Sun Life Financial reports fourth quarter and 2009 results
Feb 11, 2010
Note to Editors: All figures shown in Canadian dollars unless otherwise noted.
Fourth Quarter 2009 Financial Highlights
- Net income of $296 million, increased from $129 million in 2008
- Earnings per share (diluted) of $0.52, up from $0.23
- Return on equity of 7.6%, up from 3.3%
- Quarterly dividend of $0.36 per share
2009 Annual Financial Highlights
- Net income of $534 million, compared to net income of $785 million
in 2008
- Earnings per share (diluted) of $0.94, versus $1.37 last year
- Return on equity of 3.4%, compared to 5.1% in 2008
- Annual dividend of $1.44 per share
Net income in the fourth quarter of 2009 reflected a return to more favourable market conditions including the positive impact of asset liability rebalancing, improved equity markets and increased interest rates. Favourable results from improved market conditions were constrained by the impact of credit, including downgrades on the Company's investment portfolio and net impairments. Results in the fourth quarter of 2008 included an after-tax gain of
Earnings for the full year 2009 were
The Board of Directors of Sun Life Financial today declared a quarterly shareholder dividend of
"We continued to deliver solid sales growth in 2009 and are well-positioned for 2010," said Donald A. Stewart, Chief Executive Officer. "Our strategy of diversifying across products, distribution and geographies and a strong focus on risk management has allowed us to grow and build on earnings through a difficult period for the financial services industry."
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(1) Together with its subsidiaries and joint ventures, "the Company" or
"Sun Life Financial".
Earnings and Profitability
The Company prepares its financial statements in accordance with Canadian generally accepted accounting principles (GAAP). Additional information relating to the Company can be found in SLF Inc.'s consolidated financial statements and accompanying notes (Consolidated Financial Statements), management's discussion and analysis (MD&A) and annual information form (AIF) for the year ended
This news release contains forward-looking information and non-GAAP financial measures. Additional information on forward-looking information and non-GAAP measures can be found below in the "Forward-Looking Information" and "Use of Non-GAAP Financial Measures" sections.
FINANCIAL SUMMARY
Quarterly Results Full Year
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Q4'09 Q3'09 Q2'09 Q1'09 Q4'08 2009 2008
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Common shareholders'
net income (loss)
($ millions) 296 (140) 591 (213) 129 534 785
Operating earnings
(loss)(2)
($millions) 296 (140) 591 (186) (696) 561 (40)
Basic earnings
(loss) per common
share (EPS) ($) 0.53 (0.25) 1.06 (0.38) 0.23 0.95 1.40
Diluted EPS ($) 0.52 (0.25) 1.05 (0.38) 0.23 0.94 1.37
Diluted operating
EPS(2) ($) 0.52 (0.25) 1.05 (0.33) (1.25) 0.99 (0.10)
Return on common
equity (ROE) (%) 7.6 (3.5) 14.9 (5.5) 3.3 3.4 5.1
Operating ROE(2) 7.6 (3.5) 14.9 (4.7) (17.9) 3.5 (0.3)
Average diluted
common shares
outstanding
(millions) 564.0 560.8 560.6 559.7 559.7 561.8 562.4
Closing common
shares
outstanding
(millions) 564.4 562.4 560.7 559.7 559.7 564.4 559.7
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The Company reported net income attributable to common shareholders of
Net income in the fourth quarter of 2009 reflected a return to more favourable market conditions including the positive impact of asset liability rebalancing, improvements in equity markets and increased interest rates. Net income in the fourth quarter also benefited from an overall tax recovery. These impacts were partially offset by net impairments, downgrades on the Company's investment portfolio and lower asset reinvestment gains from changes in credit spreads.
Results in the fourth quarter of 2008 included an after-tax gain of
Return on equity (ROE) for the fourth quarter of 2009 was 7.6% compared with 3.3% for the fourth quarter of 2008. The increase in ROE resulted from earnings per share of
Common shareholders' net income for the twelve months ended
Operating earnings for the twelve months ended
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(2) Operating earnings (loss) and financial measures based on operating
earnings, such as operating earnings (loss) per share and operating
return on equity, are non-GAAP financial measures. See "Use of Non-
GAAP Financial Measures". All EPS measures refer to diluted EPS,
unless otherwise stated.
Estimated 2010 Adjusted Earnings from Operations
In the third quarter of 2009, the Company provided forward-looking information under the heading "estimated 2010 normalized earnings". From this point forward, the Company will replace this term with "estimated 2010 adjusted earnings from operations". The assumptions and methodology for estimated 2010 adjusted earnings from operations, which appear below, remain unchanged from the third quarter of 2009.
Estimated adjusted earnings from operations is a forward-looking non-GAAP financial measure. Additional information on forward-looking information and non-GAAP measures can be found below in the sections "Forward-Looking Information" and "Use of Non-GAAP Financial Measures".
From 2005 to 2007, the Company generated average annual operating earnings of
Estimated 2010 adjusted earnings from operations is a financial outlook non-GAAP financial measure that estimates full-year 2010 after-tax financial results for the Company based on (i) the estimated emergence during the period of expected profit from the Company's insurance business in-force, based on the achievement of current best-estimate actuarial assumptions, plus estimated expected profit from the Company's asset management businesses, (ii) the estimated impact of writing new business during the period, (iii) estimated investment income earned on the Company's surplus assets, less debt servicing costs, during the period, and (iv) an effective tax rate for the Company during the period of between 18% and 22%. Estimated 2010 adjusted earnings from operations are based on economic and other assumptions that include (i) approximately 8% growth in equity markets per annum, (ii) a business mix (including the Company's recent acquisition in the U.K.), foreign currency exchange rates, credit spreads and interest rates consistent with levels as at
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(3) Key indicators with respect to normalized earnings assumptions
include, but are not limited to: equity markets (S&P 500, S&P/TSX
Composite Index, TSX 60); interest rates (Government of Canada and
U.S. Treasury rates); foreign currency (U.S. dollar, U.K. pound); and
credit spreads (corporate bond spreads, swap spreads).
Estimated 2010 adjusted earnings from operations are based on the assumptions about future economic and other conditions, qualifications and courses of action described above. Reported financial results in 2010 may differ materially from estimated 2010 adjusted earnings from operations for a variety of reasons, including changes to the economic and other assumptions used to estimate 2010 adjusted earnings from operations, and actual economic and other experience before and during 2010 that is different than the Company's estimates. Furthermore, estimated 2010 adjusted earnings from operations excludes items that are included in the Company's reported financial results. The Company is subject to a number of sources of volatility that are described above and in the Company's 2009 annual MD&A, which may cause adjusted earnings from operations to be outside of the range of the estimate. Information related to estimated 2010 adjusted earnings from operations should be read in conjunction with the information contained in the "Critical Accounting Policies and Estimates", "Risk Management", "Market Risk Sensitivity" and "Outlook" sections in the Company's 2009 annual MD&A, and "Risk Factors" in the Company's 2009 AIF.
Subject to the foregoing, the Company estimates adjusted earnings from operations for the year ended
Based on the assumptions and methodology used to determine the Company's 2010 estimated adjusted earnings from operations, the Company's estimated adjusted earnings from operations for the fourth quarter of 2009 would have been
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(C$ millions) Q4 2009
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Adjusted earnings from operations(4) (after-tax) 344
Adjusting items:
Net impairments (92)
Downgrades on the Company's investment portfolio (92)
Net equity market impact 38
Tax-related items 65
Other items 33
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Common Shareholders' Net Income 296
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(4) Adjusted earnings from operations excludes (i) impairments on the
Company's invested assets, net of the release of related provisions
in the actuarial liabilities during the period; (ii) the impact of
changes in actuarial liabilities resulting from changes in the credit
ratings on the Company's invested assets during the period; (iii)
equity market changes during the period that differ from the
Company's best estimate assumption of approximately 8% growth in
equity markets per annum, primarily in the S&P 500, S&P/TSX Composite
Index and TSX60 indicies; (iv) the impact of tax-related items during
the period, including those more particularly described on page 10 in
the section entitled Income Taxes, that result in the Company's
effective tax rate to fall outside of a range of 18% to 22% during
the period; and (v) certain other items during the period, including:
changes in credit spreads on corporate bonds during the period that
impact the actuarial valuation of in-force policies by changing the
future returns assumed on investment of net future cash flows, the
impact of asset-liability rebalancing actions taken during the period
in response to market conditions, such as equity market, interest
rate or credit spread conditions, in order to adjust the Company's
asset-liability duration management position in accordance with the
Company's policies and practices, including its risk tolerance
policies and practices; changes in interest rates during the period
that impact the investment returns assumed for new business, as well
as the impact of changes in interest rates on the value of derivative
instruments employed as part of the Company's hedging program; gains
or losses on the sale of the Company's surplus assets; mortality and
morbidity experience that differ from the Company's best estimate
assumptions; policyholder behaviour, including lapse and surrenders,
that differs from the Company's best estimate assumptions; and
changes in actuarial methods and assumptions and other management
actions during the period.
Impact of Currency
The Company has operations in key markets worldwide, including the
Items impacting the Company's consolidated statement of operations are translated back to Canadian dollars using average exchange rates for the respective period. For items impacting the consolidated balance sheet, period end rates are used for currency translation purposes.
In general, the Company's net income benefits from a weakening Canadian dollar and is adversely affected by a strengthening Canadian dollar as net income from the Company's international operations is translated back to Canadian dollars. In a period of net losses, the weakening of the Canadian dollar can exacerbate losses. The relative impact of currency in any given period is driven by the movement of currency rates as well as the proportion of earnings generated in the Company's foreign operations. The Company generally expresses the impact of currency on net income on a year-over-year basis. During the fourth quarter of 2009 and for the full year 2009, the Company's overall reported net income decreased by
Performance by Business Group
The Company manages its operations and reports its results in five business segments: Sun Life Financial
SLF
Quarterly results Full Year
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Q4'09 Q3'09 Q2'09 Q1'09 Q4'08 2009 2008
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Common shareholders'
net income (loss)
($ millions)
Individual
Insurance &
Investments 138 134 131 77 (130) 480 224
Group Benefits 72 44 52 65 74 233 284
Group Wealth 33 41 27 52 1 153 137
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Total 243 219 210 194 (55) 866 645
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SLF
Results in the fourth quarter of 2008 included charges of
Full year 2009 earnings for SLF
In the fourth quarter of 2009, sales of Individual fixed interest products, including accumulation annuities, GICs and payout annuities, increased 58% from the same period a year ago to
SLF U.S.
Quarterly results Full Year
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Q4'09 Q3'09 Q2'09 Q1'09 Q4'08 2009 2008
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Common shareholders'
net income (loss)
(US$ millions)
Annuities (80) (186) 187 (324) (672) (403) (1,031)
Individual
Insurance 50 (222) 70 (57) 95 (159) 73
Employee Benefits
Group 22 22 30 48 1 122 75
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Total (US$
millions) (8) (386) 287 (333) (576) (440) (883)
Total (C$ millions) (9) (413) 364 (407) (679) (465) (1,016)
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SLF U.S. had a loss of C$9 million in the fourth quarter of 2009, as compared to a loss of C$413 million in the third quarter of 2009 and a loss of C$679 million in the fourth quarter of 2008. The strengthening of the Canadian dollar against the U.S. dollar decreased the reported loss in SLF U.S. by C$1 million in the fourth quarter of 2009 compared to the fourth quarter of 2008.
In U.S. dollars, the fourth quarter 2009 loss of US$8 million compared to a loss of US$576 million in the fourth quarter of 2008. Results in the fourth quarter of 2009 were driven primarily by losses in Annuities partially offset by favourable results in Individual Insurance and the Employee Benefits Group. The losses in the fourth quarter were attributable primarily to net credit impairments, reserve increases for downgrades on the investment portfolio, and lower asset reinvestment gains from changes in credit spreads. These losses were partially offset by the favourable impact of asset liability rebalancing, equity markets and increased interest rates.
Results in the fourth quarter of 2008 were driven mainly by an increase in annuity reserves required by the impact of declining equity markets, the negative impact of credit spreads, reserve increases for downgrades on the investment portfolio, asset impairments and changes to asset default assumptions in anticipation of higher future credit-related losses.
The loss for the twelve months ended
Growth initiatives and enhanced distribution continue to improve sales performance in the Annuities division. Domestic variable annuity sales in the fourth quarter were US$716 million, an increase of 50% from the same period a year ago. Changes to the variable annuity product were launched in the third quarter of 2009 to reduce the risk profile of products and improve profitability, while remaining competitive in the market place. Total Individual Insurance sales in the fourth quarter of 2009 were up 7% compared to the same period a year ago. Employee Benefits Group sales of US$323 million in the fourth quarter of 2009 were consistent with record sales reported in the fourth quarter of 2008.
MFS Investment Management
Quarterly Results Full Year
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Q4'09 Q3'09 Q2'09 Q1'09 Q4'08 2009 2008
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Common shareholders'
net income
(US$ millions) 47 39 27 23 25 136 186
Common shareholders'
net income
(C$ millions) 49 43 32 28 30 152 194
Pre-tax operating
profit margin
ratio(4) 29% 28% 23% 21% 21% 26% 30%
Average net assets
(US$ billions) 181 162 140 125 133 153 172
Assets under
management
(US$ billions)(4) 187 175 147 124 134 187 134
Net sales
(redemptions)
(US$ billions) 6.1 7.7 4.9 0.2 (2.1) 18.9 (5.8)
Asset appreciation/
(depreciation)
(US$ billions) 6.9 20.0 17.9 (10.7) (25.5) 34.1 (59.4)
S&P 500 Index
(daily average) 1,088 994 893 811 910 947 1,221
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MFS had net income of C$49 million in the fourth quarter of 2009 compared to earnings of C$43 million in the third quarter of 2009 and earnings of C$30 million in the fourth quarter of 2008. The strengthening of the Canadian dollar against the U.S. dollar decreased earnings for MFS by C$7 million in the fourth quarter of 2009 compared to the fourth quarter of 2008.
In U.S. dollars, fourth quarter earnings were US$47 million compared to US$39 million in the third quarter of 2009 and earnings of US$25 million in the fourth quarter of 2008. The increase in earnings from the fourth quarter of 2008 was primarily due to higher average net assets, which increased to US$181 billion in the fourth quarter of 2009 from US$133 billion in the fourth quarter of 2008 as a result of strong net sales and asset appreciation.
Earnings for the twelve months ended
Total assets under management at
Gross sales in the fourth quarter of US$14.9 billion and annual gross sales of US$48.5 billion were the highest in the 85-year history of MFS. Net inflows were US$18.9 billion for 2009. MFS' retail fund performance remains strong with 83% of fund assets ranked in the top half of their respective Lipper categories based on 3-year performance. Performance in the Global/International equity style has been especially strong, with 97% of fund assets ranking in the top half of their 3 and 5-year Lipper averages as of
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(4) Pre-tax operating profit margin ratio and assets under management are
non-GAAP measures. See "Use of Non-GAAP Financial Measures".
SLF Asia
Quarterly results Full Year
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Q4'09 Q3'09 Q2'09 Q1'09 Q4'08 2009 2008
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Common shareholders'
net income
($ millions) 27 13 19 17 16 76 33
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Fourth quarter earnings for SLF Asia were
Full year 2009 earnings of SLF Asia were
Individual life sales in SLF Asia for the year of 2009 were
Corporate
Corporate includes the results of Sun Life Financial U.K. (SLF U.K.) and Corporate Support, which includes the Company's reinsurance businesses as well as investment income, expenses, capital and other items not allocated to Sun Life Financial's other business segments.
Quarterly results Full Year
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Q4'09 Q3'09 Q2'09 Q1'09 Q4'08 2009 2008
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Common shareholders'
net income (loss)
($ millions)
SLF U.K. 9 10 (50) - 40 (31) 209
Corporate Support (23) (12) 16 (45) 777 (64) 720
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Total (14) (2) (34) (45) 817 (95) 929
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The Corporate segment had a loss of
SLF U.K. had a net income of
Net losses for the twelve months ended
On
Additional Financial Disclosure
REVENUE
Under Canadian GAAP, revenues include (i) regular premiums received on life and health insurance policies and fixed annuity products, (ii) net investment income comprised of income earned on general fund assets and changes in the value of held-for-trading assets and derivative instruments, and (iii) fee income received for services provided. Under Canadian GAAP, segregated fund deposits, mutual fund deposits and managed fund deposits are not included in revenues.
Net investment income can experience volatility arising from quarterly fluctuation in the value of held-for-trading assets. The bonds and stocks which support actuarial liabilities are designated as held-for-trading and, consequently, changes in fair values of these assets are recorded in net investment income in the consolidated statement of operations. Changes in the fair values of these assets are largely offset by changes in the fair value of the actuarial liabilities, where there is an effective matching of assets and liabilities. The Company performs cash flow testing whereby asset and liability cash flows are projected under various scenarios. When assets backing liabilities are written down in value to reflect impairment or default, the actuarial assumptions about the cash flows required to support the liabilities will change, resulting in an increase in actuarial liabilities charged through the consolidated statement of operations. Additional detail on the Company's accounting policies can be found in Sun Life Financial Inc.'s 2009 annual MD&A.
Quarterly Results Year to date
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($millions) Q4'09 Q3'09 Q2'09 Q1'09 Q4'08 2009 2008
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Revenues
SLF Canada 2,291 3,388 3,479 2,249 2,052 11,407 7,927
SLF U.S. 1,818 3,643 3,893 2,360 587 11,714 3,817
MFS 342 322 299 288 310 1,251 1,381
SLF Asia 353 588 634 238 128 1,813 498
Corporate (net
of consolidation
adjustments) 189 890 415 (107) 1,629 1,387 1,940
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Total as reported 4,993 8,831 8,720 5,028 4,706 27,572 15,563
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Impact of
currency and
changes in the
fair value of
held-for trading
assets and
derivative
instruments (912) 2,653 2,387 (877) (1,827) 3,251 (8,117)
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Total adjusted
revenue 5,905 6,178 6,333 5,905 6,533 24,321 23,680
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Revenues for the fourth quarter of 2009 were
Premium revenue was down by
Net investment income of
Fee income of
Revenues of
(i) an increase of $9.9 billion in net investment income, excluding
currency changes, primarily from changes in fair value of held-
for-trading assets less the 2008 gain of $1.0 billion arising
from the sale of the Company's interest in CI Financial;
(ii) an increase of $1.4 billion in premium revenue, excluding
currency changes primarily from higher annuity premiums in SLF
Canada and SLF U.S.; and
(iii) an increase of $886 million from the weakening of the Canadian
dollar.
INCOME TAXES
The Company has a statutory tax rate of 32%, which is reduced by a relatively steady stream of tax benefits, such as lower tax in foreign jurisdictions, a range of tax exempt investment income sources and other sustainable tax benefit streams that, in combination with a normal level of pre-tax income, decrease the Company's effective tax rate to an expected range of 18 to 22%.
In the fourth quarter of 2009, the Company had a tax recovery of
ASSETS UNDER MANAGEMENT (AUM)
AUM(5) were
(i) positive market movements of $47.5 billion;
(ii) net sales of mutual, managed and segregated funds of
$25.6 billion;
(iii) an increase of $4.9 billion from the change in value of held-
for-trading assets;
(iv) an increase of $6.6 billion in segregated funds and
$1.3 billion in general funds arising from the acquisition of
the Lincoln U.K. business; and
(v) business growth of $2.7 billion, mostly in the wealth
businesses partially offset by
(vi) a decrease of $37.1 billion from a strengthening Canadian
dollar against foreign currencies compared to the prior period
exchange rates.
AUM increased
(i) net sales of mutual, managed and segregated funds of
$7.1 billion;
(ii) positive market movements of $9.8 billion; and
(iii) an increase of $6.6 billion in segregated funds and
$1.3 billion in general funds arising from the acquisition of
the Lincoln U.K. business; partially offset by
(iv) a decrease of $ 4.2 billion from the strengthening of the
Canadian dollar against foreign currencies.
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(5) AUM is a non-GAAP financial measure. See "Use of Non-GAAP Financial
Measures".
CHANGES IN THE BALANCE SHEET AND SHAREHOLDERS' EQUITY
Total general fund assets were
Actuarial and other policy liabilities of
Shareholders' equity, including Sun Life Financial's preferred share capital, was
(i) shareholders' net income of $613 million, before preferred
share dividends of $79 million;
(ii) change in unrealized gains (losses) on available-for-sale
assets in other comprehensive income (OCI) of $1.5 billion;
(iii) an increase of $136 million from common share issues and
$22 million from stock based compensation and
(iv) net proceeds of $246 million from the issue of 6% preferred
shares; partially offset by
(v) common share dividend payments of $796 million; and
(vi) a decrease of $1.6 billion from the strengthening of the
Canadian dollar.
REVIEW OF ACTUARIAL METHODS AND ASSUMPTIONS
Management makes judgments involving assumptions and estimates relating to the Company's obligations to policyholders, some of which relate to matters that are inherently uncertain. The determination of these obligations is fundamental to the Company's financial results and requires management to make assumptions about equity market performance, interest rates, asset default, mortality and morbidity rates, policy terminations, expenses and inflation, and other factors over the life of its products. The Company's policyholder benefit payment obligations are estimated over the life of its annuity and insurance products, based on internal valuation models, and are recorded in its financial statements, primarily in the form of actuarial liabilities. The Company reviews these assumptions each year, generally in the third and fourth quarters, and revises these assumptions, if appropriate.
During the fourth quarter of 2009, the net impact of the review and update of actuarial method and assumption changes resulted in a net decrease in actuarial liabilities of
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Assumption Increase(Decrease) Comments
in actuarial
liabilities
($millions)
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Mortality/Morbidity (54) Reflect recent mortality
experience studies in several
of the Company's businesses.
Lapse and other 48 Primarily attributed to
policyholder updates for experience on lapse
behaviour and annuitization rates for a
closed block of reinsurance
business.
Other 4
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Total (2)
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Additional information on estimates relating to the Company's obligation to policyholders, including the methodology and assumptions used in their determination, can be found in the Benefits to Policyholders section of the Company's 2009 Annual MD&A under the heading "Critical Accounting Policies and Estimates".
INVESTMENTS
The Company had total general fund invested assets of
As at
Included in the
The Company's gross unrealized losses as at
The Company's bond portfolio as at
The Company's bond portfolio as at
December 31, 2009 December 31, 2008
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($ millions) Amortized Fair BBB and Amortized Fair BBB and
Cost value higher Cost value higher
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Commercial mortgage-
backed securities 2,219 1,772 92.9% 2,820 1,889 99.7%
Residential mortgage-
backed securities
Agency 735 768 100.0% 1,108 1,138 100.0%
Non-agency 1,318 886 80.2% 1,773 1,092 98.4%
Collateralized debt
obligations 243 169 34.9% 449 215 80.8%
Other* 729 571 80.6% 983 754 97.3%
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Total 5,244 4,166 87.5% 7,133 5,088 98.3%
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* Other includes sub-prime, a portion of the Company's exposure to
Alt-A and other asset-backed securities.
The Company determines impairments on asset-backed securities by using discounted cash flow models that consider losses under current and expected economic conditions, and a set of assumed default rates and loss given default expectations for the underlying collateral pool. Assumptions used include macro economic factors, such as commercial and residential property values and unemployment rates. Assumed default rates and loss given default expectations for the underlying collateral pool are assessed on a security by security basis based on factors such as the seasoning of the underlying assets, whether the underlying assets are fixed or adjustable rate loans and the likelihood of refinancing at reset dates. If the cash flow modelling projects an economic loss and the Company believes the loss is probable of occurring, an impairment is recorded.
Due to the complexity of these securities, different sets of assumptions regarding economic conditions and the performance of the underlying collateral pools can fall into a reasonable range but lead to significantly different loss estimates. The Company's asset-backed portfolio is highly sensitive to fluctuations in macro economic factors, assumed default rates for the underlying collateral pool and loss given default expectations. In addition, the Company's asset-backed portfolio has exposure to lower rated securities that are highly leveraged, with relatively small amounts of subordination available below the Company's securities to absorb losses in the underlying collateral pool. For these securities, if a relatively small percentage of the underlying collateral pool defaults, the Company may lose all of its principal investment in the security.
Further write-downs on previously impaired securities may result from continued deterioration in economic factors, such as property values and unemployment rates, or changes in the assumed default rate of the collateral pool or loss given default expectations.
The fair value of the Company's asset-backed securities reported as bonds is further broken down in the tables below to reflect ratings and vintages of the assets within this portfolio.
As at
December 31, 2009 RMBS - RMBS -
(based on fair value) CMBS Agency Non-agency CDOs Other
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Rating
AAA 67.3% 100.0% 29.9% 7.5% 55.1%
AA 7.9% 0.0% 28.4% 21.6% 5.6%
A 8.0% 0.0% 11.5% 0.2% 10.2%
BBB 9.7% 0.0% 10.4% 5.6% 9.7%
BB & Below 7.1% 0.0% 19.8% 65.1% 19.4%
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Total 100.0% 100.0% 100.0% 100.0% 100.0%
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Vintage
2005 & Prior 80.9% 57.7% 87.9% 68.6% 55.6%
2006 14.7% 8.6% 10.0% 11.4% 17.1%
2007 4.3% 13.0% 1.5% 20.0% 1.5%
2008 0.0% 15.9% 0.0% 0.0% 25.8%
2009 0.1% 4.8% 0.6% 0.0% 0.0%
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Total 100.0% 100.0% 100.0% 100.0% 100.0%
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CMBS= Commercial Mortgage-Backed Securities; RMBS =
Residential Mortgage-Backed Securities, CDOs = Collateralized
Debt Obligations
As at
December 31, 2008 RMBS - RMBS -
(based on fair value) CMBS Agency Non-agency CDOs Other
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Rating
AAA 74.5% 100.0% 33.2% 19.1% 51.3%
AA 7.7% 0.0% 48.0% 46.5% 13.9%
A 8.3% 0.0% 11.6% 10.5% 20.4%
BBB 9.2% 0.0% 5.6% 4.7% 11.7%
BB & Below 0.3% 0.0% 1.6% 19.2% 2.7%
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Total 100.0% 100.0% 100.0% 100.0% 100.0%
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Vintage
2005 & Prior 85.6% 59.2% 90.2% 75.0% 59.3%
2006 10.8% 11.1% 8.2% 9.5% 18.5%
2007 3.5% 13.1% 1.6% 15.5% 2.5%
2008 0.1% 16.6% 0.0% 0.0% 19.7%
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Total 100.0% 100.0% 100.0% 100.0% 100.0%
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CMBS= Commercial Mortgage-Backed Securities; RMBS =
Residential Mortgage-Backed Securities, CDOs = Collateralized
Debt Obligations
As at
Alt-A loans generally are residential loans made to borrowers with credit profiles that are stronger than sub-prime but weaker than prime.
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($ millions) December 31, 2009 December 31, 2008
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Non- Non-
Residential Residential Total Residential Residential Total
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Canada 2,341 5,193 7,534 2,620 5,896 8,516
United States 280 5,905 6,185 342 7,338 7,680
United Kingdom - 57 57 - 71 71
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Total mortgages 2,621 11,155 13,776 2,962 13,305 16,267
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Corporate loans 5,673 - - 6,035
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Total
mortgages and
corporate loans 19,449 22,302
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The recovery of the commercial real estate market will more than likely lag behind the overall economic recovery. The recovery will largely be dependent on macroeconomic factors such as job growth and consumer confidence. The majority of the credit concerns the Company has experienced have been in the retail sector in states such as Arizona, Colorado and Florida. The Company has also experienced some difficulties with owner occupied industrial properties in Ohio, Michigan and Indiana. With anticipated decreases in property values, borrowers will continue to experience reduced cash flows.
The distribution of mortgages and corporate loans by credit quality as at
December 31, 2009
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($ millions) Gross Carrying Value Allowance for losses
---------------------- ----------------------
Mortgages Corporate Total Mortgages Corporate Total
loans loans
-------------------------------------------------------------------------
Not past
due $13,600 $5,649 $19,249 $ - $ - $ -
Past due:
Past due
less than
90 days 30 - 30 - - -
Past due
90 to
179 days - - - - - -
Past due
180 days
or more - 1 1 - - -
Impaired 252 33 285 106 10 116
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Balance,
December
31, 2009 $13,882 $5,683 $19,565 $106 $10 $116
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December 31, 2008
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($ millions) Gross Carrying Value Allowance for losses
---------------------- ----------------------
Mortgages Corporate Total Mortgages Corporate Total
loans loans
-------------------------------------------------------------------------
Not past
due $16,171 $5,946 $22,117 $ - $ - $ -
Past due:
Past due
less than
90 days 17 17 34 - - -
Past due
90 to
179 days - 14 14 - - -
Past due
180 days
or more 1 9 10 - - -
Impaired 91 59 150 13 10 23
-------------------------------------------------------------------------
Balance,
December
31, 2008 $16,280 $6,045 $22,325 $13 $10 $23
-------------------------------------------------------------------------
Net impaired assets for mortgages and corporate loans, net of allowances, amounted to
In addition to allowances reflected in the carrying value of mortgages and corporate loans, the Company has provided
The values of the Company's derivative instruments are summarized in the following table. The use of derivatives is measured in terms of notional amounts, which serve as the basis for calculating payments and are generally not actual amounts that are exchanged.
-------------------------------------------------------------------------
($ millions) December 31, 2009 December 31, 2008
-------------------------------------------------------------------------
Net fair value 125 (550)
Total notional amount 47,260 50,796
Credit equivalent amount 1,010 1,260
Risk-weighted credit equivalent
amount 7 28
-------------------------------------------------------------------------
The total notional amount decreased to
The invested asset values and ratios presented in this section are based on the carrying value of the respective asset categories. Carrying values for available-for-sale and held-for-trading invested assets are equal to fair value. In the event of default, if the amounts recovered are insufficient to satisfy the related actuarial liability cash flows that the assets are intended to support, credit exposure may be greater than the carrying value of the asset.
CAPITAL MANAGEMENT AND LIQUIDITY
Sun Life Financial has a policy designed to maintain a strong capital position and provide the flexibility necessary to take advantage of growth opportunities, to support the risk associated with its businesses and to optimize shareholder return. The Company's capital base is structured to exceed regulatory and internal capital targets and maintain strong credit ratings while maintaining a capital-efficient structure and desired capital ratios. Capital is managed both on a consolidated basis under principles that consider all the risks associated with the business as well as at the business unit level under the principles appropriate to the jurisdiction in which it operates. Sun Life Financial manages capital for all of its subsidiaries in a manner commensurate with their individual risk profiles.
Sun Life Financial, including all of its business groups, conducts a rigorous capital plan annually where capital options, fundraising alternatives and dividend policies are presented to the Board. Capital reviews are regularly conducted which consider the potential impacts under various business, interest rate and equity market scenarios. Relevant components of the capital reviews are presented to the Board on a quarterly basis.
Sun Life Assurance, the Company's principal operating subsidiary in
Capital is managed both on a consolidated basis under principles that consider all the risk associated with the business as well as at the business group level under the principles appropriate to the jurisdiction in which it operates. Sun Life Financial was well above its minimum internal capital targets as at
The financial strength ratings assigned by independent credit rating agencies for Sun Life Financial's principal operating subsidiaries remained unchanged during the fourth quarter of 2009.
The Company's risk management framework includes a number of liquidity risk management procedures, including prescribed liquidity stress testing, active monitoring and contingency planning. The Company maintains an overall asset liquidity profile that exceeds requirements to fund potential demand liabilities under internally prescribed adverse liability demand scenarios. The Company also actively manages and monitors the matching of its asset positions against its commitments, together with the diversification and credit quality of its investments against established targets.
The Company's primary source of funds is cash provided by operating activities, including premiums, investment management fees and net investment income. These funds are used primarily to pay policy benefits, dividends to policyholders, claims, commissions, operating expenses, interest expenses and shareholder dividends. Cash flows generated from operating activities are generally invested to support future payment requirements, including the payment of dividends to shareholders.
MARKET RISK SENSITIVITY
The Company's earnings are dependent on the determination of its policyholder obligations under its annuity and insurance contracts. These amounts are determined using internal valuation models and are recorded in the Company's financial statements, primarily as actuarial liabilities. The determination of these obligations requires management to make assumptions about the future level of equity market performance, interest rates and other factors over the life of its products. The following table sets out the estimated immediate impact or sensitivity of the Company's net income and MCCSR ratio to certain instantaneous changes in interest rates and equity market prices as at
---------------------------------------------------------------------
Interest Rates(1) Equity Markets(2)
---------------------------------------------------------------------
1% 1% 10% 10%
increase decrease increase decrease
---------------------------------------------------------------------
Net income impact
($ millions) (50) - 50 (150) - (250) 75 - 125 (150) - (200)
---------------------------------------------------------------------
MCCSR ratio(3) up to 8 up to 12 up to 5 up to 5
percentage percentage percentage percentage
points points points points
increase decrease increase decrease
---------------------------------------------------------------------
-------------------------------------------
Equity Markets(2)
-------------------------------------------
25% 25%
increase decrease
-------------------------------------------
Net income impact
($ millions) 150 - 250 (475) - (575)
-------------------------------------------
MCCSR ratio(3) up to 5 up to 15
percentage percentage
points points
increase decrease
-------------------------------------------
(1) Represents a 100 basis point parallel shift in assumed interest rates
across the entire yield curve as at December 31, 2009
(2) Represents the respective change across all equity markets as at
December 31, 2009. Assumes that actual equity exposures consistently
and precisely track the broader equity markets. Since in actual
practice equity related exposures generally differ from broad market
indices (due to the impact of active management, basis risk, and
other factors), realized sensitivities may differ significantly for
from those illustrated above
(3) The sensitivities provided are relative to the MCCSR ratio for
Sun Life Assurance of 221%
The Company used a 10% increase or decrease in equity markets and a 1% change in interest rates in its market sensitivity because it believed that such changes in equity markets and interest rates were reasonably possible as at
The equity market risk sensitivities disclosed in the table above includes the impact of providing for the guarantees associated with the segregated fund and variable annuity contracts and are net of the expected mitigation impact of the Company's hedging programs in effect as at
The Company's market risk sensitivities are forward-looking estimates and are non-GAAP measures. These are measures of the Company's estimated net income and capital sensitivity to the changes in interest rate and equity market levels described above, based on interest rates, equity market prices, and business mix in place as of
These sensitivities reflect the composition of the Company's assets and liabilities as of
Similarly, the sensitivities are based on financial reporting methods and assumptions in effect as of
For the reasons outlined above, these sensitivities should only be viewed as directional estimates of the underlying sensitivities of each factor under these specialized assumptions, and should not be viewed as predictors of the Company's future net income and capital sensitivities. Given the nature of these calculations, the Company cannot provide assurance that those actual earnings and capital impacts will be within the indicated ranges.
The Company's primary exposure to equity risk is through its segregated fund products and variable annuities which provide benefit guarantees linked to underlying fund performance. These benefit guarantees may be triggered upon death, maturity, withdrawal or annuitization, depending on the market performance of the underlying funds. Approximately 70 - 80% of the Company's sensitivity to equity market risk is derived from segregated fund products in SLF
-------------------------------------------------------------------------
December 31, 2009
-------------------------------------------------------------------------
($ millions) Fund Value Amount at Risk Actuarial Liabilities
-------------------------------------------------------------------------
SLF Canada 10,796 539 215
SLF U.S. 21,069 3,006 675
Run-off reinsurance 3,049 811 452
-------------------------------------------------------------------------
Total 34,915 4,356 1,342
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2008
-------------------------------------------------------------------------
($ millions) Fund Value Amount at Risk Actuarial Liabilities
-------------------------------------------------------------------------
SLF Canada 7,940 1,373 616
SLF U.S. 18,115 6,490 1,726
Run-off reinsurance 3,675 1,200 694
-------------------------------------------------------------------------
Total 29,730 9,063 3,036
-------------------------------------------------------------------------
The amount at risk shown in the above tables represents the excess of guaranteed values over fund values on all policies where the guaranteed value exceeds the fund value. The amount at risk is not currently payable as the amount payable is contingent on future fund performance, deaths, deposits and withdrawals. The actuarial liabilities represents management's provision for future costs associated with these guarantees in accordance with accounting guidelines and includes a provision for adverse deviation in accordance with valuation standards.
Guaranteed benefits are contingent and only payable upon death, maturity, withdrawal or annuitization if fund values remain below guaranteed values. The amount at risk and actuarial liabilities at
The Company's run-off reinsurance business includes risks assumed through reinsurance of variable annuity products issued by various North American insurance companies between 1997 and 2001. This line of business has been discontinued and is part of a closed block of reinsurance which is included in the Corporate business segment.
The ultimate cost of providing for the guarantees in respect of the Company's segregated fund and variable annuity products is uncertain, and will depend upon a number of factors including general capital market conditions, policyholder behaviour and mortality experience, as described in the Risk Factors section in the Company's 2009 AIF, which may result in negative impacts on net income and capital. The Company has implemented hedging programs, involving the use of derivative instruments, in order to help mitigate a portion of the equity market-related volatility in the cost of providing for these guarantees, thereby reducing its exposure to this particular class of equity market risk.
As at
Information related to market risk sensitivities and guarantees related to variable annuity and segregated fund products should be read in conjunction with the information contained in the "Outlook", "Critical Accounting Policies and Estimates" and "Risk Management" sections in the Company's 2009 annual MD&A and "Risk Factors" in the Company's AIF for the year ended
ENTERPRISE RISK MANAGEMENT
Sun Life Financial uses an enterprise risk management framework to assist in categorizing, monitoring and managing the risks to which it is exposed. The major categories of risk are credit risk, market risk, insurance risk, operational risk and strategic risk. Operational risk is a broad category that includes legal and regulatory risks, people risks, and systems and processing risks.
Through its ongoing enterprise risk management procedures, Sun Life Financial reviews the various risk factors identified in the framework and reports to senior management and to the Risk Review Committee of the Board at least quarterly. Sun Life Financial's enterprise risk management procedures and risk factors are described in Sun Life Financial Inc.'s 2009 annual MD&A and 2009 AIF.
LEGAL AND REGULATORY MATTERS
Information concerning legal and regulatory matters is provided in Sun Life Financial Inc.'s 2009 annual Consolidated Financial Statements, 2009 annual MD&A and 2009 AIF.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of the Company's financial reporting and the preparation of its financial statements in accordance with GAAP.
There were no changes in the Company's internal control over financial reporting during the period beginning on
USE OF NON-GAAP FINANCIAL MEASURES
Management evaluates the Company's performance on the basis of financial measures prepared in accordance with GAAP and certain non-GAAP financial measures. Management believes that these non-GAAP financial measures provide information useful to investors in understanding the Company's performance and facilitate the comparison of the quarterly and full-year results of the Company's ongoing operations. These non-GAAP financial measures do not have any standardized meaning and may not be comparable with similar measures used by other companies. They should not be viewed as an alternative to measures of financial performance determined in accordance with GAAP. Additional information concerning these non-GAAP financial measures and reconciliations to GAAP measures are included in Sun Life Financial Inc.'s annual and interim MD&A and the Supplementary Financial Information packages that are available on www.sunlife.com under Investors - Financial Results & Reports - Year-end Reports.
Management measures the Company's performance based on operating earnings and financial measures based on operating earnings, including operating EPS and operating ROE, that exclude certain items that are not operational or ongoing in nature. Other non-GAAP measures that management uses include (i) financial performance measures that are prepared on a constant currency basis, which exclude the impact of currency fluctuations; (ii) adjusted revenue, which excludes the impact of currency and fair value changes in held-for-trading assets and derivative instruments from total revenue; (iii) pre-tax operating profit margin ratios for MFS, the denominator of which excludes certain investment income and includes certain commission expenses, as a means of measuring the underlying profitability of MFS; (iv) assets under management, mutual funds, managed funds and other AUM, and (v) the value of new business is used to measure overall profitability, which is based on actuarial amounts for which there are no comparable amounts under GAAP.
Estimated 2010 adjusted earnings from operations and market sensitivities are forward-looking non-GAAP financial measures, for which there are no directly comparable measures under GAAP and for which a reconciliation is not possible as they are forward-looking information. Reconciliations of those amounts to the most directly comparable GAAP measures are not accessible on a forward-looking basis because the Company believes it is only possible to provide ranges of the assumptions used in determining those non-GAAP measures, as actual results can fluctuate significantly inside or outside those ranges and from period to period and may have a significant impact on reported net income in 2010.
RECONCILIATION OF OPERATING EARNINGS
The following table sets out the items that have been excluded from the Company's operating earnings in the eight most recently completed quarters and provides a reconciliation to the Company's earnings based on GAAP.
($ millions) Quarterly results
-------------------------------------------------------------------------
Q4'09 Q3'09 Q2'09 Q1'09 Q4'08 Q3'08 Q2'08 Q1'08
-------------------------------------------------------------------------
Reported Earnings
(GAAP) 296 (140) 591 (213) 129 (396) 519 533
After-tax gain
(loss) on
special items
Gain on sale of
interest in
CI Financial - - - - 825 - - -
Restructuring
costs to reduce
expense levels - - - (27) - - - -
-------------------------------------------------------------------------
Total special items - - - (27) 825 - - -
-------------------------------------------------------------------------
Operating
earnings 296 (140) 591 (186) (696) (396) 519 533
-------------------------------------------------------------------------
FORWARD-LOOKING INFORMATION
Certain information in this document, including information relating to the Company's strategies and other statements that are predictive in nature, that depend upon or refer to future events or conditions, including information set out in this MD&A under the headings of Estimated Adjusted Earnings from Operations, Outlook and Market Risk Sensitivity, or that include words such as "expects", "anticipates", "intends", "plans", "believes", "estimates" or similar expressions, are forward-looking statements within the meaning of securities laws. Forward-looking information includes the information concerning possible or assumed future results of operations of the Company. These statements represent the Company's expectations, estimates and projections regarding future events and are not historical facts. Forward-looking information is not a guarantee of future performance and involves risks and uncertainties that are difficult to predict. Future results and shareholder value of SLF Inc. may differ materially from those expressed in this forward-looking information due to, among other factors, the matters set out under "Risk Factors" in the Company's AIF and the factors detailed in its other filings with Canadian and U.S. securities regulators, including its annual and interim MD&A, and annual and interim financial statements, which are available for review at www.sedar.com and www.sec.gov.
Factors that could cause actual results to differ materially from expectations include, but are not limited to, investment losses and defaults and changes to investment valuations; the creditworthiness of guarantors and counterparties to derivatives; the performance of equity markets; the cost, effectiveness and availability of risk-mitigating hedging programs; interest rate fluctuations; other market risks including movement in credit spreads; possible sustained economic downturn; changes in legislation and regulations including tax laws; regulatory investigations and proceedings and private legal proceedings and class actions relating to practices in the mutual fund, insurance, annuity and financial product distribution industries; risks related to market liquidity; market conditions that adversely affect the Company's capital position or its ability to raise capital; downgrades in financial strength or credit ratings; the performance of the Company's investments and investment portfolios managed for clients such as segregated and mutual funds; the impact of mergers and acquisitions; insurance risks including mortality, morbidity, including the occurrence of natural or man-made disasters, pandemic diseases and acts of terrorism; risks relating to product design and pricing; risks relating to policyholder behaviour; the inability to maintain strong distribution channels and risks relating to market conduct by intermediaries and agents; risks relating to operations in Asia including risks relating to joint ventures; the impact of competition; currency exchange rate fluctuations; risks relating to financial modelling errors; business continuity risks; failure of information systems and Internet-enabled technology; breaches of computer security and privacy; dependence on third-party relationships including outsourcing arrangements; the ability to attract and retain employees; uncertainty in the rate of mortality improvement; the impact of adverse results in the closed block of business; the potential for financial loss related to changes in the environment; the availability, cost and effectiveness of reinsurance; the ineffectiveness of risk management policies and procedures; and the potential for losses from multiple risks occurring simultaneously or in rapid progression. The Company does not undertake any obligation to update or revise its forward-looking information to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law.
The financial results presented in this document are unaudited.
Consolidated Statements of Operations
-------------------------------------------------------------------------
For the three months ended For the year ended
-------------------------------------------------------------------------
(unaudited, in millions of
Canadian dollars except for December December December December
per share amounts) 31 2009 31 2008 31 2009 31 2008
-------------------------------------------------------------------------
Revenue
Premium Income:
Annuities $ 777 $ 748 $ 4,795 $ 3,592
Life insurance 1,639 1,661 6,380 5,928
Health insurance 1,064 1,076 4,335 4,067
-------------------------------------------------------------------------
3,480 3,485 15,510 13,587
-------------------------------------------------------------------------
Net investment income (loss):
Changes in fair value of
held-for-trading assets (147) (2,189) 4,878 (7,399)
Income (loss) from derivative
instruments (380) 340 (943) (220)
Net gains (losses) on
available-for-sale assets 7 (66) (5) (241)
Other net investment income 1,262 1,491 5,462 6,078
Gain on sale of equity
investment - 1,015 - 1,015
-------------------------------------------------------------------------
742 591 9,392 (767)
-------------------------------------------------------------------------
Fee income 771 630 2,670 2,743
-------------------------------------------------------------------------
4,993 4,706 27,572 15,563
-------------------------------------------------------------------------
Policy benefits and expenses
Payments to policyholders,
beneficiaries and depositors:
Maturities and surrenders 1,002 1,624 4,566 5,310
Annuity payments 337 353 1,367 1,380
Death and disability benefits 662 797 2,997 2,844
Health benefits 820 771 3,210 2,938
Policyholder dividends and
interest on claims and
deposits 325 363 1,317 1,303
-------------------------------------------------------------------------
3,146 3,908 13,457 13,775
Net transfers to segregated
funds 206 66 860 539
Increase (decrease) in
actuarial liabilities (32) (385) 7,697 (4,429)
Commissions 418 396 1,662 1,545
Operating expenses 869 835 3,176 3,003
Premium taxes 56 56 222 227
Interest expense 94 87 403 366
-------------------------------------------------------------------------
4,757 4,963 27,477 15,026
-------------------------------------------------------------------------
Income (loss) before income
taxes and non-controlling
interests 236 (257) 95 537
Income tax expense (benefit) (87) (406) (542) (343)
Non-controlling interests in
net income of subsidiaries 5 3 15 23
-------------------------------------------------------------------------
Total net income 318 146 622 857
Less: Participating
policyholders' net income
(loss) 1 - 9 2
-------------------------------------------------------------------------
Shareholders' net income 317 146 613 855
Less: Preferred shareholder
dividends 21 17 79 70
-------------------------------------------------------------------------
Common shareholders' net
income $ 296 $ 129 $ 534 $ 785
-------------------------------------------------------------------------
Earnings (loss) per share
Basic $ 0.53 $ 0.23 $ 0.95 $ 1.40
Diluted $ 0.52 $ 0.23 $ 0.94 $ 1.37
Consolidated Balance Sheets
As at December 31 (in millions of Canadian dollars)
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Assets
Bonds - held-for-trading $ 51,634 $ 48,458
Bonds - available-for-sale 9,673 10,616
Mortgages and corporate loans 19,449 22,302
Stocks - held-for-trading 4,331 3,440
Stocks - available-for-sale 635 1,018
Real estate 4,877 4,908
Cash, cash equivalents and short-term
securities 11,868 8,879
Derivative assets 1,382 2,669
Policy loans and other invested assets 3,503 3,585
Other invested assets - held-for-trading 425 380
Other invested assets - available-for-sale 452 623
-------------------------------------------------------------------------
Invested assets 108,229 106,878
Goodwill 6,419 6,598
Intangible assets 926 878
Other assets 4,508 5,479
-------------------------------------------------------------------------
Total general fund assets $ 120,082 $ 119,833
-------------------------------------------------------------------------
Segregated funds net assets $ 81,305 $ 65,762
-------------------------------------------------------------------------
Liabilities and equity
Actuarial liabilities and other policy
liabilities $ 84,638 $ 81,411
Amounts on deposit 4,181 4,079
Deferred net realized gains 225 251
Senior debentures 3,811 3,013
Derivative liabilities 1,257 3,219
Other liabilities 5,466 7,831
-------------------------------------------------------------------------
Total general fund liabilities 99,578 99,804
Subordinated debt 3,048 2,576
Non-controlling interests in subsidiaries 42 44
Total equity 17,414 17,409
-------------------------------------------------------------------------
Total general fund liabilities and equity $ 120,082 $ 119,833
-------------------------------------------------------------------------
Segregated funds contract liabilities $ 81,305 $ 65,762
-------------------------------------------------------------------------
Earnings Conference Call
The Company's fourth quarter 2009 financial results will be reviewed at a conference call
The conference call can also be accessed by phone by dialing 416-644-3416 (
About Sun Life Financial
Sun Life Financial is a leading international financial services organization providing a diverse range of protection and wealth accumulation products and services to individuals and corporate customers. Chartered in 1865, Sun Life Financial and its partners today have operations in key markets worldwide, including
Sun Life Financial Inc. trades on the
For further information: Media Relations Contact: Steve Kee, Assistant Vice-President, Communications, Tel: (416) 979-6237, steve.kee@sunlife.com; Investor Relations Contact: Paul Petrelli, Vice-President, Investor Relations, Tel: (416) 204-8163, investor.relations@sunlife.com