Sun Life Financial reports third quarter results
Note to Editors: All figures shown in Canadian dollars unless otherwise
noted.
The net loss in the third quarter of 2009 was primarily driven by the implementation of certain equity- and interest rate-related actuarial assumption updates previously announced on
The Board of Directors of Sun Life Financial today declared a quarterly shareholder dividend of
"There is underlying strength in our business but we continue to face challenging economic headwinds," said Donald A. Stewart, Chief Executive Officer, Sun Life Financial. "Earnings in the third quarter were negatively impacted by previously announced actuarial assumption updates as well as credit markets." He added, "There are encouraging signs of progress including strong net flows and asset levels which reached a 12-month high at MFS. Our Canadian business reflects a strong brand and distribution, our U.S. business continues to benefit from enhanced distribution and strong annuity sales, and we are well positioned in our international markets."
MANAGEMENT'S DISCUSSION & ANALYSIS
For the period ended September 30, 2009
Dated November 5, 2009
Earnings and Profitability
The financial results presented in this document are unaudited.
FINANCIAL SUMMARY
Quarterly Results Year to date
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Q3'09 Q2'09 Q1'09 Q4'08 Q3'08 2009 2008
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Common shareholders'
net income (loss)
($ millions) (140) 591 (213) 129 (396) 238 656
Operating earnings
(loss)(1)
($ millions) (140) 591 (186) (696) (396) 265 656
Basic earnings
(loss) per common
share (EPS) ($) (0.25) 1.06 (0.38) 0.23 (0.71) 0.42 1.17
Diluted EPS ($) (0.25) 1.05 (0.38) 0.23 (0.71) 0.42 1.14
Diluted operating
EPS(1) ($) (0.25) 1.05 (0.33) (1.25) (0.71) 0.47 1.14
Return on common
equity (ROE) (%) (3.5) 14.9 (5.5) 3.3 (10.2) 2.0 5.6
Operating ROE(1) (3.5) 14.9 (4.7) (17.9) (10.2) 2.2 5.6
Average common
shares
outstanding
(millions) 560.8 559.8 559.7 559.7 559.7 560.1 561.7
Closing common
shares
outstanding
(millions) 562.4 560.7 559.7 559.7 559.7 562.4 559.7
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Sun Life Financial Inc.(2) reported a net loss attributable to common shareholders of
Return on equity (ROE) for the third quarter of 2009 was negative 3.5% compared with negative 10.2% for the third quarter of 2008. The change in ROE resulted from a loss per share of
Common shareholders' net income for the first nine months of 2009 was
Operating earnings for the first nine months of 2009 were
Impact of Certain Actuarial Assumption Updates
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 Company's 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 determination of these obligations is fundamental to the financial results and requires management to make assumptions about a number of factors over the life of its products. The Company reviews these assumptions each year, generally in the third and fourth quarters, and revises these assumptions, if appropriate.
Following the second quarter of 2009, the Company announced that it would review and update the equity and interest rate assumptions used to value its variable annuity, segregated fund and certain fixed annuity and individual life liabilities in the third quarter (equity and interest rate assumption updates). Equity related assumption updates, which are part of an annual process to update the Company's economic assumptions with recent data, were driven by the pronounced equity market volatility experienced over the past year. The Company's interest rate-related assumption updates in the third quarter of 2009 were driven primarily by new criteria provided by a committee of the Canadian Institute of Actuaries.
The net result of these updates in the third quarter of 2009 was an unfavourable impact to net income of
The impact of the implementation of the equity and interest rate assumptions updates on the Minimum Continuing Capital Surplus Requirements (MCCSR) ratio for Sun Life Assurance Company of
Estimated 2010 Normalized Earnings
The information in this section is forward-looking information and estimated normalized earnings is a non-GAAP measure. Additional information on forward-looking information and non-GAAP measures can be found below in the sections "Forward-Looking Statements" and "Use of Non-GAAP Financial Measures".
Recent market conditions have resulted in substantial volatility in the Company's reported financial results over the past year. The Company expects that macroeconomic challenges and market volatility will continue for some time. The Company previously generated average annual operating earnings of
Estimated 2010 normalized earnings constitute a financial outlook 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 normalized earnings 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
Estimated 2010 normalized earnings are based on the assumptions about future economic and other conditions, qualifications and courses of action described in this section and elsewhere in this MD&A. Reported financial results in 2010 may differ materially from estimated 2010 normalized earnings for a variety of reasons, including changes to the economic and other assumptions used to estimate 2010 normalized earnings, and actual economic and other experience before and during 2010 that is different than the Company's estimates. The Company is subject to a number of sources of volatility that are described elsewhere in this MD&A, which may cause normalized earnings to be outside of the range of the estimate. Information related to estimated 2010 normalized earnings should be read in conjunction with the information contained in the "Market Risk Sensitivity" and "Outlook" sections of this MD&A, "Risk Factors" in the Company's annual information form (AIF) for the year ended
Subject to the foregoing, the Company estimates normalized earnings for the year ended
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 quarter is driven by the movement in 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 third quarter of 2009 the Canadian dollar appreciated relative to the U.S. dollar compared with the second quarter of 2009; however, the value of the Canadian dollar weakened in the third quarter of 2009 compared with the third quarter of 2008. In the third quarter of 2009, the Company's overall reported net loss increased by
Performance by Business Group
The Company manages its operations and reports its results in five business segments: Sun Life Financial
In the second quarter of 2009 the Company reported credit impairments in the Corporate segment which had not yet been allocated to the Company's business groups. Certain results from the second quarter of 2009 have been adjusted to reflect the allocation of these credit impairments from the Corporate segment to the Company's business groups. By business group, the adjustment impacts second quarter 2009 income as follows: SLF
SLF
Quarterly Results Year to date
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Q3'09 Q2'09 Q1'09 Q4'08 Q3'08 2009 2008
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Common shareholders'
net income (loss)
($ millions)
Individual
Insurance &
Investments 134 131 77 (130) 28 342 354
Group Benefits 44 52 65 74 81 161 210
Group Wealth 41 27 52 1 48 120 136
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Total 219 210 194 (55) 157 623 700
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SLF
Results in the third quarter of 2008 included charges of
Earnings for the first nine months of 2009 were
In the third quarter of 2009, sales of Individual fixed interest products, including accumulation annuities, GICs and payout annuities, increased 38% from the same period a year ago to
SLF U.S.
Quarterly Results Year to date
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Q3'09 Q2'09 Q1'09 Q4'08 Q3'08 2009 2008
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Common shareholders'
net income (loss)
(US$ millions)
Annuities (186) 187 (324) (672) (456) (323) (359)
Individual
Insurance (222) 70 (57) 95 (76) (209) (22)
Employee Benefits
Group 22 30 48 1 30 100 74
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Total (US$
millions) (386) 287 (333) (576) (502) (432) (307)
Total (C$ millions) (413) 364 (407) (679) (533) (456) (337)
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SLF U.S. had a net loss of C$413 million in the third quarter of 2009, as compared to net income of C$364 million in the second quarter of 2009 and a net loss of C$533 million in the third quarter of 2008. The weakening of the Canadian dollar against the U.S. dollar increased the reported loss in SLF U.S. by C$22 million in the third quarter of 2009 compared to the third quarter of 2008.
In U.S. dollars, the loss of US$386 million in the third quarter of 2009 compared to the loss of US$502 million in the third quarter of 2008. Results in the third quarter of 2009 were driven primarily by losses in Annuities and Individual Insurance. The losses in the third quarter of 2009 were largely a result of the implementation of equity- and interest rate-related assumption updates of US$295 million and reserve increases of US$167 million for downgrades on the investment portfolio. Further reserve strengthening in Individual Insurance for updates to policyholder behaviour assumptions lowered earnings by US$150 million. The losses in the third quarter of 2009 were partially offset by reserve releases of US$89 million related to favourable equity markets.
Results in the third quarter of 2008 were driven by credit-related losses, including impairments of US$460 million and reserve increases of US$170 million required by changes in capital markets.
The net loss for the first nine months of 2009 was US$432 million, compared to a net loss of US$307 million for the same period last year. Earnings were lower primarily due to the impact of credit-related allowances and credit-related losses in Annuities, the unfavourable impact of the implementation of an internal reinsurance transaction in Individual Insurance for capital efficiency, and the implementation of equity- and interest rate-related assumption updates in the third quarter of 2009. These decreases were partially offset by reserve releases related to favourable equity markets in the second and third quarters of 2009.
Growth initiatives and enhanced distribution have resulted in improved sales performance in SLF U.S. Domestic variable annuity sales in the third quarter were US$1.1 billion, an increase of 128% from the same period one year ago. Changes to the variable annuity product suite were launched in the quarter to de-risk the product and improve profitability, while remaining competitive in the marketplace. Sales of core products in Individual Insurance were up 23% compared to the same period a year ago. While total sales in Individual Insurance were down 36% compared to the same period a year ago, the decrease was due to lower sales of non-core products, primarily bank-owned life insurance. EBG sales of US$90 million in the third quarter of 2009 were higher by 3% as compared to the third quarter of 2008.
MFS Investment Management
Quarterly Results Year to date
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Q3'09 Q2'09 Q1'09 Q4'08 Q3'08 2009 2008
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Common shareholders'
net income
(US$ millions) 39 27 23 25 47 89 161
Common shareholders'
net income
(C$ millions) 43 32 28 30 49 103 164
Pre-tax operating
profit margin
ratio(4) 28% 23% 21% 21% 29% 24% 33%
Average net assets
(US$ billions) 162 140 125 133 176 143 185
Assets under
management
(US$ billions) 175 147 124 134 162 175 162
Net sales
(redemptions)
(US$ billions) 7.7 4.9 0.2 (2.1) (2.0) 12.8 (3.7)
Asset appreciation
/(depreciation)
(US$ billions) 20.0 17.9 (10.7) (25.5) (19.4) 27.2 (33.9)
S&P 500 Index
(daily average) 994 893 811 910 1,255 900 1,325
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MFS had net income of C$43 million in the third quarter of 2009 compared to earnings of C$32 million in the second quarter of 2009 and earnings of C$49 million in the third quarter of 2008. The weakening of the Canadian dollar against the U.S. dollar increased earnings for MFS by C$2 million in the third quarter of 2009 compared to the third quarter of 2008.
In U.S. dollars, third quarter earnings were US$39 million compared to US$47 million in the third quarter of 2008. The decrease in earnings from the third quarter of 2008 was primarily due to lower average net assets.
Nine-month earnings in 2009 were US$89 million compared to US$161 million in the same period last year. The decrease was primarily due to lower average net assets.
Total assets under management at
Fund performance at MFS remains strong with 91%, 95% and 92% of fund assets ranked in the top half of their Lipper Category Average over 3, 5 and 10 years, respectively, as of
SLF Asia
Quarterly Results Year to date
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Q3'09 Q2'09 Q1'09 Q4'08 Q3'08 2009 2008
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Common shareholders'
net income (loss)
($ millions) 13 19 17 16 (8) 49 17
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Third quarter earnings for SLF Asia were
Earnings for the first nine months of 2009 were
Sales in SLF Asia for the first nine months were flat to the first nine months of 2008 with continued growth in
Sun Life announced a repositioning of Sun Life Everbright Insurance Company Limited (SLEB) on
On
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 Year to date
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Q3'09 Q2'09 Q1'09 Q4'08 Q3'08 2009 2008
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Common shareholders'
net income (loss)
($ millions)
SLF U.K. 10 (50) - 40 69 (40) 169
Corporate Support (12) 16 (45) 777 (130) (41) (57)
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Total (2) (34) (45) 817 (61) (81) 112
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The Corporate segment had a loss of
SLF U.K. had a net income of
Losses for the first nine months of 2009 in the Corporate segment were
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. 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 annual MD&A, which is available on the Company's website at www.sunlife.com.
Quarterly Results Year to date
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($ millions) Q3'09 Q2'09 Q1'09 Q4'08 Q3'08 2009 2008
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Revenues
SLF Canada 3,388 3,479 2,249 2,052 1,279 9,116 5,875
SLF U.S. 3,643 3,893 2,360 587 546 9,896 3,230
MFS 322 299 288 310 342 909 1,071
SLF Asia 588 634 238 128 180 1,460 370
Corporate
(net of
consolidation
adjustments) 890 415 (107) 1,629 213 1,198 311
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Total as reported 8,831 8,720 5,028 4,706 2,560 22,579 10,857
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Impact of
currency and
changes in the
fair value of
held-for
trading assets
and derivative
instruments 3,117 2,859 (443) (1,424) (2,976) 5,533 (5,725)
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Total adjusted
revenue 5,714 5,861 5,471 6,130 5,536 17,046 16,582
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Revenues for the third quarter of 2009 were
Premium revenue was higher by
Net investment income of
Fee income of
Revenues of
(i) an increase of $9.5 billion in net investment income, excluding
currency changes, primarily from changes in fair value of held-
for-trading assets;
(ii) an increase of $1.1 billion in premium revenue from higher annuity
premiums in SLF Canada and SLF U.S., excluding currency changes;
and
(iii) an increase of $1.5 billion from the weakening of the Canadian
dollar; partially offset by
(iv) a decrease of $0.4 billion in fee income, excluding currency
changes primarily from lower fees on reduced asset values.
INCOME TAXES
An increase in the market value of debt securities combined with tax planning strategies implemented during the third quarter of 2009 allowed the Company to record previously unrecognized tax benefits of
Tax recoveries of
ASSETS UNDER MANAGEMENT (AUM)
AUM were
(i) positive market movements of $37.8 billion;
(ii) net sales of mutual, managed and segregated funds of $18.5
billion;
(iii) an increase of $5.0 billion from the change in value of held-for-
trading assets; partially offset by
(iv) a decrease of $33.0 billion from a strengthening Canadian dollar
compared to the prior period exchange rates.
AUM increased
(i) net sales of mutual, managed and segregated funds of $16.1
billion;
(ii) an increase of $2.8 billion from the change in value of held-for-
trading assets;
(iii) an increase of $2.4 billion from the weakening of the Canadian
dollar against foreign currencies; and
(iv) business growth, primarily in fixed annuities in SLF U.S.;
partially offset by
(v) negative market movements of $2.1 billion.
CHANGES IN THE BALANCE SHEET AND SHAREHOLDERS' EQUITY
Total general fund assets were
Total general fund assets decreased by
Actuarial and other policy liabilities of
Actuarial and other policy liabilities were up by
Shareholders' equity, including Sun Life Financial's preferred share capital, was
(i) shareholders' net income of $296 million, before preferred share
dividends of $58 million;
(ii) unrealized gains on available-for-sale assets in other
comprehensive income (OCI) of $1.4 billion;
and
(iii) net proceeds of $246 million from the issue of 6% preferred
shares; partially offset by
(iv) common share dividend payments of $594 million; and
(v) a decrease of $1.4 billion from the strengthening of the Canadian
dollar.
As at
CASH FLOWS
Quarterly
Results Year to date
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($ millions) Q3'09 Q3'08 2009 2008
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Cash and cash equivalents, beginning
of period 9,165 3,114 7,263 3,603
Cash flows provided by (used in):
Operating activities 934 1,126 2,745 1,918
Financing activities (165) (188) 612 (10)
Investing activities (362) 949 (727) (534)
Changes due to fluctuations in
exchange rates (433) 117 (754) 141
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Increase (decrease) in cash and cash
equivalents (26) 2,004 1,876 1,515
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Cash and cash equivalents, end of period 9,139 5,118 9,139 5,118
Short-term securities, end of period 2,692 1,496 2,692 1,496
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Total cash, cash equivalents and
short-term securities 11,831 6,614 11,831 6,614
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Net cash, cash equivalents and short-term securities of
Cash generated by operations was
Cash provided by operating activities for the nine months ended
QUARTERLY FINANCIAL RESULTS
The following table provides a summary of Sun Life Financial's results for the eight most recently completed quarters. A more complete discussion of the Company's historical quarterly results can be found in the Company's interim and annual MD&As, which are available at www.sunlife.com.
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Q3'09 Q2'09 Q1'09 Q4'08 Q3'08 Q2'08 Q1'08 Q4'07
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Common share-
holders' net
income (loss)
($millions) (140) 591 (213) 129 (396) 519 533 555
Operating
earnings (loss)
($millions) (140) 591 (186) (696) (396) 519 533 560
Basic EPS ($) (0.25) 1.06 (0.38) 0.23 (0.71) 0.92 0.95 0.98
Diluted EPS ($) (0.25) 1.05 (0.38) 0.23 (0.71) 0.91 0.93 0.97
Diluted operating
EPS ($) (0.25) 1.05 (0.33) (1.25) (0.71) 0.91 0.93 0.98
Total revenue
($millions) 8,831 8,720 5,028 4,706 2,560 4,411 3,886 5,405
Total AUM
($billions) 412 397 375 381 389 413 415 425
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Second Quarter 2009
Sun Life Financial reported net income of
First Quarter 2009
A net operating loss of
Fourth Quarter 2008
Sun Life Financial had net income of
Third Quarter 2008
A net loss of
Second Quarter 2008
The Company reported common shareholders' net income of
First Quarter 2008
Sun Life Financial reported common shareholders' net income of
Fourth Quarter 2007
In the fourth quarter of 2007, the Company reported common shareholders' net income of
INVESTMENTS
The Company had total invested assets of
As at
Included in
The Company's gross unrealized losses as at
The Company's bond portfolio as at
The Company's bond portfolio as at
September 30, December 31,
2009 2008
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Invest- Invest-
Fair ment Fair ment
($ millions) value grade % value grade %
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Commercial mortgage-backed securities 1,869 95.5% 1,889 99.7%
Residential mortgage-backed securities
Agency 833 100.0% 1,138 100.0%
Non-agency 931 83.1% 1,092 98.4%
Collateralized debt obligations 162 42.2% 215 80.8%
Other* 587 85.3% 754 97.3%
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Total 4,382 90.4% 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 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. The Company determines impairments on securitized assets by using discounted cash flow models that consider losses under current and expected economic conditions. Assumptions used include macroeconomic factors such as commercial and residential property values and unemployment rates. If the cash flow modelling results in an economic loss and the Company believes the loss is probable of occurring, an impairment is recorded. The asset-backed portfolio is highly sensitive to fluctuations in macroeconomic factors. Further write-downs on previously impaired securities may result from continued deterioration in economic factors such as property values and unemployment rates.
As at September 30, RMBS - RMBS -
2009 CMBS Agency Non-agency CDOs Other
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Rating
AAA 72.7% 100.0% 32.3% 7.9% 54.1%
AA 7.3% 0.0% 32.8% 22.5% 6.7%
A 7.8% 0.0% 10.6% 0.4% 11.0%
BBB 7.7% 0.0% 7.3% 11.4% 13.6%
BB & Below 4.5% 0.0% 17.0% 57.8% 14.6%
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Total 100.0% 100.0% 100.0% 100.0% 100.0%
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Vintage
2005 & Prior 81.8% 58.0% 89.4% 70.2% 55.6%
2006 13.8% 8.7% 8.9% 9.5% 17.2%
2007 4.2% 13.1% 1.5% 20.3% 1.7%
2008 0.1% 15.7% 0.0% 0.0% 25.4%
2009 0.1% 4.5% 0.2% 0.0% 0.1%
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Total 100.0% 100.0% 100.0% 100.0% 100.0%
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CMBS (equals) Commercial Mortgage-Backed Securities;
RMBS (equals) Residential Mortgage-Backed Securities,
CDOs (equals) Collateralized Debt Obligations
As at December 31, RMBS - RMBS -
2008 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 (equals) Commercial Mortgage-Backed Securities;
RMBS (equals) Residential Mortgage-Backed Securities,
CDOs (equals) Collateralized Debt Obligations
As at
The Company's mortgage portfolio consists almost entirely of first mortgages. While the Company generally requires a maximum loan to value ratio of 75%, it may invest in mortgages with a higher loan to value ratio in
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($ millions) September 30, 2009 December 31, 2008
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Non- Non-
Residential Residential Total Residential Residential Total
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Canada 2,474 5,305 7,779 2,620 5,896 8,516
United
States 293 6,164 6,457 342 7,338 7,680
United
Kingdom - 67 67 - 71 71
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Total
mortgages 2,767 11,536 14,303 2,962 13,305 16,267
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Corporate
loans - - 5,756 - - 6,035
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Total mortgages
and corporate
loans 20,059 22,302
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The distribution of mortgages and corporate loans by credit quality as at
September 30, 2009
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($ millions) Gross Carrying Value Allowance for losses
---------------------- ----------------------
Mortgages Corporate Total Mortgages Corporate Total
loans loans
-------------------------------------------------------------------------
Not past
due $14,086 $5,722 $19,808 $ - $ - $ -
Past due:
Past due
less than
90 days 31 10 41 - - -
Past due
90 to
179 days - - - - - -
Past due
180 days
or more - - - - - -
Impaired 226 55 281 40 31 71
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Balance,
September
30, 2009 $14,343 $5,787 $20,130 $40 $31 $71
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December 31, 2008
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($ 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
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Balance,
December 31,
2008 $16,280 $6,045 $22,325 $13 $10 $23
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Net impaired assets for mortgages and corporate loans, net of allowances, amounted to
In addition to allowances reflected in the carrying value of mortgages and corporate loans, the Company had
The values of the Company's derivative instruments are summarized in the following table. The use of derivatives is measured in terms of notional amounts, which serve as the basis for calculating payments and are generally not actual amounts that are exchanged.
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($ millions) September 30, 2009 December 31, 2008
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Net fair value 103 (550)
Total notional amount 45,248 50,796
Credit equivalent amount 1,140 1,260
Risk-weighted credit equivalent amount 8 28
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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 its risk profile.
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
The financial strength ratings assigned by independent credit rating agencies for Sun Life Financial's principal operating subsidiaries remained unchanged during the third 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 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.
OUTLOOK
During the third quarter of 2009, the North American economy showed some signs of improvement. In the U.S., the S&P 500 increased by 15% for the quarter. The Federal Reserve held two meetings during the third quarter of 2009, and kept interest rates in a range of 0% - 0.25%, the same level since
In
The Company is affected by a number of factors which are fundamentally linked to the economic environment. Equity market performance, interest rate levels, credit experience, surrender and lapse experience, currency exchange rates, and spreads between interest credited to policyholders and investment returns can have a substantial impact on the profitability of the Company's operations. Furthermore, the regulatory environment is expected to evolve as governments and regulators work to develop the appropriate level of financial regulation required to ensure that capital, liquidity and risk management practices are sufficient to withstand severe economic downturns. In
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 estimated impact on the Company's net income from an immediate 10% increase across all equity markets as at
The estimated impact of an immediate parallel increase of 1% in interest rates as at
The Company provides guarantees through its segregated fund business in
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September 30, 2009 December 31, 2008
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Amount Actuarial Amount Actuarial
Fund at Lia- Fund at Lia-
($ millions) Value Risk(5) bilities Value Risk(5) bilities
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Total 33,797 4,864 1,617 29,730 9,063 3,036
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Guaranteed benefits are contingent and only payable upon death, maturity, withdrawal or annuitization if fund values remain below guaranteed values. If markets do not recover, liabilities on current in-force business would be due primarily in the period from 2013 to 2031. The amount at risk and actuarial liabilities at
The Company's principal operating subsidiary, Sun Life Assurance, is subject to the MCCSR capital rules for a life insurance company 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 unit 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 Company's market risk sensitivities are forward-looking information 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 a starting point and business mix in place as of
These sensitivities reflect the composition of the Company's assets and liabilities as of
Similarly, the net income 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 income sensitivity of each factor under these specialized assumptions, and should not be viewed as predictors of the Company's future earnings. Given the nature of these calculations, the Company cannot provide assurance that those actual earnings impacts will be within the indicated ranges.
Information related to market risk sensitivities should be read in conjunction with the information contained in the "Outlook" section of this MD&A, "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 annual MD&A and AIF for the year ended
LEGAL AND REGULATORY MATTERS
Information concerning legal and regulatory matters is provided in Sun Life Financial Inc.'s annual consolidated financial statements, annual MD&A and AIF for the year ended
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
TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
The Canadian Accounting Standards Board has confirmed
- Education and training requirements
- Accounting policy changes
- Information technology and data systems impacts
- Impacts on business activities
- Financial reporting requirements
- Internal control over financial reporting
The IFRS changeover plan is well underway, with key IFRS standards analyzed and compared against Sun Life Financial's current Canadian GAAP policies. The key accounting policy alternatives have been identified, including contract classification, first-time adoption options and other mandatory changes under IFRS. Developments relating to existing standards and new standards are being monitored to assess the impact on the changeover plan.
The core IFRS team has partnered with all of the relevant functional areas of the Company to assess the specific and overall impact of IFRS, including, for example, information technology, data systems, Treasury and Taxation. As the implementation process moves forward, the Company will continue to monitor its changeover plan; accordingly, changes to the existing plan may be required.
The Company is currently in the detailed implementation phase of its changeover plan, which includes formal training and finalizing business and systems requirements, processes for new data requirements, financial statement and notes development, and the changes to the control environment under IFRS. The Company is assessing the impact the adoption of IFRS will have on its financial statements.
USE OF NON-GAAP FINANCIAL MEASURES
Management evaluates the Company's performance on the basis of financial measures prepared in accordance with GAAP, including earnings, diluted EPS and ROE. Management also measures the Company's performance based on certain non-GAAP measures, including 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. Management uses financial performance measures that are prepared on a constant currency basis, which exclude the impact of currency fluctuations. The Company also reviews adjusted revenue, which excludes the impact of currency and fair value changes in held-for-trading assets and derivative instruments from total revenue. Management monitors MFS's pre-tax operating profit margin ratio, the denominator of which excludes certain investment income and includes certain commission expenses, as a means of measuring the underlying profitability of MFS. Value of new business is used to measure overall profitability. Value of new business is based on actuarial amounts for which there are no comparable amounts under GAAP. Management has provided information concerning the Company's estimated 2010 normalized earnings and market sensitivities, for which there are no directly comparable measures under GAAP and for which a reconciliation is not possible as it is forward-looking information. 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.
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
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Q3'09 Q2'09 Q1'09 Q4'08 Q3'08 Q2'08 Q1'08 Q4'07
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Reported Earnings
(GAAP) (140) 591 (213) 129 (396) 519 533 555
After-tax gain
(loss) on special
items
Re-branding
expenses in
Canada - - - - - - - (3)
EBG integration
costs - - - - - - - (2)
Gain on sale of
interest in CI
Financial - - - 825 - - - -
Restructuring
costs to reduce
expense levels - - (27) - - - - -
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Total special
items - - (27) 825 - - - (5)
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Operating earnings (140) 591 (186) (696) (396) 519 533 560
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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 2010 Normalized Earnings, 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 performance of equity markets; interest rate fluctuations; other market risks including movement in credit spreads; possible sustained economic downturn; 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 impact of mergers and acquisitions; the performance of the Company's investments and investment portfolios managed for clients such as segregated and mutual funds; insurance risks including mortality, morbidity, longevity and policyholder behaviour including the occurrence of natural or man-made disasters, pandemic diseases and acts of terrorism; changes in significant accounting principles; 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 relating to product design and pricing; the availability, cost and effectiveness of reinsurance; the inability to maintain strong distribution channels and risks relating to market conduct by intermediaries and agents; currency exchange rate fluctuations; the cost, effectiveness and availability of risk-mitigating hedging programs; the creditworthiness of guarantors and counterparties to derivatives; risks relating to operations in Asia including risks relating to joint ventures; the impact of competition; 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; the impact of adverse results in the closed block of business; the ineffectiveness of risk management policies and procedures and the potential for financial loss related to changes in the environment. The Company does not undertake any obligation to update or revise these forward-looking statements 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.
Earnings Conference Call
The Company's third quarter 2009 financial results will be reviewed at a conference call today at
The conference call can also be accessed by phone by dialing 416-644-3416 (
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
SUMMARY CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations
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For the three For the nine
months ended months ended
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(unaudited, in millions of
Canadian dollars except for September September September September
per share amounts) 30 2009 30 2008 30 2009 30 2008
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Revenue
Premium Income:
Annuities $ 1,134 $ 1,145 $ 4,018 $ 2,844
Life insurance 1,603 1,449 4,741 4,267
Health insurance 1,082 1,017 3,271 2,991
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3,819 3,611 12,030 10,102
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Net investment income (loss):
Changes in fair value of
held-for-trading assets 3,072 (2,862) 5,025 (5,210)
Income (loss) from
derivative instruments (116) (145) (563) (560)
Net gains (losses) on
available-for-sale assets 53 (227) (12) (175)
Other net investment
income 1,334 1,490 4,200 4,587
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4,343 (1,744) 8,650 (1,358)
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Fee income 669 693 1,899 2,113
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8,831 2,560 22,579 10,857
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Policy benefits and expenses
Payments to policyholders,
beneficiaries and
depositors:
Maturities and surrenders 1,006 1,081 3,564 3,686
Annuity payments 344 343 1,030 1,027
Death and disability
benefits 703 679 2,335 2,047
Health benefits 788 713 2,390 2,167
Policyholder dividends
and interest on claims
and deposits 293 357 992 940
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3,134 3,173 10,311 9,867
Net transfers to
segregated funds 304 165 654 473
Increase (decrease) in
actuarial liabilities 4,395 (1,504) 7,729 (4,044)
Commissions 423 397 1,244 1,149
Operating expenses 763 704 2,307 2,168
Premium taxes 56 56 166 171
Interest expense 103 80 309 279
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9,178 3,071 22,720 10,063
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Income (loss) before income
taxes and non-controlling
interests (347) (511) (141) 794
Income tax expense (benefit) (238) (138) (455) 63
Non-controlling interests
in net income of
subsidiaries 4 6 10 20
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Total net income (113) (379) 304 711
Less: Participating
policyholders' net
income (loss) 4 (1) 8 2
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Shareholders' net income (loss) (117) (378) 296 709
Less: Preferred shareholder
dividends 23 18 58 53
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Common shareholders' net income
(loss) $(140) $(396) $238 $656
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Earnings (loss) per share
Basic $(0.25) $(0.71) $0.42 $(1.17)
Diluted $(0.25) $(0.71) $0.42 $(1.14)
Consolidated Balance Sheets
As at
-------------------------------------------------------------------------
(unaudited, in millions of September December September
Canadian dollars) 30 2009 31 2008 30 2008
-------------------------------------------------------------------------
Assets
Bonds - held-for-trading $ 49,965 $ 48,458 $ 47,116
Bonds - available-for-sale 10,164 10,616 9,523
Mortgages and corporate loans 20,059 22,302 21,366
Stocks - held-for-trading 4,062 3,440 3,876
Stocks - available-for-sale 648 1,018 629
Real estate 4,826 4,908 4,638
Cash, cash equivalents and short-term
securities 11,831 8,879 6,614
Derivative assets 1,535 2,669 1,468
Policy loans and other invested assets 3,486 3,585 4,505
Other invested assets - held-for-
trading 365 380 351
Other invested assets - available-for-
sale 493 623 660
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Invested assets 107,434 106,878 100,746
Goodwill 6,281 6,598 6,235
Intangible assets 937 878 827
Other assets 4,855 5,479 5,403
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Total general fund assets $119,507 $119,833 $113,211
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Segregated funds net assets $72,984 $65,762 $69,042
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Liabilities and equity
Actuarial liabilities and other policy
liabilities $84,139 $81,411 $77,556
Amounts on deposit 4,125 4,079 3,758
Deferred net realized gains 232 251 258
Senior debentures 3,312 3,013 3,013
Derivative liabilities 1,432 3,219 964
Other liabilities 5,843 7,831 8,448
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Total general fund liabilities 99,083 99,804 93,997
Subordinated debt 3,050 2,576 2,553
Non-controlling interests in
subsidiaries 36 44 42
Total equity 17,338 17,409 16,619
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Total general fund liabilities and
equity $119,507 $119,833 $113,211
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Segregated funds contract liabilities $72,984 $65,762 $69,042
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----------------------------------------
(1) Operating earnings (loss) and other financial information based on
operating earnings such as operating earnings (loss) per share and
operating return on equity are non-GAAP financial measures. For
additional information see "Use of Non-GAAP Financial Measures". All
EPS measures refer to diluted EPS, unless otherwise stated.
(2) Together with its subsidiaries and joint ventures, "the Company" or
"Sun Life Financial".
(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).
(4) Pre-tax operating profit margin ratio is a non-GAAP measure. See "Use
of Non-GAAP Financial Measures".
(5) Amount at risk is the excess of guaranteed values over fund values on
all policies where the guaranteed value exceeds the fund value. Fund
value and amount at risk are net of amounts reinsured. The amount at
risk is not currently payable.
For further information: Media Relations Contact: Steve Kee, Assistant Vice-President, Communications, Tel: (416) 979-6237, [email protected]; Investor Relations Contact: Paul Petrelli, Vice-President, Investor Relations, Tel: (416) 204-8163, [email protected]
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