|
$ 715
|
|
|
Residential mortgage-backed securities
|
32,263
|
2,351
|
-
|
-
|
34,614
|
|
|
Commercial mortgage-backed securities
|
15,952
|
522
|
(1,424)
|
-
|
15,050
|
|
|
Foreign government & agency securities
|
506
|
57
|
-
|
-
|
563
|
|
|
U.S. states and political subdivision securities
|
217
|
-
|
(3)
|
-
|
214
|
|
|
U.S. treasury and agency securities
|
371,704
|
4,500
|
(971)
|
-
|
375,233
|
|
|
Total non-corporate securities
|
421,336
|
7,457
|
(2,404)
|
-
|
426,389
|
|
|
Corporate securities
|
1,001,615
|
82,490
|
(2,267)
|
(12,304)
|
1,069,534
|
|
|
Total available-for-sale fixed maturity securities
|
$ 1,422,951
|
$ 89,947
|
$ (4,671)
|
$ (12,304)
|
$ 1,495,923
|
|
|
Trading fixed maturity securities
|
Amortized
Cost
|
Gross Unrealized
Gains
|
Gross Unrealized
Losses
|
Fair
Value
|
||
|
Non-corporate securities:
|
||||||
|
Asset-backed securities
|
$ 544,106
|
$ 10,104
|
$ (142,230)
|
$ 411,980
|
||
|
Residential mortgage-backed securities
|
1,184,184
|
17,259
|
(278,650)
|
922,793
|
||
|
Commercial mortgage-backed securities
|
917,650
|
42,368
|
(140,823)
|
819,195
|
||
|
Foreign government & agency securities
|
122,537
|
8,239
|
-
|
130,776
|
||
|
U.S. states and political subdivision securities
|
605
|
8
|
-
|
613
|
||
|
U.S. treasury and agency securities
|
745,460
|
3,037
|
(878)
|
747,619
|
||
|
Total non-corporate securities
|
3,514,542
|
81,015
|
(562,581)
|
3,032,976
|
||
|
Corporate securities
|
8,195,874
|
368,893
|
(130,625)
|
8,434,142
|
||
|
Total trading fixed maturity securities
|
$ 11,710,416
|
$ 449,908
|
$ (693,206)
|
$ 11,467,118
|
||
|
|
(1) Represents the pre-tax non-credit OTTI loss recorded as a component of AOCI for assets still held at the reporting date.
|
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 investments held at March 31, 2011 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
|
$ 28,852
|
$ 29,217
|
|||||
|
Due after one year through five years
|
773,143
|
818,278
|
|||||
|
Due after five years through ten years
|
99,263
|
103,117
|
|||||
|
Due after ten years
|
572,812
|
581,469
|
|||||
|
Subtotal – Maturities of available-for-sale fixed securities
|
1,474,070
|
1,532,081
|
|||||
|
ABS, RMBS and CMBS securities(1)
|
45,763
|
47,174
|
|||||
|
Total available-for-sale fixed securities
|
$ 1,519,833
|
$ 1,579,255
|
|||||
|
Maturities of trading fixed securities:
|
|||||||
|
Due in one year or less
|
$ 1,270,571
|
$ 1,284,617
|
|||||
|
Due after one year through five years
|
4,464,381
|
4,636,733
|
|||||
|
Due after five years through ten years
|
1,805,203
|
1,903,897
|
|||||
|
Due after ten years
|
1,449,336
|
1,420,090
|
|||||
|
Subtotal – Maturities of trading fixed securities
|
8,989,491
|
9,245,337
|
|||||
|
ABS, RMBS and CMBS securities(1)
|
2,541,899
|
2,164,533
|
|||||
|
Total trading fixed securities
|
$ 11,531,390
|
$ 11,409,870
|
|||||
|
|
(1)
|
ABS, RMBS and CMBS securities are shown separately in the table as they are not due at a single maturity.
|
Gross gains of $21.5 million and gross losses of $4.3 million were realized on the sale of fixed maturity securities for the three-month period ended March 31, 2011.
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 number of securities (not in thousands), fair value and gross unrealized losses, which includes temporary unrealized losses and the portion of non-credit OTTI losses recognized in AOCI, of the Company’s available-for-sale fixed maturity investments, aggregated by investment category and length of time that the individual securities had been in an unrealized loss position at March 31, 2011 (in 000’s).
|
Less than Twelve Months
|
Twelve Months or More
|
Total
|
|||||||||
|
No.
(1)
|
Fair
Value
|
Gross
Unrealized
Losses
|
No.
(1)
|
Fair
Value
|
Gross
Unrealized
Losses
|
No.
(1)
|
Fair
Value
|
Gross
Unrealized
Losses
|
|||
|
Non-corporate securities:
|
|||||||||||
|
Asset-backed securities
|
-
|
$ -
|
$ -
|
1
|
$ 7
|
$ (3)
|
1
|
$ 7
|
$ (3)
|
||
|
Residential mortgage-backed securities
|
1
|
25
|
-
|
-
|
-
|
-
|
1
|
25
|
-
|
||
|
Commercial mortgage-backed securities
|
1
|
488
|
(10)
|
4
|
2,089
|
(1,238)
|
5
|
2,577
|
(1,248)
|
||
|
U.S. states and political subdivisions
|
1
|
214
|
(2)
|
-
|
-
|
-
|
1
|
214
|
(2)
|
||
|
U.S. treasury and agency securities
|
2
|
23,181
|
(1,436)
|
-
|
-
|
-
|
2
|
23,181
|
(1,436)
|
||
|
Total non-corporate securities
|
5
|
23,908
|
(1,448)
|
5
|
2,096
|
(1,241)
|
10
|
26,004
|
(2,689)
|
||
|
Corporate securities
|
61
|
166,416
|
(5,158)
|
44
|
119,496
|
(8,134)
|
105
|
285,912
|
(13,292)
|
||
|
Total
|
66
|
$ 190,324
|
$ (6,606)
|
49
|
$ 121,592
|
$ (9,375)
|
115
|
$ 311,916
|
$ (15,981)
|
||
The following table shows the number of securities (not in thousands), fair value and gross unrealized losses, which includes temporary unrealized losses and the portion of non-credit OTTI losses recognized in AOCI, of the Company’s available-for-sale fixed maturity investments, aggregated by investment category and length of time that the individual securities had been in an unrealized loss position at December 31, 2010 (in 000’s).
|
Less than Twelve Months
|
Twelve Months or More
|
Total
|
|||||||||
|
No.
(1)
|
Fair
Value
|
Gross
Unrealized
Losses
|
No.
(1)
|
Fair
Value
|
Gross
Unrealized
Losses
|
No.
(1)
|
Fair
Value
|
Gross
Unrealized
Losses
|
|||
|
Non-corporate securities:
|
|||||||||||
|
Asset-backed securities
|
-
|
$ -
|
$ -
|
1
|
$ 11
|
$ (6)
|
1
|
$ 11
|
$ (6)
|
||
|
Residential mortgage-backed securities
|
1
|
26
|
-
|
-
|
-
|
-
|
1
|
26
|
-
|
||
|
Commercial mortgage-backed securities
|
-
|
-
|
-
|
5
|
2,534
|
(1,424)
|
5
|
2,534
|
(1,424)
|
||
|
Foreign government & agency securities
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||
|
U.S. states and political subdivisions
|
1
|
214
|
(3)
|
-
|
-
|
-
|
1
|
214
|
(3)
|
||
|
U.S. treasury and agency securities
|
2
|
23,636
|
(971)
|
-
|
-
|
-
|
2
|
23,636
|
(971)
|
||
|
Total non-corporate securities
|
4
|
23,876
|
(974)
|
6
|
2,545
|
(1,430)
|
10
|
26,421
|
(2,404)
|
||
|
Corporate securities
|
72
|
187,916
|
(5,211)
|
35
|
91,154
|
(9,360)
|
107
|
279,070
|
(14,571)
|
||
|
Total
|
76
|
$ 211,792
|
$ (6,185)
|
41
|
$ 93,699
|
$ (10,790)
|
117
|
$ 305,491
|
$ (16,975)
|
||
|
(1)
|
These columns present the number of securities (not in thousands) in an unrealized loss position.
|
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
Beginning on April 1, 2009, the Company presents and discloses OTTI in accordance with FASB ASC Topic 320, “Investments–Debt and Equity Securities.” 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 the 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 gains in the condensed consolidated statements of operations, while the non-credit loss is charged to other comprehensive income. When an unrealized loss on an available-for-sale fixed maturity security is considered temporary, the Company continues to record the unrealized loss in other comprehensive income 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 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, also are 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.
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 loss 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.
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 fair value is less than carrying amount and there has been an adverse change in the expected cash flows (as measured by comparing the original expected cash flows to the current expectation of cash flows, both discounted at the current effective rate), then an impairment charge is recorded to income. Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third parties, along with assumptions and judgments about the future performance of the underlying collateral. Losses incurred on the respective 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.
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 OTTI credit losses in its condensed consolidated statements of operations totaling $0.1 million and $0.9 million for the three-month periods ended March 31, 2011 and 2010, respectively, for OTTI on its available-for-sale fixed maturity securities. The $0.1 million OTTI credit loss recorded during the three-month period ended March 31, 2011 was concentrated in structured securities issued by sponsored securitization vehicles. The $0.9 million credit loss OTTI recorded during the three-month period ended March 31, 2010 was concentrated in corporate debt of financial institutions. These impairments were driven primarily by adverse financial conditions of the issuers.
The following table rolls forward the amount of credit losses recognized in earnings on debt securities, for which a portion of the OTTI was also recognized in other comprehensive income for the three-month periods ended March 31 (in 000’s):
|
2011
|
2010
|
||||
|
Beginning balance, at January 1,
|
$
|
5,847
|
$
|
9,148
|
|
|
Add: Credit losses on OTTI not previously recognized
|
71
|
885
|
|||
|
Less: Credit losses on securities sold
|
(3,944)
|
(968)
|
|||
|
Less: Increases in cash flows expected on previously
impaired securities
|
-
|
(1,089)
|
|||
|
Other
|
3,341
|
-
|
|||
|
Ending balance, at March 31,
|
$
|
5,315
|
$
|
7,976
|
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)
MORTGAGE LOANS
The Company invests in commercial first mortgage loans throughout the United States. Investments are diversified by geographic area. The Company’s mortgage loans are collateralized by the related properties and generally are no more than 75% of the property’s value at the time that the original loan is made. The carrying value of mortgage loans, net of applicable allowances, was as follow:
|
March 31,
2011
|
December 31,
2010
|
||
|
Total mortgage loans
|
$ 1,685,060
|
$ 1,737,528
|
|
A loan is considered impaired when it is probable that the principal or interest is not collectible in accordance with the contractual terms of the loan. The allowance for credit losses is estimated using the present value of expected cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, if the loan is collateral dependent. A specific allowance for loan loss is established for an impaired loan if the present value of expected cash flows discounted at the loan’s effective interest rate, or the fair value of the loan collateral, less cost to sell, is less than the recorded amount of the loan. A general allowance for loan loss is established based on an assessment of past loss experience on a group of loans with similar characteristics and current economic conditions. While management believes that it uses the best information available to establish the allowances, future adjustments may become necessary if economic conditions differ from the assumptions used in calculating them.
Delinquency status is determined based upon the occurrence of a missed contract payment. The following table sets forth an age analysis of past due loans in the Company’s mortgage loan portfolio.
|
Gross Carrying Value
|
||
|
March 31,
|
December 31,
|
|
|
2011
|
2010
|
|
|
Past due:
|
||
|
Between 30 and 59 days
|
$ 19,889
|
$ 16,607
|
|
Between 60 and 89 days
|
-
|
12,333
|
|
90 days or more
|
24,781
|
19,310
|
|
Total past due
|
44,670
|
48,250
|
|
Current (1)
|
1,693,512
|
1,743,060
|
|
Total mortgage loans
|
$ 1,738,182
|
$ 1,791,310
|
|
Past due more than 90 days with total
accrued interest
|
$ -
|
$ -
|
The Company’s allowance for mortgage loan losses was as follow:
|
Allowance for Loan Loss
|
||
|
March 31,
|
December 31,
|
|
|
2011
|
2010
|
|
|
General allowance
|
$ 23,662
|
$ 23,662
|
|
Specific allowance
|
29,460
|
30,120
|
|
Total
|
$ 53,122
|
$ 53,782
|
|
(1)
|
Included in the $1,693.5 million and $1,743.1 million of the Company’s mortgage loans in current status at March 31, 2011 and December 31, 2010 are $174.7 million and $165.6 million, respectively, of mortgage loans that are impaired but not past due.
|
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)
MORTGAGE LOANS (CONTINUED)
The Company individually evaluates all its mortgage loans for impairment and records a specific provision for those deemed impaired. The Company also collectively evaluates most of its mortgage loans (excluding those for which a specific allowance was recorded) for impairment. At March 31, 2011, the Company individually and collectively evaluated loans with a gross carrying value of $1,738.2 million and $1,654.4 million, respectively. At December 31, 2010, the Company individually and collectively evaluated loans with a gross carrying value of $1,791.3 million and $1,706.0 million, respectively.
The credit quality indicator for the Company’s mortgage loans is an internal risk-rated measure based on the borrowers’ ability to pay and the value of the underlying collateral. The internal risk rating is related to an increasing likelihood of loss, with a low quality rating representing the category in which a loss is first expected. The following table shows the gross carrying value of the Company’s mortgage loans disaggregated by credit quality indicator.
|
March 31,
|
December 31,
|
|
|
2011
|
2010
|
|
|
Insured
|
$ -
|
$ -
|
|
High
|
381,309
|
394,288
|
|
Standard
|
520,039
|
544,243
|
|
Satisfactory
|
314,799
|
333,086
|
|
Low quality
|
522,035
|
519,693
|
|
Total
|
$ 1,738,182
|
$ 1,791,310
|
The following table shows the gross carrying value of impaired mortgage loans and related allowances at March 31, 2011:
|
With no
allowance recorded |
With an
allowance recorded |
Total
|
|||
|
Gross carrying value
|
$ 132,670
|
$ 83,749
|
$ 216,419
|
||
|
Unpaid principal balance
|
134,211
|
88,042
|
222,253
|
||
|
Related allowance
|
-
|
29,460
|
29,460
|
||
|
Average recorded investment
|
125,997
|
84,515
|
210,512
|
||
|
Interest income recognized
|
$ 1,462
|
$ -
|
$ 1,462
|
The following table shows the gross carrying value of impaired mortgage loans and related allowances at December 31, 2010:
|
With no
allowance recorded |
With an
allowance recorded |
Total
|
|||
|
Gross carrying value
|
$ 119,323
|
$ 85,281
|
$ 204,604
|
||
|
Unpaid principal balance
|
120,417
|
88,625
|
209,042
|
||
|
Related allowance
|
-
|
30,120
|
30,120
|
||
|
Average recorded investment
|
113,701
|
86,575
|
200,276
|
||
|
Interest income recognized
|
$ 5,899
|
$ -
|
$ 5,899
|
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)
MORTGAGE LOANS (CONTINUED)
The gross carrying value of the Company’s mortgage loans in a nonaccrual status was $124.3 million and $114.7 million at March 31, 2011 and December 31, 2010, respectively.
The activity in the allowance for loan loss was as follows:
|
March 31,
2011
|
December 31,
2010
|
||||
|
Beginning balance
|
$
|
53,782
|
$
|
42,782
|
|
|
Provisions for allowance
|
940
|
26,742
|
|||
|
Charge-offs
|
(28)
|
(6,892)
|
|||
|
Recoveries
|
(1,572)
|
(8,850)
|
|||
|
Ending balance
|
$
|
53,122
|
$
|
53,782
|
|
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 enhancement such as collateral is used to improve the credit risk of longer term derivative contracts.
It is common, and the Company’s preferred practice, for the parties to execute a Credit Support Annex (“CSA”) in conjunction with the International Swaps and Derivatives Association Master Agreement. Under a CSA, collateral is passed between the parties to mitigate the market contingent counterparty risk inherent in outstanding positions.
The primary types of derivatives held by the Company include swap agreements, swaptions, futures, call/put options, foreign currency contracts 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 income (loss) in the condensed consolidated statement of operations.
Interest rate swaps are generally used to change the character of cash flows (e.g. fixed payments to floating rate payments) for duration matching purposes and to manage exposures to changes in the risk-free interest rate.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. INVESTMENTS (CONTINUED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (CONTINUED)
Swap Agreements (continued)
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 GIC 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 whereby the Company is the sole beneficiary of the CARS Trust. Refer to Note 1 for additional information on the CARS Trust.
Swaptions
The Company utilizes payer swaptions to hedge exposure to interest rate risk. Swaptions give the buyer the option to enter into an interest rate swap per the terms of the original swaption agreement. A premium is paid on settlement date and no further cash transactions occur until the positions settle or expire. At expiration, the swaption either cash settles for value, settles into an interest rate swap, or expires worthless per the terms of the original swaption agreement.
Futures
Futures contracts, both long and short, are entered into for purposes of hedging liabilities on fixed index and variable annuity products containing guaranteed minimum death benefits (“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. On the trade date, an initial cash margin is exchanged for listed options. Daily cash is exchanged to settle the daily variation margin.
Foreign Currency Contracts
A foreign currency contract is an agreement between two parties to buy and sell currencies at the current market rate, for settlement at a specified future date. Foreign currency contracts are utilized as an economic hedge against changes in foreign currencies associated with certain non-U.S. dollar denominated cash flows.
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. Please refer to Note 6 for further information regarding derivatives embedded in reinsurance contracts; refer to Note 8 for further information regarding derivatives embedded in annuity contracts.
The following is a summary of the Company’s derivative positions at:
|
March 31, 2011
|
December 31, 2010
|
|||
|
Number of
Contracts |
Principal
Notional (2)
|
Number of
Contracts |
Principal
Notional (2)
|
|
|
Interest rate swaps
|
65
|
$ 5,220,000
|
70
|
$ 5,443,500
|
|
Currency swaps
|
6
|
335,775
|
7
|
349,460
|
|
Credit default swaps
|
1
|
37,400
|
1
|
37,400
|
|
Currency forwards
|
30
|
38,498
|
36
|
44,149
|
|
Swaptions
|
-
|
-
|
1
|
350,000
|
|
Futures (1)
|
(22,835)
|
2,996,856
|
(25,699)
|
2,918,839
|
|
Index call options
|
9,580
|
1,922,136
|
9,604
|
1,858,109
|
|
Index put options
|
3,650
|
483,928
|
4,100
|
515,632
|
|
Total
|
$ 11,034,593
|
$ 11,517,089
|
||
(1) The negative amount represents the Company’s short position.
(2) In thousands
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 March 31, 2011
|
At December 31, 2010
|
|||||||
|
Asset Derivatives
|
Liability
Derivatives
|
Asset Derivatives
|
Liability
Derivatives
|
|||||
|
Fair Value (a)
|
Fair Value (a)
|
Fair Value (a)
|
Fair Value (a)
|
|||||
|
Interest rate contracts
|
$ 65,086
|
$ 281,475
|
$ 97,060
|
$ 329,214
|
||||
|
Foreign currency contracts
|
40,208
|
3,990
|
32,504
|
3,878
|
||||
|
Equity contracts
|
95,282
|
-
|
59,397
|
-
|
||||
|
Credit contracts
|
-
|
23,846
|
-
|
27,341
|
||||
|
Futures contracts (b)
|
5,334
|
2,454
|
9,103
|
1,590
|
||||
|
Derivative instruments
|
205,910
|
311,765
|
198,064
|
362,023
|
||||
|
Embedded derivatives (c)
|
157,785
|
223,291
|
2,896
|
178,069
|
||||
|
Total
|
$ 363,695
|
$ 535,056
|
$ 200,960
|
$ 540,092
|
||||
|
(a)
|
Amounts are presented without consideration of cross-transaction netting and collateral.
|
|
(b)
|
Futures contracts include interest rate, equity price and foreign currency exchange 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 income (loss) included in the Company’s condensed consolidated statements of operations. The following is a summary of the Company’s realized and unrealized gains (losses) by derivative type for the three-month periods ended March 31, (in 000’s):
|
2011
|
2010
|
||||
|
Interest rate contracts
|
$
|
(8,922)
|
$
|
(42,444)
|
|
|
Foreign currency contracts
|
(2,623)
|
(3,459)
|
|||
|
Equity contracts
|
10,504
|
(5,229)
|
|||
|
Credit contracts
|
3,495
|
(263)
|
|||
|
Futures contracts
|
(120,880)
|
(71,775)
|
|||
|
Embedded derivatives
|
146,196
|
81,720
|
|||
|
Net derivative income (loss)
|
$
|
27,770
|
$
|
(41,450)
|
|
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. INVESTMENTS (CONTINUED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (CONTINUED)
Concentration of Credit Risk
Credit risk relates to the uncertainty of an obligor’s continued ability to make timely payments in accordance with the contractual terms of the instrument or contract. With derivative instruments, the Company is primarily exposed to credit risk through its counterparty relationships. The Company primarily manages credit risk through policies which address the quality of counterparties, contractual requirements for transacting with counterparties and collateral support agreements, and limitations on counterparty concentrations. Exposures by counterparty and counterparty credit ratings are monitored closely. All of the contracts are held with counterparties rated A or higher. As of March 31, 2011, the Company’s liability positions were linked to a total of 12 counterparties, of which the largest single unaffiliated counterparty payable net of collateral, had credit exposure of $23.8 million to the Company. As of March 31, 2011, the Company’s asset positions were linked to a total of 8 counterparties, of which the largest single unaffiliated counterparty receivable net of collateral, had credit exposure of $3.1 million.
Credit-related Contingent Features
All derivative transactions are covered under standardized contractual agreements with counterparties all of which include credit-related contingent features. Certain counterparty relationships may also include supplementary agreements with such tailored terms as additional triggers for early terminations, acceptable practices related to cross transaction netting, or minimum thresholds for determining collateral.
Credit-related triggers include failure to pay or deliver on an obligation past certain grace periods, bankruptcy or the downgrade of credit ratings to below a stipulated level. These triggers apply to both the Company and its counterparty. The aggregate value of all derivative instruments with credit risk-related contingent features that were in a liability position was $311.8 million and $362.0 million at March 31, 2011 and December 31, 2010, respectively.
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 also will be held in escrow to facilitate settlement. If an early termination was triggered on March 31, 2011, the Company would have no net obligation to settle.
If counterparties are unable to meet accelerated payment obligations, the Company also may be exposed to uncollectible asset positions, offset by the value of collateral that has been posted by the Company.
At March 31, 2011, the Company pledged $195.9 million in U.S. Treasury securities as collateral to counterparties. At March 31, 2011, counterparties pledged to the Company $48.9 million in collateral, comprised of cash and U.S. Treasury securities.
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. Refer to Note 3 for additional information on the Company’s operating segments.
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 March 31, 2011 and December 31, 2010. This entire block of business is reinsured on a funds-withheld basis with SLOC, an affiliate. Pursuant to this reinsurance agreement, the Company held the following assets and liabilities (in 000’s) at:
|
March 31,
|
December 31,
|
||||
|
2011
|
2010
|
||||
|
Assets
Reinsurance receivable
|
$
|
1,455,402
|
$
|
1,466,247
|
|
|
Liabilities
Contractholder deposit funds and other policy liabilities
|
1,467,552
|
1,478,459
|
|||
|
Future contract and policy benefits
|
1,823
|
1,823
|
|||
|
Reinsurance payable
|
$
|
1,541,760
|
$
|
1,555,336
|
|
The Company manages the investment of the funds-withheld assets, valued at $1.6 billion at both March 31, 2011 and December 31, 2010. The funds-withheld assets are comprised of bonds, mortgage loans, policy loans, derivative instruments, real estate and cash and cash equivalents. The coinsurance treaty with funds withheld gives rise to an embedded derivative with is required to be separated from the host reinsurance contract. The change in the fair value of this embedded derivative increased (decreased) derivative income by less than $0.1 million and $(10.4) million for the three-month periods ended March 31, 2011 and 2010, respectively.
By reinsuring the SPWL product, the Company reduced net investment income by $21.4 million and $17.6 million for the three-month periods ended March 31, 2011 and 2010, respectively. The Company also reduced interest credited by $17.2 million and $17.5 million for the three-month periods ended March 31, 2011 and 2010, respectively.
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 pertain to the Individual Protection segment:
On February 11, 2009, the Company received regulatory approval and entered into a reinsurance agreement with Sun Life (Barbados) Holdings No. 3 Limited (“BarbCo 3”), an affiliate, to cede all of the risks associated with certain corporate and bank-owned variable universal life and private placement variable universal life businesses on a combination coinsurance, coinsurance with funds withheld and a modified coinsurance basis. Future new business will be ceded under this agreement.
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 continued for all cases sold prior to April 1, 2010. However, cases sold on or after April 1, 2010 have not been 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:
|
March 31,
|
December 31,
|
||||
|
2011
|
2010
|
||||
|
Assets
Reinsurance receivable
|
$
|
415,868
|
$
|
419,684
|
|
|
Liabilities
Contractholder deposit funds and other policy liabilities
|
453,190
|
465,035
|
|||
|
Reinsurance payable
|
$
|
424,909
|
$
|
432,160
|
|
At March 31, 2011 and December 31, 2010, reinsurance payable includes a funds-withheld liability of $319.4 million and $326.9 million, respectively, and a deferred gain of $105.5 million and $105.3 million, respectively. The funds-withheld assets are comprised of bonds, policy loans, and cash and cash equivalents that are managed by the Company. The funds-withheld coinsurance agreement gives rise to an embedded derivative which is required to be separated from the host reinsurance contract. At March 31, 2011 and December 31, 2010, the fair value of the embedded derivative increased contractholder deposit funds and other policy liabilities by $20.4 million and $24.1 million, respectively.
The change in fair value of the embedded derivative increased (decreased) of derivative income by $3.6 million and $(2.7) million for the three-month periods ended March 31, 2011 and 2010, respectively. In addition, during the three-month periods ended March 31, 2011 and 2010, the reinsurance agreement reduced revenues by $6.3 million and $8.4 million, respectively, and decreased expenses by $9.1 million and $10.3 million, respectively.
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 (“AXXX reserves”) required by New York Regulation 147, which is substantially similar to Actuarial Guideline 38 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 businesses also will be reinsured under this agreement. Pursuant to this agreement, SLNY held the following assets and liabilities at (in 000’s):
|
March 31,
|
December 31,
|
||||
|
2011
|
2010
|
||||
|
Assets
Reinsurance receivable
|
$
|
136,839
|
$
|
133,088
|
|
|
Liabilities
Contractholder deposit funds and other policy liabilities
|
102,622
|
104,795
|
|||
|
Future contract and policy benefits
|
19,970
|
21,662
|
|||
|
Reinsurance payable
|
$
|
229,618
|
$
|
225,387
|
|
Reinsurance payable includes a funds-withheld liability of $175.6 million and $172.8 million at March 31, 2011 and December 31, 2010, respectively, and a deferred gain of $53.1 million and $52.6 million at March 31, 2011 and December 31, 2010, 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 with is required to be separated from the host reinsurance contract. The fair value of the embedded derivative (decreased) increased contractholder deposit funds and other policy liabilities by $(0.5) million and $3.2 million at March 31, 2011 and December 31, 2010, respectively.
The change in fair value of this embedded derivative increased (decreased) derivative income by $3.7 million and $(1.4) million for the three-month periods ended March 31, 2011 and 2010, respectively. In addition, the activities related to the reinsurance agreement have decreased revenues by approximately $3.0 million and $7.0 million, and decreased benefits and expenses by approximately $0.2 million and $4.6 million for the three-month periods ended March 31, 2011 and 2010, 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 decreased revenues by approximately $25.5 million and $39.0 million for the three-month periods ended March 31, 2011 and 2010, respectively, and reduced expenses by $22.7 million and $41.6 million for the three-month periods ended March 31, 2011 and 2010, respectively.
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 reinsurance agreements with unrelated companies whereby the unrelated companies reinsure the mortality and morbidity risks of certain of the SLNY’s group insurance contracts.
SLNY also has a reinsurance agreement, effective May 31, 2007, to assume the net risks of the New York issued contracts of Sun Life and Health Insurance Company (U.S.) (“SLHIC”), an affiliate. At March 31, 2011 and December 31, 2010, SLNY held policyholder liabilities related to this agreement of $28.9 million and $28.6 million, respectively. In addition, the reinsurance agreement increased revenues by $10.9 million and $12.4 million for the three-month periods ended March 31, 2011 and 2010, respectively. This agreement also increased benefits and expenses by $8.6 million and $10.6 million for the three-month periods ended March 31, 2011 and 2010, respectively.
7. COMMITMENTS AND CONTINGENCIES
Guaranty Funds
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.
Income Taxes
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. On May 30, 2010, the IRS issued an Industry Director Directive which makes clear that IRS interpretations prior to Revenue Ruling 2007-54 should be followed until new regulations are issued. 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. For the three-month periods ended March 31, 2011 and 2010, the Company recorded benefits of $3.7 million and $4.1 million, respectively, related to the separate account DRD.
Litigation
The Company and its subsidiaries are parties to threatened or 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 ultimate resolution of these proceedings, management believes, based upon currently available information, that the ultimate resolution of these matters will not be materially adverse to the Company's financial position, results of operations or cash flows.
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.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. 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 March 31, 2011 (in 000’s, except for age data):
|
Benefit Type
|
Account Balance
|
Net Amount
at Risk 1
|
Average
Attained Age
|
|
Minimum death
|
$ 20,888,476
|
$ 1,570,297
|
66.7
|
|
Minimum income
|
$ 172,696
|
$ 51,790
|
62.4
|
|
Minimum accumulation or
withdrawal
|
$ 13,077,309
|
$ 93,264
|
64.1
|
The table below represents information regarding the Company’s variable annuity contracts with guarantees at December 31, 2010 (in 000’s, except for age data):
|
Benefit Type
|
Account Balance
|
Net Amount
at Risk 1
|
Average
Attained Age
|
|
Minimum death
|
$ 20,061,043
|
$ 1,742,139
|
66.0
|
|
Minimum income
|
$ 179,878
|
$ 59,322
|
62.2
|
|
Minimum accumulation or
withdrawal
|
$ 12,233,731
|
$ 152,571
|
63.2
|
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 GMDBs and guaranteed minimum income benefits (“GMIB”) for the three-month-period ended March 31, 2011 (in 000’s):
|
Guaranteed
Minimum
Death Benefit
|
Guaranteed
Minimum
Income Benefit
|
Total
|
|||
|
Balance at December 31, 2010
|
$ 123,605
|
$ 14,630
|
$ 138,235
|
||
|
Benefit ratio change /
Assumption changes
|
(4,873)
|
(2,783)
|
(7,656)
|
||
|
Incurred guaranteed benefits
|
4,879
|
284
|
5,163
|
||
|
Paid guaranteed benefits
|
(9,283)
|
(368)
|
(9,651)
|
||
|
Interest
|
2,149
|
249
|
2,398
|
||
|
Balance at March 31, 2011
|
$ 116,477
|
$ 12,012
|
$ 128,489
|
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. LIABILITIES FOR CONTRACT GUARANTEES (CONTINUED)
The following roll-forward summarizes the change in reserves for the Company’s GMDBs and GMIBs for the three-month-period ended March 31, 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
|
(7,222)
|
(400)
|
(7,622)
|
||
|
Incurred guaranteed benefits
|
2,086
|
360
|
2,446
|
||
|
Paid guaranteed benefits
|
(7,134)
|
(1,296)
|
(8,430)
|
||
|
Interest
|
6,768
|
178
|
6,946
|
||
|
Balance at March 31, 2010
|
$ 90,765
|
$ 8,900
|
$ 99,665
|
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 contract guarantees are developed using a projection model and stochastic scenarios. 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-calculated and adjusted regularly. Changes to the liability balance are recorded as a charge or credit to policyowner 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 an asset (a liability) in the amount of $157.2 million and $(2.3) million at March 31, 2011 and December 31, 2010, respectively. The Company records GMAB and GMWB assets or liabilities in its condensed consolidated balance sheets as part of contractholder deposit funds and other policy liabilities.
9. GOODWILL
The Company’s goodwill represents the intangible asset related to the transfer of goodwill to SLNY, based on the SLHIC to SLNY asset transfer, effective May 31, 2007. Goodwill is allocated to the Group Protection segment. In accordance with FASB ASC Topic 350, “Intangibles–Goodwill and Other,” goodwill is tested for impairment on an annual basis. The Company completed the required impairment tests of goodwill and indefinite-lived intangible assets during the second quarter of 2010 and concluded that these assets were not impaired.
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. 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’s net deferred tax asset at March 31, 2011 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 the capital loss carryforwards will begin to expire in 2023 and 2014, respectively. The Company’s net deferred tax asset was $376.7 million and $394.3 million at March 31, 2011 and December 31, 2010, respectively.
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.
During the three-month ended March 31, 2011, no valuation allowance was recorded against deferred tax assets for investment losses. 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 mortgage-backed securities, the Company’s intent and ability to hold the related investment securities to maturity, and other tax planning strategies. For the remaining unrealized investment losses, the Company believes that it is more likely than not that the related deferred tax assets will be realized due to the Company’s intent and ability to hold the related investment securities to recovery of amortized cost.
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following condensed consolidating financial statements are provided in compliance with Regulation S-X of the U.S. Securities and Exchange Commission (the “SEC”) and in accordance with SEC Rule 12h-5.
The Company’s wholly-owned subsidiary, SLNY, sells, among other products, combination fixed and variable annuity contracts (the “Contracts”) in the State of New York. The Contracts contain a fixed investment option, where interest is paid at a guaranteed rate for a specified period of time, and withdrawals made before the end of the specified period may be subject to a market value adjustment that can increase or decrease the amount of the withdrawal proceeds (the “fixed investment option period”). Effective September 27, 2007, the Company provided a full and unconditional guarantee (the “guarantee”) of SLNY’s obligation related to the fixed investment option period related to Contracts currently in-force or sold on or after that date. The guarantee relieves SLNY of its obligation to file annual, quarterly, and current reports with the SEC on Form 10-K, Form 10-Q, and Form 8-K.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. 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 three-month period ended March 31, 2011
|
SLUS
as Parent
|
SLNY
|
Other
Subs
|
Elimination
|
Consolidated
Company
|
||||||||||
|
Revenues
|
||||||||||||||
|
Premiums and annuity considerations
|
$
|
5,004
|
$
|
29,273
|
$
|
-
|
$
|
-
|
$
|
34,277
|
||||
|
Net investment income (1)
|
268,098
|
23,422
|
478
|
-
|
291,998
|
|||||||||
|
Net derivative income
|
12,591
|
15,179
|
-
|
-
|
27,770
|
|||||||||
|
Net realized investment gains (losses), excluding
impairment losses on available-for-sale securities
|
4,450
|
(453)
|
86
|
-
|
4,083
|
|||||||||
|
Other-than-temporary impairment losses
|
(71)
|
-
|
-
|
-
|
(71)
|
|||||||||
|
Fee and other income
|
138,313
|
6,474
|
3,234
|
-
|
148,021
|
|||||||||
|
Total revenues
|
428,385
|
73,895
|
3,798
|
-
|
506,078
|
|||||||||
|
Benefits and Expenses
|
||||||||||||||
|
Interest credited
|
74,452
|
13,190
|
234
|
-
|
87,876
|
|||||||||
|
Interest expense
|
11,092
|
-
|
-
|
-
|
11,092
|
|||||||||
|
Policyowner benefits
|
21,394
|
23,518
|
55
|
-
|
44,967
|
|||||||||
|
Amortization of DAC, VOBA and VOCRA
|
238,702
|
9,412
|
-
|
-
|
248,114
|
|||||||||
|
Other operating expenses
|
74,646
|
11,716
|
3,123
|
-
|
89,485
|
|||||||||
|
Total benefits and expenses
|
420,286
|
57,836
|
3,412
|
-
|
481,534
|
|||||||||
|
Income before income tax (benefit) expense
|
8,099
|
16,059
|
386
|
-
|
24,544
|
|||||||||
|
Income tax (benefit) expense
|
(1,466)
|
5,453
|
172
|
-
|
4,159
|
|||||||||
|
Equity in the net income of subsidiaries
|
10,820
|
-
|
-
|
(10,820)
|
-
|
|||||||||
|
Net income
|
$
|
20,385
|
$
|
10,606
|
$
|
214
|
$
|
(10,820)
|
$
|
20,385
|
||||
|
(1)
|
SLUS’, SLNY’s and Other Subs’ net investment income includes an increase (decrease) in market value of trading fixed maturity securities of $122.3 million, $(0.9) million and $0.0 million, respectively, for the three-month period ended March 31, 2011.
|
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Condensed Consolidating Statements of Operations
For the three-month period ended March 31, 2010
|
SLUS
as Parent
|
SLNY
|
Other
Subs
|
Elimination
|
Consolidated
Company
|
||||||||||
|
Revenues
|
||||||||||||||
|
Premiums and annuity considerations
|
$
|
5,091
|
$
|
29,973
|
$
|
-
|
$
|
-
|
$
|
35,064
|
||||
|
Net investment income (1)
|
404,410
|
38,299
|
1,120
|
-
|
443,829
|
|||||||||
|
Net derivative (loss) income
|
(47,949)
|
6,499
|
-
|
-
|
(41,450)
|
|||||||||
|
Net realized investment gains, excluding
impairment losses on available-for-sale
securities
|
4,370
|
396
|
399
|
-
|
5,165
|
|||||||||
|
Other-than-temporary impairment losses
|
(735)
|
(150)
|
-
|
-
|
(885)
|
|||||||||
|
Fee and other income
|
108,717
|
5,007
|
2,029
|
-
|
115,753
|
|||||||||
|
Total revenues
|
473,904
|
80,024
|
3,548
|
-
|
557,476
|
|||||||||
|
Benefits and Expenses
|
||||||||||||||
|
Interest credited
|
76,656
|
12,533
|
194
|
-
|
89,383
|
|||||||||
|
Interest expense
|
17,112
|
(15)
|
-
|
-
|
17,097
|
|||||||||
|
Policyowner benefits
|
10,586
|
23,984
|
33
|
-
|
34,603
|
|||||||||
|
Amortization of DAC, VOBA and VOCRA
|
135,321
|
36,388
|
-
|
-
|
171,709
|
|||||||||
|
Other operating expenses
|
69,986
|
8,982
|
1,942
|
-
|
80,910
|
|||||||||
|
Total benefits and expenses
|
309,661
|
81,872
|
2,169
|
-
|
393,702
|
|||||||||
|
Income (loss) before income tax expense (benefit)
|
164,243
|
(1,848)
|
1,379
|
-
|
163,774
|
|||||||||
|
Income tax expense (benefit)
|
52,485
|
(783)
|
421
|
-
|
52,123
|
|||||||||
|
Equity in the net loss of subsidiaries
|
(107)
|
-
|
-
|
107
|
-
|
|||||||||
|
Net income (loss)
|
$
|
111,651
|
$
|
(1,065)
|
$
|
958
|
$
|
107
|
$
|
111,651
|
||||
|
(1)
|
SLUS’, SLNY’s and Other Subs’ net investment income includes an increase in market value of trading fixed maturity securities of $253.3 million, $17.1 million and $0.0 million, respectively, for the three-month period ended March 31, 2010.
|
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Condensed Consolidating Balance Sheets at March 31, 2011
|
SLUS
as Parent
|
SLNY
|
Other
Subs
|
Elimination
|
Consolidated
Company
|
||||||||||
|
ASSETS
|
||||||||||||||
|
Investments
|
||||||||||||||
|
Available-for-sale fixed maturity securities at fair value
|
$
|
1,273,157
|
$
|
243,560
|
$
|
62,538
|
$
|
-
|
$
|
1,579,255
|
||||
|
Trading fixed maturity securities at fair value
|
9,869,645
|
1,540,225
|
-
|
-
|
11,409,870
|
|||||||||
|
Investment in subsidiaries
|
573,262
|
-
|
-
|
(573,262)
|
-
|
|||||||||
|
Mortgage loans
|
1,470,205
|
173,753
|
41,102
|
-
|
1,685,060
|
|||||||||
|
Derivative instruments – receivable
|
205,910
|
-
|
-
|
-
|
205,910
|
|||||||||
|
Limited partnerships
|
39,000
|
-
|
-
|
-
|
39,000
|
|||||||||
|
Real estate
|
171,646
|
-
|
44,803
|
-
|
216,449
|
|||||||||
|
Policy loans
|
692,702
|
828
|
20,792
|
-
|
714,322
|
|||||||||
|
Other invested assets
|
37,130
|
9,406
|
-
|
-
|
46,536
|
|||||||||
|
Short-term investments
|
242,960
|
18,998
|
-
|
-
|
261,958
|
|||||||||
|
Cash and cash equivalents
|
967,624
|
76,514
|
9,890
|
-
|
1,054,028
|
|||||||||
|
Total investments and cash
|
15,543,241
|
2,063,284
|
179,125
|
(573,262)
|
17,212,388
|
|||||||||
|
Accrued investment income
|
179,572
|
21,670
|
1,515
|
-
|
202,757
|
|||||||||
|
Deferred policy acquisition costs and sales inducement
asset
|
1,400,786
|
105,674
|
-
|
-
|
1,506,460
|
|||||||||
|
Value of business and customer renewals acquired
|
104,364
|
4,158
|
-
|
-
|
108,522
|
|||||||||
|
Net deferred tax asset
|
358,392
|
14,281
|
4,020
|
-
|
376,693
|
|||||||||
|
Goodwill
|
-
|
7,299
|
-
|
-
|
7,299
|
|||||||||
|
Receivable for investments sold
|
33,236
|
945
|
250
|
-
|
34,431
|
|||||||||
|
Reinsurance receivable
|
2,173,365
|
159,167
|
81
|
-
|
2,332,613
|
|||||||||
|
Other assets
|
143,396
|
27,817
|
2,221
|
(2,345)
|
171,089
|
|||||||||
|
Separate account assets
|
26,504,194
|
1,340,341
|
42,787
|
-
|
27,887,322
|
|||||||||
|
Total assets
|
$
|
46,440,546
|
$
|
3,744,636
|
$
|
229,999
|
$
|
(575,607)
|
$
|
49,839,574
|
||||
|
LIABILITIES
|
||||||||||||||
|
Contractholder deposit funds and other policy liabilities
|
$
|
12,578,391
|
$
|
1,540,644
|
$
|
24,329
|
$
|
-
|
$
|
14,143,364
|
||||
|
Future contract and policy benefits
|
712,796
|
116,871
|
200
|
-
|
829,867
|
|||||||||
|
Payable for investments purchased
|
153,405
|
603
|
-
|
-
|
154,008
|
|||||||||
|
Accrued expenses and taxes
|
39,858
|
6,081
|
1,492
|
(2,345)
|
45,086
|
|||||||||
|
Debt payable to affiliates
|
783,000
|
-
|
-
|
-
|
783,000
|
|||||||||
|
Reinsurance payable
|
1,974,407
|
242,283
|
35
|
-
|
2,216,725
|
|||||||||
|
Derivative instruments – payable
|
311,765
|
-
|
-
|
-
|
311,765
|
|||||||||
|
Other liabilities
|
217,597
|
60,644
|
25,063
|
-
|
303,304
|
|||||||||
|
Separate account liabilities
|
26,504,194
|
1,340,341
|
42,787
|
-
|
27,887,322
|
|||||||||
|
Total liabilities
|
$
|
43,275,413
|
$
|
3,307,467
|
$
|
93,906
|
$
|
(2,345)
|
$ ,488
|
46,674,441
|
||||
|
STOCKHOLDER’S EQUITY
|
||||||||||||||
|
Common stock
|
$
|
6,437
|
$
|
2,100
|
$
|
2,542
|
$
|
(4,642)
|
$
|
6,437
|
||||
|
Additional paid-in capital
|
3,929,012
|
389,963
|
113,265
|
(503,228)
|
3,929,012
|
|||||||||
|
Accumulated other comprehensive income
|
37,931
|
112
|
1,855
|
(1,967)
|
37,931
|
|||||||||
|
(Accumulated deficit) retained earnings
|
(808,247)
|
44,994
|
18,431
|
(63,425)
|
(808,247)
|
|||||||||
|
Total stockholder’s equity
|
3,165,133
|
437,169
|
136,093
|
(573,262)
|
3,165,133
|
|||||||||
|
Total liabilities and stockholder’s equity
|
$
|
46,440,546
|
$
|
3,744,767
|
$
|
229,999
|
$
|
(575,607)
|
$
|
49,839,574
|
||||
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Consolidating Balance Sheets at December 31, 2010
|
SLUS
as Parent
|
SLNY
|
Other
Subs
|
Elimination
|
Consolidated
Company
|
||||||||||
|
ASSETS
|
||||||||||||||
|
Investments
|
||||||||||||||
|
Available-for-sale fixed maturity securities at fair value
|
$
|
1,193,875
|
$
|
246,944
|
$
|
55,104
|
$
|
-
|
$
|
1,495,923
|
||||
|
Trading fixed maturity securities at fair value
|
9,911,284
|
1,555,834
|
-
|
-
|
11,467,118
|
|||||||||
|
Mortgage loans
|
1,531,545
|
176,518
|
29,465
|
-
|
1,737,528
|
|||||||||
|
Derivative instruments – receivable
|
198,064
|
-
|
-
|
-
|
198,064
|
|||||||||
|
Limited partnerships
|
41,622
|
-
|
-
|
-
|
41,622
|
|||||||||
|
Real estate
|
161,800
|
-
|
52,865
|
-
|
214,665
|
|||||||||
|
Policy loans
|
695,607
|
1,217
|
20,584
|
-
|
717,408
|
|||||||||
|
Other invested assets
|
19,588
|
7,868
|
-
|
-
|
27,456
|
|||||||||
|
Short-term investments
|
813,745
|
18,994
|
-
|
-
|
832,739
|
|||||||||
|
Cash and cash equivalents
|
647,579
|
72,978
|
15,766
|
-
|
736,323
|
|||||||||
|
Investment in subsidiaries
|
559,344
|
-
|
-
|
(559,344)
|
-
|
|||||||||
|
Total investments and cash
|
15,774,053
|
2,080,353
|
173,784
|
(559,344)
|
17,468,846
|
|||||||||
|
Accrued investment income
|
165,841
|
21,130
|
1,815
|
-
|
188,786
|
|||||||||
|
Deferred policy acquisition costs and sales inducement
asset
|
1,571,768
|
110,791
|
-
|
-
|
1,682,559
|
|||||||||
|
Value of business and customer renewals acquired
|
130,546
|
4,439
|
-
|
-
|
134,985
|
|||||||||
|
Net deferred tax asset
|
378,078
|
12,057
|
4,162
|
-
|
394,297
|
|||||||||
|
Goodwill
|
-
|
7,299
|
-
|
-
|
7,299
|
|||||||||
|
Receivable for investments sold
|
5,166
|
162
|
-
|
-
|
5,328
|
|||||||||
|
Reinsurance receivable
|
2,184,487
|
162,522
|
77
|
-
|
2,347,086
|
|||||||||
|
Other assets
|
93,755
|
31,729
|
2,918
|
(2,873)
|
125,529
|
|||||||||
|
Separate account assets
|
25,573,382
|
1,265,464
|
41,575
|
-
|
26,880,421
|
|||||||||
|
Total assets
|
$
|
45,877,076
|
$
|
3,695,946
|
$
|
224,331
|
$
|
(562,217)
|
$
|
49,235,136
|
||||
|
LIABILITIES
|
||||||||||||||
|
Contractholder deposit funds and other policy liabilities
|
$
|
12,991,306
|
$
|
1,577,556
|
$
|
24,366
|
$
|
-
|
$
|
14,593,228
|
||||
|
Future contract and policy benefits
|
732,368
|
116,946
|
200
|
-
|
849,514
|
|||||||||
|
Payable for investments purchased
|
44,723
|
104
|
-
|
-
|
44,827
|
|||||||||
|
Accrued expenses and taxes
|
49,224
|
4,612
|
1,665
|
(2,873)
|
52,628
|
|||||||||
|
Debt payable to affiliates
|
783,000
|
-
|
-
|
-
|
783,000
|
|||||||||
|
Reinsurance payable
|
1,995,083
|
236,718
|
34
|
-
|
2,231,835
|
|||||||||
|
Derivative instruments – payable
|
362,023
|
-
|
-
|
-
|
362,023
|
|||||||||
|
Other liabilities
|
193,363
|
66,118
|
25,575
|
-
|
285,056
|
|||||||||
|
Separate account liabilities
|
25,573,382
|
1,265,464
|
41,575
|
-
|
26,880,421
|
|||||||||
|
Total liabilities
|
42,724,472
|
3,267,518
|
93,415
|
(2,873)
|
46,082,532
|
|||||||||
|
STOCKHOLDER’S EQUITY
|
||||||||||||||
|
Common stock
|
$
|
6,437
|
$
|
2,100
|
$
|
2,542
|
$
|
(4,642)
|
$
|
6,437
|
||||
|
Additional paid-in capital
|
3,928,246
|
389,963
|
108,450
|
(498,413)
|
3,928,246
|
|||||||||
|
Accumulated other comprehensive income
|
46,553
|
1,977
|
1,707
|
(3,684)
|
46,553
|
|||||||||
|
(Accumulated deficit) retained earnings
|
(828,632)
|
34,388
|
18,217
|
(52,605)
|
(828,632)
|
|||||||||
|
Total stockholder’s equity
|
3,152,604
|
428,428
|
130,916
|
(559,344)
|
3,152,604
|
|||||||||
|
Total liabilities and stockholder’s equity
|
$
|
45,877,076
|
$
|
3,695,946
|
$
|
224,331
|
$
|
(562,217)
|
$
|
49,235,136
|
||||
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Condensed Consolidating Statements of Cash Flow
For the three-month period ended March 31, 2011
|
SLUS
as Parent
|
SLNY
|
Other
Subs
|
Elimination
|
Consolidated
Company
|
||||||||||
|
Cash Flows From Operating Activities:
|
||||||||||||||
|
Net income
|
$
|
20,385
|
$
|
10,606
|
$
|
214
|
$
|
(10,820)
|
$
|
20,385
|
||||
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
||||||||||||||
|
Net amortization of premiums on investments
|
8,434
|
1,583
|
271
|
-
|
10,288
|
|||||||||
|
Amortization of DAC, VOBA and VOCRA
|
238,702
|
9,412
|
-
|
-
|
248,114
|
|||||||||
|
Depreciation and amortization
|
4,499
|
79
|
338
|
-
|
4,916
|
|||||||||
|
Net gains on derivatives
|
(25,591)
|
(15,179)
|
-
|
-
|
(40,770)
|
|||||||||
|
Net realized (gains) losses and OTTI credit losses on
available-for-sale investments
|
(4,379)
|
453
|
(86)
|
-
|
(4,012)
|
|||||||||
|
Net (increase) decrease in fair value of trading
investments
|
(122,250)
|
929
|
-
|
-
|
(121,321)
|
|||||||||
|
Net realized losses (gains) on trading investments
|
1,293
|
(3,514)
|
-
|
-
|
(2,221)
|
|||||||||
|
Undistributed loss in private equity limited
partnerships
|
694
|
-
|
-
|
-
|
694
|
|||||||||
|
Interest credited to contractholder deposits
|
74,452
|
13,190
|
234
|
-
|
87,876
|
|||||||||
|
Equity in net income of subsidiaries
|
(10,820)
|
-
|
-
|
10,820
|
-
|
|||||||||
|
Deferred federal income taxes
|
23,404
|
(1,219)
|
62
|
-
|
22,247
|
|||||||||
|
Changes in assets and liabilities:
|
||||||||||||||
|
Additions to DAC, SIA, VOBA and VOCRA
|
(38,841)
|
(4,014)
|
-
|
-
|
(42,855)
|
|||||||||
|
Accrued investment income
|
(13,731)
|
(540)
|
300
|
-
|
(13,971)
|
|||||||||
|
Net change in reinsurance receivable/payable
|
22,190
|
10,162
|
(3)
|
-
|
32,349
|
|||||||||
|
Future contract and policy benefits
|
(19,572)
|
(75)
|
-
|
-
|
(19,647)
|
|||||||||
|
Other, net
|
40,647
|
7,638
|
(75)
|
-
|
48,210
|
|||||||||
|
Net cash provided by operating activities
|
199,516
|
29,511
|
1,255
|
-
|
230,282
|
|||||||||
|
Cash Flows From Investing Activities:
|
||||||||||||||
|
Sales, maturities and repayments of:
|
||||||||||||||
|
Available-for-sale fixed maturity securities
|
36,639
|
23,900
|
557
|
-
|
61,096
|
|||||||||
|
Trading fixed maturity securities
|
654,286
|
106,779
|
-
|
-
|
761,065
|
|||||||||
|
Mortgage loans
|
58,328
|
2,744
|
1,608
|
(12,624)
|
50,056
|
|||||||||
|
Real estate
|
-
|
-
|
8,641
|
(8,641)
|
-
|
|||||||||
|
Other invested assets
|
(121,031)
|
-
|
-
|
-
|
(121,031)
|
|||||||||
|
Purchases of:
|
||||||||||||||
|
Available-for-sale fixed maturity securities
|
(119,932)
|
(23,519)
|
(7,941)
|
-
|
(151,392)
|
|||||||||
|
Trading fixed maturity securities
|
(504,551)
|
(90,737)
|
-
|
-
|
(595,288)
|
|||||||||
|
Mortgage loans
|
(13)
|
(550)
|
(13,556)
|
12,624
|
(1,495)
|
|||||||||
|
Real estate
|
(14,239)
|
-
|
(863)
|
8,641
|
(6,461)
|
|||||||||
|
Other invested assets
|
(32,224)
|
-
|
-
|
-
|
(32,224)
|
|||||||||
|
Net change in policy loans
|
2,905
|
389
|
(208)
|
-
|
3,086
|
|||||||||
|
Net change in short-term investments
|
570,785
|
(4)
|
-
|
-
|
570,781
|
|||||||||
|
Net cash provided by (used in) investing activities
|
$
|
530,953
|
$
|
19,002
|
$
|
(11,762)
|
$
|
-
|
$
|
538,193
|
||||
Continued on next page
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Condensed Consolidating Statements of Cash Flow (continued)
For the three-month period ended March 31, 2011
|
SLUS
as Parent
|
SLNY
|
Other
Subs
|
Elimination
|
Consolidated
Company
|
||||||||||
|
Cash Flows From Financing Activities:
|
||||||||||||||
|
Additions to contractholder deposit funds
|
$
|
222,319
|
$
|
29,548
|
$
|
-
|
$
|
-
|
$
|
251,867
|
||||
|
Withdrawals from contractholder deposit funds
|
(622,460)
|
(65,710)
|
(270)
|
-
|
(688,440)
|
|||||||||
|
Additional capital contributed to subsidiaries
|
(4,815)
|
-
|
-
|
4,815
|
-
|
|||||||||
|
Capital contribution from Parent
|
-
|
-
|
4,815
|
(4,815)
|
-
|
|||||||||
|
Other, net
|
(5,468)
|
(8,815)
|
86
|
-
|
(14,197)
|
|||||||||
|
Net cash (used in) provided by financing activities
|
(410,424)
|
(44,977)
|
4,631
|
-
|
(450,770)
|
|||||||||
|
Net change in cash and cash equivalents
|
320,045
|
3,536
|
(5,876)
|
-
|
317,705
|
|||||||||
|
Cash and cash equivalents, beginning of period
|
647,579
|
72,978
|
15,766
|
-
|
736,323
|
|||||||||
|
Cash and cash equivalents, end of period
|
$
|
967,624
|
$
|
76,514
|
$
|
9,890
|
$
|
-
|
$
|
1,054,028
|
||||
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Condensed Consolidating Statements of Cash Flow
For the three-month period ended March 31, 2010
|
SLUS
as Parent
|
SLNY
|
Other
Subs
|
Elimination
|
Consolidated
Company
|
||||||||||
|
Cash Flows From Operating Activities:
|
||||||||||||||
|
Net income (loss)
|
$
|
111,651
|
$
|
(1,065)
|
$
|
958
|
$
|
107
|
$
|
111,651
|
||||
|
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
|
||||||||||||||
|
Net amortization of premiums on investments
|
1,873
|
552
|
162
|
-
|
2,587
|
|||||||||
|
Amortization of DAC, VOBA and VOCRA
|
135,321
|
36,388
|
-
|
-
|
171,709
|
|||||||||
|
Depreciation and amortization
|
925
|
78
|
211
|
-
|
1,214
|
|||||||||
|
Net losses (gains) on derivatives
|
12,620
|
(6,499)
|
-
|
-
|
6,121
|
|||||||||
|
Net realized gains and OTTI credit losses on
available-for-sale investments
|
(3,635)
|
(246)
|
(399)
|
-
|
(4,280)
|
|||||||||
|
Net increase in fair value of trading investments
|
(253,291)
|
(17,144)
|
-
|
-
|
(270,435)
|
|||||||||
|
Net realized losses (gains) on trading investments
|
37,752
|
(3,825)
|
-
|
-
|
33,927
|
|||||||||
|
Undistributed loss in private equity limited
partnerships
|
1,631
|
-
|
-
|
-
|
1,631
|
|||||||||
|
Interest credited to contractholder deposits
|
76,656
|
12,533
|
194
|
-
|
89,383
|
|||||||||
|
Equity in net loss of subsidiaries
|
107
|
-
|
-
|
(107)
|
-
|
|||||||||
|
Deferred federal income taxes
|
55,083
|
(729)
|
177
|
-
|
54,531
|
|||||||||
|
Changes in assets and liabilities:
|
||||||||||||||
|
Additions to DAC, VOBA and VOCRA
|
(49,149)
|
(6,990)
|
-
|
-
|
(56,139)
|
|||||||||
|
Accrued investment income
|
14,079
|
(1,685)
|
151
|
-
|
12,545
|
|||||||||
|
Net change in reinsurance receivable/payable
|
27,338
|
1,473
|
57
|
-
|
28,868
|
|||||||||
|
Future contract and policy benefits
|
(20,301)
|
(238)
|
-
|
-
|
(20,539)
|
|||||||||
|
Other, net
|
55,946
|
25,560
|
(278)
|
-
|
81,228
|
|||||||||
|
Net cash provided by operating activities
|
204,606
|
38,163
|
1,233
|
-
|
244,002
|
|||||||||
|
Cash Flows From Investing Activities:
|
||||||||||||||
|
Sales, maturities and repayments of:
|
||||||||||||||
|
Available-for-sale fixed maturity securities
|
59,278
|
8,902
|
2,312
|
-
|
70,492
|
|||||||||
|
Trading fixed maturity securities
|
561,184
|
176,441
|
-
|
-
|
737,625
|
|||||||||
|
Mortgage loans
|
37,645
|
2,444
|
71
|
(15,064)
|
25,096
|
|||||||||
|
Real estate
|
-
|
1,000
|
-
|
(1,000)
|
-
|
|||||||||
|
Other invested assets
|
(65,565)
|
502
|
502
|
-
|
(64,561)
|
|||||||||
|
Purchases of:
|
||||||||||||||
|
Available-for-sale fixed maturity securities
|
(3,501)
|
(42,645)
|
(253)
|
-
|
(46,399)
|
|||||||||
|
Trading fixed maturity securities
|
(1,114,393)
|
(218,072)
|
-
|
-
|
(1,332,465)
|
|||||||||
|
Mortgage loans
|
3,409
|
(18,840)
|
(15,064)
|
15,064
|
(15,431)
|
|||||||||
|
Real estate
|
(1,685)
|
-
|
(219)
|
1,000
|
(904)
|
|||||||||
|
Other invested assets
|
(16,616)
|
-
|
-
|
-
|
(16,616)
|
|||||||||
|
Net change in policy loans
|
12,727
|
(655)
|
226
|
-
|
12,298
|
|||||||||
|
Net change in short-term investments
|
(751,435)
|
(31,001)
|
(2,000)
|
-
|
(784,436)
|
|||||||||
|
Net cash used in investing activities
|
$
|
(1,278,952)
|
$
|
(121,924)
|
$
|
(14,425)
|
$
|
-
|
$
|
(1,415,301)
|
||||
Continued on next page
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Condensed Consolidating Statements of Cash Flow (continued)
For the three-month period ended March 31, 2010
|
SLUS
as Parent
|
SLNY
|
Other
Subs
|
Elimination
|
Consolidated
Company
|
||||||||||
|
Cash Flows From Financing Activities:
|
||||||||||||||
|
Additions to contractholder deposit funds
|
$
|
284,686
|
$
|
43,929
|
$
|
-
|
$
|
-
|
$
|
328,615
|
||||
|
Withdrawals from contractholder deposit funds
|
(552,936)
|
(56,094)
|
(1,780)
|
-
|
(610,810)
|
|||||||||
|
Additional capital contributed to subsidiaries
|
(15,097)
|
-
|
-
|
15,097
|
-
|
|||||||||
|
Capital contribution from Parent
|
400,000
|
-
|
15,097
|
(15,097)
|
400,000
|
|||||||||
|
Other, net
|
(14,085)
|
(3,552)
|
20
|
-
|
(17,617)
|
|||||||||
|
Net cash provided by (used in) financing activities
|
102,568
|
(15,717)
|
13,337
|
-
|
100,188
|
|||||||||
|
Net change in cash and cash equivalents
|
(971,778)
|
(99,478)
|
145
|
-
|
(1,071,111)
|
|||||||||
|
Cash and cash equivalents, beginning of period
|
1,616,991
|
175,322
|
11,895
|
-
|
1,804,208
|
|||||||||
|
Cash and cash equivalents, end of period
|
$
|
645,213
|
$
|
75,844
|
$
|
12,040
|
$
|
-
|
$
|
733,097
|
||||
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
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 three-month periods ended March 31, 2011 and March 31, 2010.
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, 2010.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The Company has identified the following estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:
|
|
·
|
Deferred policy acquisition costs (“DAC”), including sales inducement asset (“SIA”);
|
|
|
·
|
Value of business acquired (“VOBA”);
|
|
|
·
|
Value of customer renewals acquired (“VOCRA”);
|
|
|
·
|
Derivative instruments;
|
|
|
·
|
Fair value of financial instruments;
|
|
|
·
|
Policy liabilities and accruals;
|
|
|
·
|
Other-than-temporary impairments (“OTTI”) of investments;
|
|
|
·
|
Goodwill valuation;
|
|
|
·
|
Allowance for loan loss;
|
|
|
·
|
Valuation allowance on deferred tax assets; and
|
|
|
·
|
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 discussion of the Company’s critical accounting estimates, see Management’s Discussion and Analysis of Financial Position and Result of Operations in the Company’s annual report on Form 10-K for the year ended December 31, 2010.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
RESULTS OF OPERATIONS
Three-month period ended March 31, 2011 compared to the three-month period ended March 31, 2010:
Net Income
The Company’s net income was $20.4 million and $111.7 million for the three-month periods ended March 31, 2011 and 2010, respectively. The significant changes are described below.
REVENUES
Total revenues were $506.1 million and $557.5 million for the three-month periods ended March 31, 2011 and 2010, respectively. The decrease of $51.4 million was primarily due to the following:
Premium and annuity considerations - were $ 34.3 million and $35.1 million for the three-month periods ended March 31, 2011 and 2010, respectively.
Net investment income - was $292.0 million and $443.8 million for the three-month periods ended March 31, 2011 and 2010, respectively. Investment income, excluding the mark-to-market of the trading portfolio, net realized gains (losses), partnership income and ceded investment income, was $195.7 million and $230.2 million for the three-month periods ended March 31, 2011 and 2010, respectively. The decrease of $34.5 million during 2011, as compared to 2010, was the result of lower average invested assets, which decreased investment income by $26.1 million as well as lower average investment yields which decreased investment income by $8.4 million.
The change in investment income related to the mark-to-market of the trading portfolio, net realized gains (losses) and partnership investments was $148.1 million. The Company earned $121.3 million of investment income during the three-month period ended March 31, 2011 as compared to a $270.3 million investment income during the three-month period ended March 31, 2010, related to changes in the market value of the trading portfolio in the respective periods. The $149.0 million decrease in unrealized gains was due primarily to bond spreads tightening less during the three-month period ended March 31, 2011 relative to the same period in 2010, which resulted in a lower increase in the market value of the Company’s trading portfolio during the three-month period ended March 31, 2011. The Company also recognized net realized gains (losses) of $2.2 million and $(34.0) million during the three-month periods ended March 31, 2011 and 2010, respectively. The $36.2 million increase in net realized gains was primarily due to lower write-downs in the three-month period ended March 31, 2011 as compared to the same period in 2010. The $149.0 million change in the trading portfolio was also offset by a $0.9 million increase in the fair value of the limited partnership investments.
Investment income on funds-withheld reinsurance portfolios is included as a component of net investment income in the Company’s condensed consolidated statements of operations. The Company ceded net investment income of $26.6 million and $21.4 million for the three-month periods ended March 31, 2011 and 2010, 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.
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 income (loss) - was $27.8 million and $(41.5) million for the three-month periods ended March 31, 2011 and 2010, respectively. The Company’s realized and unrealized gains and losses by derivative type for the three-month periods ended March 31 consisted of the following (in 000’s):
|
2011
|
2010
|
|||
|
Interest rate contracts
|
$ (8,922)
|
$ (42,444)
|
||
|
Foreign currency contracts
|
(2,623)
|
(3,459)
|
||
|
Equity contracts
|
10,504
|
(5,229)
|
||
|
Credit contracts
|
3,495
|
(263)
|
||
|
Futures contracts
|
(120,880)
|
(71,775)
|
||
|
Embedded derivatives
|
146,196
|
81,720
|
||
|
Net derivative income (loss)
|
$ 27,770
|
$ (41,450)
|
The $27.8 million net derivative income during the three-month period ended March 31, 2011, as compared to the $(41.5) million net derivative loss during the three-month period ended March 31, 2010, was primarily due to $64.5 million, $33.5 million and $15.7 million in net gains related to embedded derivatives, interest rates and equity contracts, respectively. These changes were partially offset by $(49.1) million increase in derivatives losses related to futures contracts.
The $64.5 million increase in embedded derivative income during the three-month period ended March 31, 2011, as compared to the three-month period ended March 31, 2010, was primarily due to a decrease 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. The decrease in the liability for GMAB and GMWB resulted from a decrease in projected benefits, which was due to improvements in the equity markets and a smaller decrease in the volatility curve during the three-month period ended March 31, 2011 relative to the same period in 2010.
The $33.5 million decrease in net derivative loss related to interest rate contracts was primarily due to changes in the fair value of interest rate swaps resulting from changes in notional amounts, duration and the overall swap curve. The decrease in the fair value of interest rate swap agreements for the three-month period ended March 31, 2011, as compared to the three-month period ended March 31, 2010, was primarily a result of a decrease in exposure to interest rate swaps.
The $15.7 million increase in net derivative income related to equity contracts was primarily related to the Company’s option exposure to the changes in the equity markets during the three-month period ended March 31, 2011 as compared to the three-month period ended March 31, 2010. During the three-month ended March 31, 2011, the Company held long equity exposure in the form of call options on the S&P 500 Index, which appreciated over the quarter resulting in $10.5 million in gains. The $5.2 million losses for the three-month period ended March 31, 2010 were due to the expiration of certain put options that the Company held during that period.
The $(49.1) million increase in net derivative loss related to futures contracts for the three-month period ending March 31, 2011 as compared to the same period in 2010 was primarily due to the Company’s short exposure to the change in equity markets as well as the Company’s long exposure to the treasury market. Equity markets increased in both 2011 and 2010 periods which resulted in decreases in the value of the Company’s short positions during the three-month periods ended March 31, 2011 and 2010. The Treasury market (decreased) increase during the three-month period ended March 31, 2011 and 2010, respectively. The increase in the Treasury market in 2010 resulted in gains related to the Company’s long position which offset the 2010 loss. For discussion of the Company’s short and long future contacts, refer to Note 5 of the Company’s condensed consolidated financial statements included in Part I, Item I of this quarterly report on Form 10-Q.
Net realized investment gains, excluding impairment losses on available-for-sale securities - were $4.1 million and $5.2 million for the three-month periods ended March 31, 2011 and 2010, respectively. The $1.1 million decrease in gains during the three-month period ended March 31, 2011, as compared to the same period in 2010, was primarily related to the sale of certain mortgage loans.
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)
Fee and other income - were $148.0 million and $115.8 million for the three-month periods ended March 31, 2011 and 2010, respectively. Fee and other income consist primarily of mortality and expense charges, rider fees, surrender charges and other income. Mortality and expense charges and rider fees are based on the market values of the assets in the separate accounts supporting the contract. Mortality and expense charges and rider fees combined were $107.5 million and $88.0 million for the three-month periods ended March 31, 2011 and 2010, respectively. Variable product fees represented 1.57% and 1.48% of the average variable annuity separate account balances for the three-month periods ended March 31, 2011 and 2010, respectively. Average separate account assets were $27.4 billion and $23.8 billion for the three-month periods ended March 31, 2011 and 2010, 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 $4.7 million and $4.3 million for the three-month periods ended March 31, 2011 and 2010, respectively.
Other income represents fees charged for the cost of insurance, investment advisory services, asset participation fees and administrative service fees. Other income was $35.8 million and $23.5 million for the three-month periods ended March 31, 2011 and 2010, respectively. The $12.3 million increase in other income was primarily due to an increase in benefit fees which was attributable to an increase in sales of certain variable annuity products with optional benefit features.
BENEFITS AND EXPENSES
Total benefits and expenses were $481.5 million and $393.7 million for the three-month periods ended March 31, 2011 and 2010, respectively. The increase of $87.8 million was primarily due to the following:
Interest credited - to policyholders was $87.9 million and $89.4 million for the three-month periods ended March 31, 2011 and 2010, respectively. The decrease of $1.5 million was primarily the result of lower average policyholder balances, which decreased interest credited by $14.3 million, partially offset by higher average crediting rates, which increased interest credited by $6.3 million. The $14.3 million also was offset by a decrease in capitalized interest, net of SIA amortization expense related to certain fixed annuity products, which increased interest credited by $6.6 million.
Interest expense - was $11.1 million and $17.1 million for the three-month periods ended March 31, 2011 and 2010, respectively. The $6.0 million decrease was primarily due to a decrease in interest expense related to unrecognized tax benefits during the three-month period ended March 31, 2011, as compared to the three-month period ended March 31, 2010.
Policyowner benefits - were $45.0 million and $34.6 million for the three-month periods ended March 31, 2011 and 2010, respectively. The $10.4 million increase in 2011 as compared to 2010 was primarily due to a $12.1 million increase in SIA amortization and deferrals related to certain variable annuity products and a $2.2 million increase in annuity payments, offset by a $3.9 million decrease in reserves, health benefits and other policyowner benefits.
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)
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. DAC amortization expense was $221.7 million and $173.5 million for the three-month periods ended March 31, 2011 and 2010, respectively. The $48.2 million change in amortization expense during the three-month period ended March 31, 2011, as compared to the three-month period ended March 31, 2010, was attributable to a $55.4 million increase in expense related to unlocking adjustments, offset by a $7.2 million decrease related to current period amortization expense and interest on the DAC asset.
The $55.4 million increase in unlocking adjustments related to decreases in estimated gross profits in the three-month period ended March 31, 2011 as compared to the same period in the 2010, which was primarily driven by updates to profitability projections due to actual changes to in-force policies and assumption changes in certain of the Company’s annuity products.
The $7.2 million decrease in DAC amortization expense and interest in the three-month period ended March 31, 2011 as compared to the same period in 2010, was primarily due to a decrease in loss recognition expense, partially offset by a decrease in interest. The Company tests its DAC asset for loss recognition expense on a quarterly basis. During the three-month period ended March 31, 2010, the Company recorded a charge of $14.5 million to amortization expense due to loss recognition for certain annuity product. At March 31, 2011, the Company’s DAC asset passed the loss recognition test and therefore no loss recognition charge was recorded during the three-month period ended March 31, 2011.
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”), as well as 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”), under which SLNY agreed to assume direct responsibility for all sales and administration of existing and new business issued by SLHIC in New York (the “SLHIC to SLNY asset transfer”). This amount is amortized in proportion to the projected emergence of profits or premium income over the estimated lives of the contracts. Amortization and interest were $26.5 million and $(1.8) million for the three-month periods ended March 31, 2011 and 2010, respectively. The change was primarily due to current period amortization on VOBA assets for certain fixed annuity products. The Company did not record any VOBA amortization expense for the three-month period ended March 31, 2010. At March 31, 2010, the Company reached the cap for its VOBA asset related to certain fixed and fixed index annuity products and reported the VOBA assets for these products at historical accumulated deferrals, plus interest.
Other operating expenses - were $89.5 million and $80.9 million for the three-month periods ended March 31, 2011 and 2010, respectively. The $8.6 million change in 2011 as compared to 2010 was primarily due to a $4.0 million increase in commission expense related to a decrease in ceded commission expense on certain UL policies and a $4.6 million decrease in general expenses and premium taxes.
Income tax expense - was $4.2 million and $52.1 million for the three-month periods ended March 31, 2011 and 2010, respectively. The effective tax rates for the same periods were 16.9% and 31.8%, respectively. The effective tax rate for the three-month periods ended March 31, 2011 and 2010 differ 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.
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 from operations reflects the operations of its four segments: Wealth Management, Individual Protection, Group Protection and Corporate.
The following provides a summary of net income from operations by segment.
Wealth Management Segment
The Wealth Management segment sells a full range of retirement-oriented annuity products that provide fixed, indexed or variable returns to policyholders. Annuities are insurance products designed to offer individuals protection against the risk of outliving their financial assets during retirement. Annuities offer a tax-deferred means of accumulating savings for retirement needs and provide a source of income in the payout period. The Company earns spread income from fixed and indexed annuities; variable annuities primarily produce fee income. This segment also markets funding agreements to both related and unrelated third parties.
The segment’s principal products are described below:
Variable Annuities - Variable annuities offer a selection of underlying investment alternatives that may satisfy a variety of policyholder risk/return objectives. Under a variable annuity, the policyholder has the opportunity to select separate account investment options (consisting of underlying mutual funds), which pass the investment risk directly to the policyholder in return for the potential of higher returns. Variable annuities also include guaranteed fixed interest options and benefits. The Company has several different variable annuity products that offer various separate account investment choices, depending on the product, and guaranteed fixed interest options.
Fixed Annuities - Fixed annuity products are primarily single premium deferred annuities (“SPDA”). An SPDA policyholder typically makes a single premium payment at the time of issuance. The Company obligates itself to credit interest to the policyholder's account at a rate that is guaranteed for an initial term and is reset annually thereafter for certain of the Company’s annuity products, subject to a guaranteed minimum rate. The Company discontinued the sale of certain of its fixed annuity products.
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. Effective January 1, 2010, the Company discontinued the sale of certain of its fixed index annuity products.
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)
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 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. (“LLC”). The floating rate funding agreements issued to LLC matured on July 6, 2010. The impact of these agreements and the detail of the payments to LLC are discussed in Note 2 of the Company’s condensed consolidated financial statements presented in Part I, Item I of this quarterly report on Form 10-Q.
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 March 31, 2011 and December 31, 2010, 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. (“SLFD”), 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.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
RESULT OF OPERATIONS (CONTINUED)
Wealth Management Segment (continued)
The following is a summary of operations for the Wealth Management segment for the three-month periods ended March 31 (in 000’s):
|
2011
|
2010
|
||||
|
Total revenues
|
$
|
459,888
|
$
|
542,125
|
|
|
Total benefits and expenses
|
424,528
|
337,465
|
|||
|
Income before income tax expense
|
35,360
|
204,660
|
|||
|
Net income
|
$
|
27,963
|
$
|
138,135
|
|
Pre-tax income was $35.4 million and $204.7 million for the three-month periods ended March 31, 2011 and 2010, respectively. The significant changes are described below.
Total revenues were $459.9 million and $542.1 million for the three-month periods ended March 31, 2011 and 2010, respectively. The $82.2 million decrease was primarily due to a $145.7 million decrease in net investment income and a $3.2 million decrease in net realized investment income, offset by a $39.4 million increase in net derivative income and a $27.5 million increase in fee and other income.
The decrease of $145.7 million in net investment income resulted primarily from a $138.1 million decrease in the fair market value of securities in the trading portfolio, primarily due to bond spreads tightening less in the three-month period ended March 31, 2011, as compared to three-month period ended March 31, 2010. The decrease in net investment income also was attributable to an increase in ceded investment income related to the reinsurance of the SPWL policies to SLOC and lower average invested assets in 2011 as compared to 2010.
The $39.4 million change in net derivative income in 2011, as compared to 2010, primarily related to an increase in income related to a decrease in the fair value of the embedded derivative liabilities, primarily due to an improvement in the equity markets during the three-month period ended March 31, 2011, as compared to the three-month period ended March 31, 2010. The increase in derivative income also was attributable to increases in the fair value of certain of the Company’s interest rate swaps and equity contracts. These increases were partially offset by an increase in losses related to changes in the fair value of equity futures which was negatively impacted by improvement in the equity markets during the three-month period ended March 31, 2011 as compared to the same period in 2010.
The $27.5 million increase in fee and other income was primarily due to a decrease in mortality and expense charges related to an increase in the average variable annuity separate account balances during the three-month period ended March 31, 2011, as compared to the three-month period ended March 31, 2010. The increase also was attributable to an increase in benefit fees which was attributable in an increase in sale of certain variable annuity products with optional benefit features.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
RESULT OF OPERATIONS (CONTINUED)
Wealth Management Segment (continued)
Total benefits and expenses were $424.5 million and $337.5 million for the three-month periods ended March 31, 2011 and 2010, respectively. The increase of $87.0 million was primarily due to a $78.6 million increase in DAC and VOBA amortization expense, an $11.0 million increase in policyowner benefits and a $2.4 million increase in interest expense, offset by a $5.0 million decrease in other operating expenses and interest credited.
The $78.6 million increase in DAC and VOBA amortization expense was attributable to a $19.0 million increase in current period amortization expense and interest on the DAC asset, as well as a $59.6 million increase in unlocking adjustments related to changes in estimated gross profits. The $19.0 million increase in amortization expense was primarily due to current period VOBA amortization. The Company did not record any amortization expense for the three-month period ended March 31, 2010.
The $11.0 million increase in policyowner benefits for the three-month period ended March 31, 2011, as compared to 2010, was primarily due to an increase in SIA amortization, net of deferrals related to certain variable annuity products. The $3.2 million decrease in other operating expenses was primarily due to a $4.2 million decrease in commission expense, which was partially offset by a $1.0 million increase in general expenses.
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)
Individual Protection Segment
The Individual Protection segment sells individual UL and variable life insurance products, including VUL, to individuals and corporate-owned life insurance (“COLI”) and bank-owned life insurance (“BOLI”) to employers. UL products allow for flexible premiums and feature an investment return to policyholders at a specified rate declared by the Company. VUL products allow for flexible premiums and variable rates of investment return; the policyholder directs how the cash value is invested and bears the investment risk.
The Company maintains reinsurance agreements with affiliates, including agreements with Sun Life Reinsurance (Barbados) No. 3 Corp (“BarbCo 3”), an affiliate, and SLOC. In its agreement with BarbCo 3, the Company cedes all of the risks associated with certain in-force corporate and bank-owned VUL and private placement VUL policies on a combination coinsurance, coinsurance with funds withheld and a modified coinsurance basis. Future new business also will be reinsured under this agreement. In addition, the Company’s subsidiary, SLNY, has a reinsurance agreement with SLOC under which SLOC will fund so-called “AXXX reserves,” attributable to certain UL policies sold by SLNY. Under this agreement, SLNY cedes, and SLOC assumes, on a funds-withheld 90% coinsurance basis certain in-force policies. Future new business also will be reinsured under this agreement.
The following provides a summary of operations for the Individual Protection segment for the three-month periods ended March 31 (in 000’s):
|
2011
|
2010
|
||||
|
Total revenues
|
$
|
19,506
|
$
|
15,226
|
|
|
Total benefits and expenses
|
21,893
|
14,215
|
|||
|
(Loss) income before income tax (benefit) expense
|
(2,387)
|
1,011
|
|||
|
Net (loss) income
|
$
|
(1,489)
|
$
|
711
|
|
Total revenues were $19.5 million and $15.2 million for the three-month periods ended March 31, 2011 and 2010, respectively. The $4.3 million increase in total revenues primarily resulted from an increase of $11.4 million and $1.6 million in embedded derivative income and fee and other income, respectively, offset by a decrease of $8.7 million in net investment income.
The increase of $11.4 million in embedded derivative income resulted from changes in the embedded derivative liabilities associated with the segment’s reinsurance agreements with affiliates. The changes in the embedded derivative liabilities reflect the impact of a lower increase in the fair value of funds-withheld assets from credit spreads tightening less during the three-month period ended March 31, 2011 relative to the same period in 2010. The $1.6 million increase in fee and other income resulted primarily from an increase in separate account fees, due to an increase in the separate account assets associated with this segment.
The decrease of $8.7 million in net investment income resulted primarily from a $10.3 million decrease in the fair market value of securities in the trading portfolio, due to bond spreads tightening less in the three-month period ended March 31, 2011, as compared to three-month period ended March 31, 2010.
Total benefits and expenses were $21.9 million and $14.2 million for the three-month periods ended March 31, 2011 and 2010, respectively. The $7.7 million increase in benefits and expenses resulted primarily from an increase in other operating expenses of $10.5 million, offset by decreases in DAC amortization and policyowner benefits of $2.2 million and $0.9 million, respectively.
The $10.5 million increase in other operating expenses resulted primarily from an increase in commission expense related to decreases in ceded commissions on certain UL policies.
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, a reinsurance agreement with SLHIC pursuant to which SLNY assumes the net risks associated with substantially all of the 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 three-month periods ended March 31 (in 000’s):
|
2011
|
2010
|
||||
|
Total revenues
|
$
|
31,307
|
$
|
32,261
|
|
|
Total benefits and expenses
|
30,418
|
31,148
|
|||
|
Income before income tax expense
|
889
|
1,113
|
|||
|
Net income
|
$
|
583
|
$
|
723
|
|
The Group Protection segment had pre-tax income of $0.9 million and $1.1 million for the three-month periods ended March 31, 2011 and 2010, respectively. Total revenues for the three-month period ended March 31, 2011 decreased by $1.0 million in comparison to the three-month period ended March 31, 2010. The decrease in revenues resulted from a decrease in premiums and net investment income of $0.5 million and $0.5 million, respectively.
Total benefits and expenses in 2011 decreased by $0.7 million as compared to 2010. The decrease in benefits and expenses resulted primarily from a decrease in other operating expenses, primarily from the segment’s assumed business related to its reinsurance agreement with SLHIC.
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 three-month periods ended
March 31 (in 000’s):
|
2011
|
2010
|
||||
|
Total revenues
|
$
|
(4,623)
|
$
|
(32,136)
|
|
|
Total benefits and expenses
|
4,695
|
10,874
|
|||
|
Loss before income tax benefit
|
(9,318)
|
(43,010)
|
|||
|
Net loss
|
$
|
(6,672)
|
$
|
(27,918)
|
|
The Corporate Segment had a pre-tax loss of $9.3 million and $43.0 million for the three-month periods ended March 31, 2011 and 2010, respectively. The $33.7 million decrease in pre-tax loss was attributable to an increase in total revenues of $27.5 million and a decrease in total benefits and expenses of $6.2 million.
The $27.5 million increase in total revenues was primarily due to increases of $18.3 million, $3.1 million and $2.2 million in derivative income, net investment income and net realized investment gains, respectively. Additionally, the Corporate segment had an increase of $3.1 million in fee and other income, and a $0.8 million decrease in other-than-temporary impairment losses.
The $18.3 million increase in derivative income was due to an increase in the fair value of the interest rate swap agreements and an increase in income from foreign currency contracts of $14.7 million and $3.6 million, respectively.
The increase of $3.1 million in net investment income resulted primarily from a change in the allocation of net investment income to the operating segments, increasing net investment income by $4.5 million. This increase was offset by a decrease of $1.4 million in limited partnership and other investment income.
The increase of $2.2 million in net realized investment gains resulted from an increase in net realized gains from available-for-sale fixed maturity securities. The increase of $3.1 million in fee and other income resulted primarily from increased management fees from an affiliated company.
The decrease of $6.2 million in total benefits and expenses was due to an $8.0 million decrease in interest expense, offset by an increase in other operating expenses of $1.8 million. The decrease of $8.0 million in interest expense resulted primarily from a change in the allocation of interest expense to the operating segments. The increase of $1.8 million in other operating expenses resulted primarily from increases in affiliated company fees and allocated expenses of $1.4 million.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Omitted pursuant to Instruction H(2)(c) of Form 10-Q.
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 March 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
The Company and its subsidiaries are parties to threatened or 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 ultimate resolution of these proceedings, management believes, based upon currently available information, that the ultimate resolution of these matters will not be materially adverse to the Company's financial position, results of operations or cash flows.
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, 2010.
Omitted pursuant to Instruction H(2)(b) of Form 10-Q.
Omitted pursuant to Instruction H(2)(b) of Form 10-Q.
(a) Not applicable.
(b) Not applicable.
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
|
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)
|
|
May 13, 2011
|
/s/ Westley V. Thompson
|
|
Date
|
Westley V. Thompson, President, SLF U.S.
|
|
(Principal Executive Officer)
|
|
May 13, 2011
|
/s/ Ronald H. Friesen
|
|
Date
|
Ronald H. Friesen, Senior Vice President and Chief Financial Officer
|
|
(Principal Financial Officer)
|