EX-99.2 3 d523167dex992.htm EX-99.2 EX-99.2

Exhibit 99.2

Consolidated Statements of Operations

 

 

      For the three months ended  
(unaudited, in millions of Canadian dollars except for per share amounts)    March 31,
2013
     March 31,
2012(1)
 

Revenue

     

Premiums

     

Gross

   $ 3,408       $ 3,306   

Less: Ceded

     1,375         1,308   

Net

     2,033         1,998   

Net investment income (loss):

     

Interest and other investment income

     1,237         1,013   

Change in fair value through profit or loss assets and liabilities (Note 5)

     (348      (570

Net gains (losses) on available-for-sale assets

     24         19   

Net investment income (loss)

     913         462   

Fee income

     844         715   

Total revenue

     3,790         3,175   

Benefits and expenses

     

Gross claims and benefits paid (Note 7)

     2,911         2,802   

Increase (decrease) in insurance contract liabilities (Note 7)

     222         (26

Decrease (increase) in reinsurance assets (Note 7)

     (107      (204

Increase (decrease) in investment contract liabilities (Note 7)

     16         15   

Reinsurance expenses (recoveries) (Note 13)

     (1,258      (1,210

Commissions

     389         324   

Net transfer to (from) segregated funds (Note 10)

     (2      (4

Operating expenses

     957         821   

Premium taxes

     57         63   

Interest expense

     87         89   

Total benefits and expenses

     3,272         2,670   

Income (loss) before income taxes

     518         505   

Less: Income tax expense (benefit) (Note 8)

     85         67   

Total net income (loss) from continuing operations

     433         438   

Less: Net income (loss) attributable to participating policyholders

     (6      2   

Shareholders’ net income (loss) from continuing operations

     439         436   

Less: Preferred shareholders’ dividends

     29         31   

Common shareholders’ net income (loss) from continuing operations

   $ 410       $ 405   

Common shareholders’ net income (loss) from discontinued operation (Note 3)

   $ 103       $ 281   

Common shareholders’ net income (loss)

   $ 513       $ 686   

 

(1) Balances have been restated. Refer to Note 3.

 

Average exchange rates during the reporting periods:

  U.S. dollars      1.01         1.00   
  U.K. pounds      1.56         1.57   

Earnings (loss) per share (Note 12)

       

Basic earnings (loss) per share from continuing operations

   $ 0.68       $ 0.69   

Basic earnings (loss) per share from discontinued operation

   $ 0.17       $ 0.48   

Basic earnings (loss) per share

     $ 0.85       $ 1.17   

Diluted earnings (loss) per share from continuing operations

   $ 0.68       $ 0.68   

Diluted earnings (loss) per share from discontinued operation

   $ 0.17       $ 0.47   

Diluted earnings (loss) per share

     $ 0.85       $ 1.15   

Dividends per common share

     $             0.36       $             0.36            

The attached notes form part of these Interim Consolidated Financial Statements.

 

34   Sun Life Financial Inc.    First Quarter 2013   INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Consolidated Statements of Comprehensive Income (Loss)

 

 

     For the three months ended  
(unaudited, in millions of Canadian dollars)   March 31,
2013
    March 31,
2012
 

Total net income (loss)

  $ 536      $ 719   

Other comprehensive income (loss), net of taxes:

   

Items that may be reclassified subsequently to income:

   

Change in unrealized foreign currency translation gains (losses):

   

Unrealized gains (losses) before net investment hedges

    205        (182

Unrealized gains (losses) on net investment hedges

    (29     17   

Change in unrealized gains (losses) on available-for-sale assets:

   

Unrealized gains (losses)

    129        176   

Reclassifications to net income (loss)

    (32     (25

Change in unrealized gains (losses) on cash flow hedges:

   

Unrealized gains (losses)

    2        12   

Reclassifications to net income (loss)

    (4     (6

Total items that may be reclassified subsequently to income

    271        (8

Items that will not be classified subsequently to income:

   

Changes in liabilities for defined benefit plans

    1          

Total items that will not be reclassified subsequently to income

    1          

Total other comprehensive income (loss)

    272        (8

Total comprehensive income (loss)

    808        711   

Less: Participating policyholders’ comprehensive income (loss)

    (4     1   

Shareholders’ comprehensive income (loss)

  $     812      $ 710   

Income Taxes included in Other Comprehensive Income (Loss)

 

 

     For the three months ended  
(unaudited, in millions of Canadian dollars)   March 31,
2013
    March 31,
2012
 

Income tax benefit (expense):

   

Items that may be reclassified subsequently to income:

   

Unrealized foreign currency translation gains / losses, including net investment hedges

  $ (3   $ 5   

Unrealized gains / losses on available-for-sale assets

    (20     (49

Reclassifications to net income for available-for-sale assets

           6   

Unrealized gains / losses on cash flow hedges

    (4     (6

Reclassifications to net income for cash flow hedges

    2                2   

Total items that may be reclassified subsequently to income

    (25     (42

Items that will not be reclassified subsequently to income:

   

Changes in liabilities for defined benefit plans

    4          

Total items that will not be reclassified subsequently to income

            4          

Total income tax benefit (expense) included in other comprehensive income (loss)

  $ (21   $ (42

The attached notes form part of these Interim Consolidated Financial Statements.

 

INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   Sun Life Financial Inc.   First Quarter 2013   35


Consolidated Statements of Financial Position

 

 

            As at         
(unaudited, in millions of Canadian dollars)   March 31,
2013
    December 31,
2012(1)
    March 31,
2012(1)
 

Assets

     

Cash, cash equivalents and short-term securities (Note 5)

  $ 6,726      $ 7,026      $ 8,263   

Debt securities (Note 5)

    54,314        54,362        61,846   

Equity securities (Note 5)

    5,209        5,026        4,919   

Mortgages and loans

    27,887        27,248        28,005   

Derivative assets

    1,850        2,113        2,134   

Other invested assets (Note 5)

    1,442        1,272        1,406   

Policy loans

    2,716        2,681        3,243   

Investment properties

    6,026        5,942        5,538   

Invested assets

    106,170        105,670        115,354   

Other assets

    2,953        2,657        3,333   

Reinsurance assets (Note 7)

    3,370        3,240        3,651   

Deferred tax assets

    1,020        1,099        1,552   

Property and equipment

    667        665        548   

Intangible assets

    862        862        873   

Goodwill

    3,931        3,911        3,919   

Assets of disposal group classified as held for sale (Note 3)

    14,896        15,067           

Total general fund assets

    133,869        133,171        129,230   

Investments for account of segregated fund holders from continuing operations (Note 10)

    67,948        64,987        91,934   

Investments for account of segregated fund holders classified as held for sale (Note 3)

    28,739        27,668           

Total assets

  $   230,556      $   225,826      $   221,164   

Liabilities and equity

     

Liabilities

     

Insurance contract liabilities (Note 7)

  $ 87,913      $ 87,275      $ 94,821   

Investment contract liabilities (Note 7)

    2,358        2,303        3,083   

Derivative liabilities

    633        594        965   

Deferred tax liabilities

    4        6        7   

Other liabilities

    7,927        8,169        7,981   

Senior debentures

    2,849        2,849        2,849   

Subordinated debt

    2,744        2,740        3,540   

Liabilities of disposal group classified as held for sale (Note 3)

    12,242        12,689           

Total general fund liabilities

    116,670        116,625        113,246   

Insurance contracts for account of segregated fund holders from continuing operations (Note 10)

    61,815        59,025        86,077   

Investment contracts for account of segregated fund holders from continuing operations (Note 10)

    6,133        5,962        5,857   

Insurance contracts for account of segregated fund holders classified as held for sale (Note 3)

    28,739        27,668           

Total liabilities

  $ 213,357      $ 209,280      $ 205,180   

Equity

     

Issued share capital and contributed surplus

  $ 10,712      $ 10,621      $ 10,417   

Retained earnings and accumulated other comprehensive income

    6,487        5,925        5,567   

Total equity

  $ 17,199      $ 16,546      $ 15,984   

Total liabilities and equity

  $ 230,556      $ 225,826      $ 221,164   

 

(1) Balances have been restated. Refer to Note 2.

 

Exchange rates at the end of the reporting periods:

     U.S. dollars                   1.02                        0.99                    1.00   
     U.K. pounds         1.55        1.61        1.60   

The attached notes form part of these Interim Consolidated Financial Statements.

Approved on behalf of the Board of Directors on May 8, 2013.

 

LOGO

  

LOGO

Dean A. Connor

  

William D. Anderson

President and Chief Executive Officer

  

Director

 

36   Sun Life Financial Inc.    First Quarter 2013   INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Consolidated Statements of Changes in Equity

 

 

      For the three months ended  
(unaudited, in millions of Canadian dollars)    March 31,
2013
     March 31,
2012(1)
 

Shareholders:

     

Preferred shares

     

Balance, beginning and end of period

   $ 2,503       $ 2,503   

Common shares

     

Balance, beginning of period

     8,008         7,735   

Stock options exercised

     31         5   

Issued under dividend reinvestment and share purchase plan (Note 9)

     64         69   

Balance, end of period

     8,103         7,809   

Contributed surplus

     

Balance, beginning of period

     110         102   

Share-based payments

     2         4   

Stock options exercised

     (6      (1

Balance, end of period

     106         105   

Retained earnings

     

Balance, beginning of period

     5,817         5,107   

Net Income (loss)

     542         717   

Dividends on common shares

     (217      (212

Dividends on preferred shares

     (29      (31

Balance, end of period

     6,113         5,581   

Accumulated other comprehensive income (loss), net of taxes

     

Unrealized gains (losses) on available-for-sale assets

     604         320   

Unrealized cumulative translation differences, net of hedging activities

     (464      (287

Unrealized gains (losses) on transfers to investment properties

     6         6   

Unrealized gains on derivatives designated as cash flow hedges

     13         9   

Cumulative changes in liabilities for defined benefit plans (Note 2)

     (179      (179

Balance, beginning of period

     (20      (131

Total other comprehensive income (loss) for the period

     270         (7

Balance, end of period

     250         (138

Total shareholders’ equity, end of period

   $ 17,075       $ 15,860   

Participating policyholders:

     

Retained earnings

     

Balance, beginning of period

   $ 131       $ 124   

Net income (loss)

     (6      2   

Balance, end of period

     125         126   

Accumulated other comprehensive income (loss), net of taxes

     

Unrealized cumulative translation differences, net of hedging activities

     (3      (1

Balance, beginning of period

     (3      (1

Total other comprehensive income (loss) for the period

     2         (1

Balance, end of period

     (1      (2

Total participating policyholders’ equity, end of period

   $ 124       $ 124   

Total equity

   $     17,199       $     15,984   

 

(1) 

Balances have been restated. Refer to Note 2.

The attached notes form part of these Interim Consolidated Financial Statements.

 

INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   Sun Life Financial Inc.   First Quarter 2013   37


Consolidated Statements of Cash Flows

 

 

      For the three months ended  
(unaudited, in millions of Canadian dollars)    March 31,
2013
     March 31,
2012
 

Cash flows provided by (used in) operating activities

     

Total income (loss) before income taxes

   $ 672       $ 927   

Add: interest expense related to financing activities

     86         89   

Operating items not affecting cash:

     

Increase (decrease) in contract liabilities

     (317      (886

(Increase) decrease in reinsurance assets

     (61      (458

Unrealized (gains) losses on investments

     457         632 (2) 

Other non-cash items

     (695      (361

Operating cash items:

     

Deferred acquisition costs

     (11      (12

Realized (gains) losses on investments

     195         303 (2) 

Sales, maturities and repayments of investments

     15,013         19,475 (2) 

Purchases of investments

     (13,850      (20,185 )(2) 

Change in policy loans

     (4      5   

Income taxes received (paid)

     (150      (35

Other cash items

     (363      (246 )(2) 

Net cash provided by (used in) operating activities

     972         (752

Cash flows provided by (used in) investing activities

     

(Purchase) sale of property and equipment

     (16      (24

Transactions with associates and joint ventures

     (25      (6

Dividends received from associates and joint ventures

     10           

Other investing activities

     (5      (7

Net cash provided by (used in) investing activities

     (36      (37

Cash flows provided by (used in) financing activities

     

Borrowed funds

     (7      24   

Issuance of senior financing, senior debentures and subordinated debt

             796   

Collateral on senior financing

     12         (2

Issuance of common shares on exercise of stock options

     25         4   

Dividends paid on common and preferred shares

     (178      (171

Interest expense paid

     (52      (83

Net cash provided by (used in) financing activities

     (200      568   

Changes due to fluctuations in exchange rates

     (23      (17

Increase (decrease) in cash and cash equivalents

     713         (238

Net cash and cash equivalents, beginning of period

     3,831         4,345 (1) 

Net cash and cash equivalents, end of period

     4,544         4,107   

Short-term securities, end of period

     2,722         4,096   

Net cash and cash equivalents and short-term securities, end of period

   $ 7,266       $         8,203   

Less: Net cash and cash equivalents and short-term securities, classified as held for sale, as at March 31, 2013 (Note 3)

   $ 566      

Net cash and cash equivalents and short-term securities, continuing operations, as at March 31, 2013

   $         6,700      

 

(1) 

Balances have been restated. Refer to Note 2.

(2) 

Certain derivative cash flows within operating activities have been reclassified to be consistent with the 2013 presentation of these cash flows.

The attached notes form part of these Interim Consolidated Financial Statements.

 

38   Sun Life Financial Inc.    First Quarter 2013   INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Condensed Notes to the Interim Consolidated Financial Statements

 

 

(Unaudited, in millions of Canadian dollars except for per share amounts and where otherwise stated)

1.    Significant Accounting Policies

 

 

Description of Business

Sun Life Financial Inc. (“SLF Inc.”) is a publicly traded company domiciled in Canada and is the holding company of Sun Life Assurance Company of Canada (“Sun Life Assurance”). SLF Inc. and its subsidiaries are collectively referred to as “us”, “our”, “ours”, “we” or “the Company”.

Our Interim Consolidated Financial Statements have been prepared in accordance with IAS 34 Interim Financial Reporting as issued and adopted by the International Accounting Standards Board (“IASB”). We have used accounting policies which are consistent with our accounting policies in our 2012 Annual Consolidated Financial Statements except as described in Note 2. Our Interim Consolidated Financial Statements should be read in conjunction with our 2012 Annual Consolidated Financial Statements, as interim financial statements do not include all the information incorporated in annual consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”).

2.    Changes in Accounting Policies

 

 

2.A New and Amended International Financial Reporting Standards Adopted in 2013

We have adopted the following new and amended standards in the current year.

In May 2011, IFRS 10 Consolidated Financial Statements (“IFRS 10”) was issued, which replaces the consolidation guidance in IAS 27 Consolidated and Separate Financial Statements (“IAS 27”) and SIC-12 Consolidation-Special Purpose Entities. It defines the principle of control, establishes control as the basis for determining which entities are consolidated, and sets out the requirements for the preparation of consolidated financial statements. Under this standard, an investor controls an investee when it has power over the investee, exposure or rights to variable returns from its involvement with the investee, and the ability to use its power over the investee to affect the amount of the investor’s returns. IFRS 10 is effective for annual periods beginning on or after January 1, 2013. We adopted this standard on a retrospective basis on January 1, 2013.

As a result of the adoption of this standard, we have deconsolidated Sun Life Capital Trust and Sun Life Capital Trust II (together, the “SL Capital Trusts”) which issued the Sun Life ExchangEable Capital Securities (“SLEECS”), for all periods presented in our Interim Consolidated Financial Statements. We have deconsolidated the SL Capital Trusts because the primary asset in each of these trusts is a senior debenture issued by us and therefore we do not have exposure or rights to variable returns from our involvement in these entities. This deconsolidation did not have any impact on our Interim Consolidated Statements of Operations or our basic and diluted earnings per share (“EPS”) for the current period or any of the prior periods presented. However, the deconsolidation impacted our Consolidated Statements of Financial Position for the current period and all prior periods presented. The impact of the deconsolidation on the Consolidated Statements of Financial Position for prior periods is shown in the table at the end of this note. Similar adjustments were made in the current period.

The segregated fund assets continue to be reported on the Interim Consolidated Statements of Financial Position as a single line as Investments for account of segregated fund holders since we have legal ownership of these assets. Since the policyholder bears the risks and rewards of the fund’s performance, we continue to present only the fee income earned from the segregated funds and not the investment income earned on these assets that is credited to the policyholder. We have not consolidated the underlying mutual funds that the segregated funds invest in even though in some cases we have power over these funds because the policyholder, not us, is exposed to the variability associated with these funds. In Note 10, we have expanded our disclosures related to the risks associated with our segregated funds by providing disclosure of the composition of the Investments for account of segregated fund holders by type of segregated fund. This standard has not yet been adopted in all jurisdictions that use IFRS and we will continue to monitor the implementation of the standard in other jurisdictions.

In May 2011, IFRS 11 Joint Arrangements (“IFRS 11”) was issued which replaces IAS 31 Interests in Joint Ventures. It requires a party to a joint arrangement to determine the type of arrangement in which it is involved by assessing its rights and obligations from the arrangement. It eliminates the option to use the proportionate consolidation method for joint ventures and requires that the equity method be applied to account for our investment in these entities. This standard is effective for annual periods beginning on or after January 1, 2013. The adoption of this standard did not have a material impact on our Interim Consolidated Financial Statements.

In May 2011, IFRS 12 Disclosure of Interests in Other Entities (“IFRS 12”) was issued, which applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. IFRS 12 requires that an entity disclose information that enables users of financial statements to evaluate the nature of, and risks associated with, its interests in other entities and to evaluate the effects of those interests on its financial position, financial performance and cash flows. We will include the relevant disclosures in our 2013 Annual Consolidated Financial Statements.

 

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   Sun Life Financial Inc.   First Quarter 2013   39


In June 2012, the IASB issued Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12). The amendments clarify the transition guidance in IFRS 10 and provide transitional relief for IFRS 10, IFRS 11 and IFRS 12 by limiting the comparative information requirements to only the preceding comparative period and by removing certain disclosure requirements for the comparative period from IFRS 12. The effective date of these amendments was January 1, 2013, consistent with the effective date of IFRS 10, 11 and 12. We applied these amendments when we adopted IFRS 10 and IFRS 11 on January 1, 2013 and will apply the transitional guidance amendments related to IFRS 12 when we adopt this standard in our 2013 Annual Consolidated Financial Statements.

As a result of the issuance of IFRS 10, IFRS 11 and IFRS 12, both the current IAS 27 and IAS 28 Investments in Associates (“IAS 28”) were amended. The requirements related to separate financial statements will remain in IAS 27 while the requirements related to consolidated financial statements are replaced by IFRS 10. The disclosure requirements currently in IAS 28 are replaced by IFRS 12. The amendments are effective for annual periods beginning on or after January 1, 2013. The amendments to IAS 27 and IAS 28 did not have an impact on our Interim Consolidated Financial Statements.

In May 2011, IFRS 13 Fair Value Measurement (“IFRS 13”) was issued. IFRS 13 defines fair value and sets out a single framework for measuring fair value when fair value is required by other IFRS standards. It also requires disclosures about fair value measurements and expands fair value disclosures to include non-financial assets. This standard is effective for interim and annual periods beginning on or after January 1, 2013. We have included the additional disclosures required by this standard in Note 5 of our Interim Consolidated Financial Statements and additional disclosures will be included in our 2013 Annual Consolidated Financial Statements.

In June 2011, IAS 19 Employee Benefits (“IAS 19”) was amended. Under the amended standard, actuarial gains and losses will no longer be deferred or recognized in net income, but will be recognized immediately in other comprehensive income (“OCI”). Past service costs will be recognized in the period of a plan amendment and the annual expense for a funded plan will include net interest expense or income using the discount rate applied to the net defined benefit asset or liability. The amendments also require enhanced disclosures for defined benefit plans. This amended standard is effective for annual periods beginning on or after January 1, 2013. We adopted this standard on a retrospective basis on January 1, 2013. The adoption of this standard did not have a material impact on our Interim Consolidated Statements of Operations or our EPS for the current period as well as all prior periods presented. As a result of the adoption of this standard, we have a new component of OCI and accumulated OCI for the changes in liabilities for defined benefit plans. The impact of adoption on our Consolidated Statements of Financial Position for prior periods is shown in the table included later in this note.

In June 2011, IAS 1 Presentation of Financial Statements was amended. The amendments require separate presentation within OCI of items which may be subsequently reclassified to net income and items that will not be reclassified to net income. The amendments are effective for annual periods beginning on or after July 1, 2012. We have included these presentation amendments on our Interim Consolidated Financial Statements.

In December 2011, amendments to IFRS 7 Financial Instruments: Disclosures (“IFRS 7”) were issued which require additional disclosures about the effects of offsetting financial assets and financial liabilities and related arrangements. The new disclosures will require entities to disclose gross amounts subject to rights of set off, amounts set off, and the related net credit exposure. The disclosures are intended to help investors understand the effect or potential effect of offsetting arrangements on a company’s financial position. The new disclosures are effective for annual periods beginning on or after January 1, 2013. The adoption of these amendments did not have an impact on our Interim Consolidated Financial Statements as we have provided the appropriate disclosure in our 2012 Annual Consolidated Financial Statements.

In May 2012, the IASB issued Annual Improvements 2009-2011 Cycle, which includes amendments to five IFRSs. The annual improvements process is used to make necessary but non-urgent changes to IFRS that are not included as part of any other project. The amendments clarify guidance and wording or make relatively minor amendments to the standards that address unintended consequences, conflicts or oversights. The amendments issued as part of this cycle must be applied retrospectively and are effective for annual periods beginning on or after January 1, 2013. The adoption of these amendments did not have a material impact on our Interim Consolidated Financial Statements.

 

40   Sun Life Financial Inc.    First Quarter 2013   CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


2.A.i Summary of Impact Upon Adoption of Changes in IFRS

The following tables summarize the impact of adoption of these changes in accounting policies in our Consolidated Statements of Financial Position:

 

As at January 1, 2012    Prior to IAS 19
and IFRS 10
restatement
     IAS 19      IFRS 10      Restated  

Assets

           

Cash, cash equivalent and short-term securities

   $ 8,837       $       $ (8    $ 8,829   

Other invested assets

   $ 1,348       $       $ 3       $ 1,351   

Other assets

   $ 2,885       $ (54    $ 9       $ 2,840   

Deferred tax assets

   $ 1,694       $ 94       $       $ 1,788   

Liabilities and equity

           

Liabilities

           

Deferred tax liabilities

   $ 7       $ 1       $       $ 8   

Other liabilities

   $     8,011       $     244       $ (1    $ 8,254   

Senior debentures

   $ 2,149       $       $     700       $     2,849   

Innovative capital instruments

   $ 695       $       $ (695    $   

Equity

           

Retained earnings and accumulated other comprehensive income(1)

   $ 5,304       $ (205    $       $ 5,099   

 

(1) 

Impact of adoption of IAS 19 was a decrease to retained earnings and accumulated OCI of $26 and $179, respectively.

 

As at March 31, 2012    Prior to IAS 19
and IFRS 10
restatement
     IAS 19      IFRS 10      Restated  

Assets

           

Cash, cash equivalent and short-term securities

   $ 8,271       $       $ (8    $ 8,263   

Other invested assets

   $ 1,403       $       $ 3       $ 1,406   

Other assets

   $ 3,378       $ (54    $ 9       $ 3,333   

Deferred tax assets

   $ 1,458       $ 94       $       $ 1,552   

Liabilities and equity

           

Liabilities

           

Deferred tax liabilities

   $ 6       $ 1       $       $ 7   

Other liabilities

   $     7,738       $     244       $ (1    $ 7,981   

Senior debentures

   $ 2,149       $       $     700       $     2,849   

Innovative capital instruments

   $ 695       $       $ (695    $   

Equity

           

Retained earnings and accumulated other comprehensive income(1)

   $ 5,772       $ (205    $       $ 5,567   

 

(1) 

Impact of adoption of IAS 19 was a decrease to retained earnings and accumulated OCI of $26 and $179, respectively.

 

As at December 31, 2012    Prior to IAS 19
and IFRS 10
restatement
     IAS 19      IFRS 10      Restated  

Assets

           

Cash, cash equivalent and short-term securities

   $ 7,034       $       $ (8    $ 7,026    

Other invested assets

   $ 1,269       $       $ 3       $ 1,272   

Other assets

   $ 2,702       $ (54    $ 9       $ 2,657   

Deferred tax assets

   $ 1,005       $ 94       $       $ 1,099   

Liabilities and equity

           

Liabilities

           

Deferred tax liabilities

   $ 5       $ 1       $       $ 6   

Other liabilities

   $     7,925       $ 244       $       $     8,169   

Senior debentures

   $ 2,149       $       $ 700       $ 2,849   

Innovative capital instruments

   $ 696       $       $     (696    $   

Equity

           

Retained earnings and accumulated other comprehensive income(1)

   $ 6,130       $     (205    $       $ 5,925   

 

(1) 

Impact of adoption of IAS 19 was a decrease to retained earnings and accumulated OCI of $26 and $179, respectively.

 

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   Sun Life Financial Inc.   First Quarter 2013   41


3.    Held for Sale Classification and Discontinued Operation

 

 

On December 17, 2012, SLF Inc. and certain of its subsidiaries entered into a definitive stock purchase agreement with Delaware Life Holdings, LLC (the “purchaser”), a Delaware limited liability company, pursuant to which we agreed to sell our U.S. Annuities business and certain of our U.S. life insurance businesses to the purchaser for a base purchase price of US$1,350 million, which will be adjusted to reflect the performance of the business through closing. The transaction will consist primarily of the sale of 100% of the shares of Sun Life Assurance Company of Canada (U.S.) (“Sun Life (U.S.)”), which includes the U.S. domestic variable annuity, fixed annuity and fixed indexed annuity products, corporate and bank-owned life insurance products and variable life insurance products. This transaction will include the transfer of certain related operating assets, systems and employees that support these businesses. The transaction is subject to regulatory approvals and other closing conditions and is expected to close by the end of the second quarter of 2013.

The assets and liabilities of the disposal group are comprised almost entirely of financial assets and liabilities that are not within the scope of the measurement requirements of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. IFRS 5 does not address the situation which arises when the carrying amount of scoped-in non-current assets are less than the amount by which a disposal group’s carrying amount exceeds its fair value less costs to sell. We have concluded that it is appropriate to recognize the loss on disposition at the time the transaction is completed and the related assets and liabilities are derecognized. Loss recognition at that time will coincide with the transfer of risks to the purchaser. The loss will be calculated by netting the adjusted purchase price against the net carrying value of the assets and liabilities classified as held for sale and will include the cumulative foreign currency translation difference for the operation. The adjusted purchase price will be derived from the base purchase price of US$1,350 million subject to purchase price adjustments based on business results from September 30, 2012 to the date of sale measured on a U.S. statutory basis and other agreed terms. As at March 31, 2013, the net carrying value of assets less liabilities classified as held for sale is $2,654, and the cumulative foreign currency translation difference for the operation is a loss of $43. The amount of the loss will be subject to several other adjustments to reflect closing price adjustments, pre-closing transactions, closing costs, and certain tax adjustments. The net carrying value of assets and liabilities classified as held for sale as at March 31, 2013 do not include such adjustments that relate to transactions that will occur subsequent to March 31, 2013.

As a result of the stock purchase agreement referred to above, we are committed to sell the U.S. Annuities business included as a part of the Sun Life Financial United States (“SLF U.S.”) segment. The operations and cash flows of the U.S. Annuities business can be clearly distinguished, operationally and for financial reporting purposes, from the rest of our operations. The financial results of the U.S. Annuities business have been disclosed publicly and have been separately reported to key management personnel. In addition, the U.S. Annuities business is comprised of two CGUs. As this transaction is part of a single coordinated plan to dispose of a separate major line of business within our U.S. reportable business segment, it meets the criteria to be presented as a discontinued operation. Other than the U.S. Annuities business, Sun Life (U.S.)’s operations also include certain U.S. life insurance businesses, including corporate and bank-owned life insurance products and variable life insurance products. These businesses are also presented as part of the discontinued operation but are not a significant component of the sale.

The results of operations relating to our U.S. Annuities business and certain life insurance businesses (the “U.S. Annuity Business”) in SLF U.S. are reflected as a discontinued operation in our Interim Consolidated Statements of Operations for all periods presented. The related assets and liabilities are separately presented as assets and liabilities classified as held for sale respectively in our Interim Consolidated Statements of Financial Position as at March 31, 2013.

Discontinued Operation

Common Shareholders’ Net Income (Loss) from Discontinued Operation

The components of the common shareholders’ net income (loss) from discontinued operation included in our Interim Consolidated Statements of Operations are as follows:

 

For the three months ended March 31,    2013      2012  

Net premiums

   $ 76       $ 76   

Net investment income (loss)

     (194      (265

Fee income

     146         154   

Total revenue

     28         (35

Gross claims and benefits paid

     422         481   

Changes in insurance / investment contract liabilities and reinsurance assets, net of reinsurance
recoveries

     (605      (1,136

Net transfer to (from) segregated funds

     (2      124   

Other expenses

     59         74   

Total benefits and expenses

     (126      (457

Income (loss) before income taxes

     154         422   

Income tax expense (benefit)

     51         141   

Total net income (loss) from discontinued operation

     103         281   

Shareholders’ net income (loss) from discontinued operation

     103         281   

Common shareholders’ net income (loss) from discontinued operation

   $     103       $     281   

 

42   Sun Life Financial Inc.    First Quarter 2013   CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Cash Flows from Discontinued Operation

The details of the cash flows from the discontinued operation included in our Interim Consolidated Statements of Cash Flows are as follows:

 

For the three months ended March 31,    2013     2012  

Net cash provided by (used in) operating activities

   $ 47         $ (470 )     

Net cash provided by (used in) financing activities

     (5     (4

Changes due to fluctuations in exchange rates

     9        (15

Increase (decrease) in cash and cash equivalents

   $             51      $          (489

Disposal Group Classified as Held for Sale

Assets and Liabilities of the Disposal Group Classified as Held for Sale

The composition of the assets and liabilities of the disposal group classified as held for sale included in our Interim Consolidated Statements of Financial Position are as follows:

 

As at    March 31,
2013
     December 31,
2012
 

Assets

     

Cash, cash equivalents and short-term securities

   $ 566       $ 574   

Debt securities

     10,343         10,449   

Equity securities

     49         47   

Mortgages and loans

     2,188         2,234   

Derivative assets

     224         309   

Other invested assets

     26         25   

Policy loans

     564         559   

Investment properties

     126         150   

Invested assets

     14,086         14,347   

Other assets

     259         156   

Reinsurance assets

     155         158   

Deferred tax assets

     396         406   

Total general fund assets

     14,896         15,067   

Investments for account of segregated fund holders

     28,739         27,668   

Total assets of disposal group classified as held for sale

   $     43,635       $     42,735   

Liabilities

     

Insurance contract liabilities

   $ 10,911       $ 11,238   

Investment contract liabilities

     980         957   

Derivative liabilities

     245         265   

Other liabilities

     106         229   

Total general fund liabilities

     12,242         12,689   

Insurance contract for account of segregated fund holders

     28,739         27,668   

Total liabilities of disposal group classified as held for sale

   $ 40,981       $ 40,357   

Accumulated Other Comprehensive Income (Loss) of the Disposal Group Classified as Held for Sale

The components of accumulated OCI, net of taxes, of disposal group classified as held for sale included in our Interim Consolidated Statements of Changes in Equity are as follows:

 

As at    March 31,
2013
     December 31,
2012
 

Unrealized gains (losses) on available-for-sale assets

   $ 64       $            72   

Unrealized cumulative translation differences, net of hedging activities

         (73          (132

Total accumulated other comprehensive income (loss) of disposal group classified as held for sale

   $ (9    $ (60

 

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   Sun Life Financial Inc.   First Quarter 2013   43


Asset-Backed Securities Supporting the U.S. Annuity Business

Before the closing of the transaction, we expect to substitute replacement assets for certain asset-backed securities supporting the general fund liabilities for fixed annuities in SLF U.S. The majority of these asset-backed securities will be reallocated to support other lines of business in the continuing operations of the Company and we expect a portion to be sold. As we have not reached a conclusion as to which replacement assets should be substituted for the asset-backed securities and to which lines of business the asset-backed securities should be reallocated, we have included the asset-backed securities in the held for sale classification as they currently support the general fund liabilities of the U.S. Annuity Business.

The carrying value of the asset-backed securities supporting the U.S. Annuity Business by credit rating is shown in the following table:

 

As at March 31, 2013        

Total asset-backed

securities supporting
the U.S. Annuity
Business

 

AAA

       $         10   

AA

       28   

A

       88   

BBB

       150   

BB and lower

         786   

Total asset-backed securities supporting the U.S. Annuity Business

     $    1,062   

The following table presents the fair value hierarchy of the asset-backed securities supporting the U.S. Annuity Business included in the preceding fair value hierarchy of financial instruments classified as held for sale:

 

As at March 31, 2013    Level 1      Level 2      Level 3      Total  

Asset-backed securities:

           

Commercial mortgage-backed securities

   $       $ 412       $ 1       $ 413   

Residential mortgage-backed securities

             381         44         425   

Collateralized debt obligations

             2         23         25   

Other

             175         24         199   

Total asset-backed securities supporting the U.S. Annuity Business

   $     –       $     970       $     92       $     1,062   

4.    Segmented Information

 

 

We have five reportable segments: Sun Life Financial Canada (“SLF Canada”), SLF U.S., MFS Investment Management (“MFS”), Sun Life Financial Asia (“SLF Asia”) and Corporate. These reportable segments operate in the financial services industry and reflect our management structure and internal financial reporting. Corporate includes the results of our U.K. business unit and our Corporate Support operations, which include our run-off reinsurance operations as well as investment income, expenses, capital and other items not allocated to our other business groups. In the fourth quarter of 2012, the indefinite life intangible assets were transferred from Corporate to SLF Canada and the finite life intangible assets were transferred from Corporate to MFS.

Revenues from our reportable segments are derived principally from life and health insurance, investment management and annuities and mutual funds. Revenues not attributed to the strategic business units are derived primarily from Corporate investments and earnings on capital. Transactions between segments are executed and priced on an arm’s-length basis in a manner similar to transactions with third parties. These transactions consist primarily of internal financing agreements. They are measured at fair values prevailing when the arrangements are negotiated. Intersegment revenue consists of interest income and fee income and is presented in the consolidation adjustments column in the tables that follow.

Intersegment transactions consist primarily of internal financing agreements which are measured at fair values prevailing when the arrangements are settled. Intersegment investment income consists primarily of interest paid by SLF U.S. to Corporate. Intersegment fee income is primarily asset management fees paid by SLF Canada and Corporate to MFS, and by MFS to SLF U.S.

 

44   Sun Life Financial Inc.    First Quarter 2013   CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Results by segment for the three months ended March 31 are as follows:

 

     SLF
Canada
    SLF
U.S.
    MFS     SLF
Asia
    Corporate    

Consolidation

adjustments

    Total  

2013

             

Gross premiums:

             

Annuities

  $ 294      $ 125      $      $      $ 57      $      $ 476   

Life insurance

    807        542               171        27               1,547   

Health insurance

    978        402               2        3               1,385   

Total gross premiums

    2,079        1,069               173        87               3,408   

Less: ceded premiums

    1,245        111               13        6               1,375   

Net investment income (loss)

    472        1               328        125        (13     913   

Fee income

    193        36        553        40        35        (13     844   

Total revenue

    1,499        995        553        528           241        (26     3,790   

Less:

             

Total benefits and expenses

    1,176        934        450        468        270        (26        3,272   

Income tax expense (benefit)

    53        (5     54        9        (26            –        85   

Total net income (loss) from continuing operations

  $ 270      $ 66      $ 49      $ 51      $ (3   $      $ 433   

Total net income (loss) from discontinued operation (Note 3)

  $      $ 115      $      $      $ (12   $      $ 103   

2012

             

Gross premiums:

             

Annuities

  $ 499      $ 54      $      $      $ 56      $      $ 609   

Life insurance

    811        432               157        26               1,426   

Health insurance

    891        375               3        2               1,271   

Total gross premiums

      2,201           861               160        84               3,306   

Less: ceded premiums

    1,185        105               12        6               1,308   

Net investment income (loss)

    388        (61     3        170        (20     (18     462   

Fee income

    186        42           434        31        36        (14     715   

Total revenue

    1,590        737        437           349        94        (32     3,175   

Less:

             

Total benefits and expenses

    1,334        571        348        311        138        (32     2,670   

Income tax expense (benefit)

    27        22        40        9        (31            67   

Total net income (loss) from continuing operations

  $ 229      $ 144      $ 49      $ 29      $ (13   $      $ 438   

Total net income (loss) from discontinued operation (Note 3)

  $      $ 281      $      $      $      $      $ 281   

5.    Financial Investments and Related Net Investment Income

 

 

We invest primarily in debt securities, equity securities, mortgages and loans, derivatives, other invested assets and investment properties.

5.A Fair Value Methodologies and Assumptions

The fair value methodologies and assumptions can be found in Note 5 of our 2012 Annual Consolidated Financial Statements.

5.A.i Fair Value Hierarchy of Assets and Liabilities

We categorize our assets and liabilities carried at fair value, based on the priority of the inputs to the valuation techniques used to measure fair value, into a three level fair value hierarchy as follows:

Level 1: Fair value is based on unadjusted quoted prices for identical assets or liabilities in an active market. The types of assets and liabilities classified as Level 1 generally include cash and cash equivalents, certain U.S. government and agency securities, exchange traded equity securities and certain segregated and mutual fund units held for account of segregated fund holders.

 

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   Sun Life Financial Inc.   First Quarter 2013   45


Level 2: Fair value is based on quoted prices for similar assets or liabilities in active markets, valuation that is based on significant observable inputs, or inputs that are derived principally from or corroborated with observable market data through correlation or other means. The types of assets and liabilities classified as Level 2 generally include Canadian federal, provincial and municipal government, other foreign government and corporate debt securities, certain asset-backed securities, over the counter derivatives, and certain segregated and mutual fund units held for account of segregated fund holders.

Level 3: Fair value is based on valuation techniques that require one or more significant inputs that are not based on observable market inputs. These unobservable inputs reflect our expectations about the assumptions market participants would use in pricing the asset or liability. The types of assets and liabilities classified as Level 3 generally include certain asset-backed securities, certain other invested assets, investment properties and investment contract liabilities.

Our assets and liabilities that are carried at fair value on a recurring basis by hierarchy level are as follows:

 

As at March 31, 2013    Level 1      Level 2      Level 3      Total  

Assets

           

Cash, cash equivalents and short-term securities

   $ 5,792       $ 934       $       $ 6,726   

Debt securities – fair value through profit or loss(1)

     990         41,340         1,071         43,401   

Debt securities – available-for-sale(1)

     441         10,416         56         10,913   

Equity securities – fair value through profit or loss

     3,090         1,111         113         4,314   

Equity securities – available-for-sale

     795         100                 895   

Derivative assets

     21         1,822         7         1,850   

Other invested assets

     383         55         560         998   

Investment properties

                     6,026         6,026   

Total invested assets

   $ 11,512       $ 55,778       $ 7,833       $ 75,123   

Investments for account of segregated fund holders

   $ 24,513       $ 42,997       $ 438       $ 67,948   

Total assets measured at fair value

   $     36,025       $     98,775       $     8,271       $     143,071   

Liabilities

           

Investment contract liabilities

   $       $ 11       $ 6       $ 17   

Derivative liabilities

     14         607         12         633   

Total liabilities measured at fair value

   $ 14       $ 618       $ 18       $ 650   

 

(1) 

See tables below for further details.

Debt securities – fair value through profit or loss consist of the following:

 

As at March 31, 2013    Level 1      Level 2      Level 3      Total  

Canadian federal government

   $       $ 1,598       $       $ 1,598   

Canadian provincial and municipal government

             9,264         24         9,288   

U.S. government and agency

     990         41         11         1,042   

Other foreign government

             4,714         70         4,784   

Corporate

             24,777         426         25,203   

Asset-backed securities:

           

Commercial mortgage-backed securities

             213         499         712   

Residential mortgage-backed securities

             298         2         300   

Collateralized debt obligations

             24         26         50   

Other

             411         13         424   

Total debt securities – fair value through profit or loss

   $           990       $     41,340       $     1,071       $       43,401   

Debt securities – available-for-sale consist of the following:

 

As at March 31, 2013    Level 1      Level 2      Level 3      Total  

Canadian federal government

   $       $ 1,187       $       $ 1,187   

Canadian provincial and municipal government

             327                 327   

U.S. government and agency

     441         54                 495   

Other foreign government

             467                 467   

Corporate

             7,896         15         7,911   

Asset-backed securities:

           

Commercial mortgage-backed securities

             154         12         166   

Residential mortgage-backed securities

             106                 106   

Collateralized debt obligations

                     15         15   

Other

             225         14         239   

Total debt securities – available-for-sale

   $           441       $     10,416       $           56       $       10,913   

 

46   Sun Life Financial Inc.    First Quarter 2013   CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The following table provides a reconciliation of the beginning and ending balances for assets and liabilities that are categorized in Level 3 for the three months ending March 31, 2013:

 

     Beginning
balance
    Included
in  net
income(1)(3)
    Included
in OCI(3)
    Purchases     Sales     Settlements     Transfers
into
Level  3(2)
    Transfers
(out) of
Level 3(2)
    Foreign
currency
translation(4)
    Ending
balance
    Gains
(losses)
included in
earnings
relating to
instruments
still held at
the reporting
date(1)
 

Assets

                     

Debt securities – fair value through profit or loss

      $ 1,141              $ 7          $              $ 8      $ (1           $ (10       $ 74          $     (127           $ (21   $ 1,071              $ 7   

Debt securities – available-for-sale

    123        1                      (2     (10            (56            56          

Equity securities – fair value through profit or loss

    110        1                                                  2        113        4   

Derivative assets

    7                                                                7          

Other invested assets

    547        8        (2     23        (16                                 560          

Investment properties

    5,942        17               77        (39                          29        6,026        32   

Total invested assets

      $ 7,870              $ 34          $ (2           $ 108      $ (58           $ (20       $ 74          $ (183           $ 10      $ 7,833              $ 43   

Investments for account of segregated fund holders

      $ 427              $ 4          $              $ 18      $ (1           $          $ 4          $ (3           $     (11   $ 438              $   

Total assets measured at fair value

      $     8,297              $     38          $     (2           $     126      $     (59           $     (20       $     78          $ (186           $ (1   $     8,271              $     43   

Liabilities(5)

                     

Investment contract liabilities

      $ 7              $          $              $      $              $          $          $              $ (1   $ 6              $   

Derivative liabilities

    16        (4                                                      12          

Total liabilities measured at fair value

      $ 23              $ (4       $              $      $              $          $          $              $ (1   $ 18              $   

 

(1) 

Included within Net investment income (loss) in our Interim Consolidated Statements of Operations.

(2) 

Transfers into Level 3 occur when the inputs used to price the assets and liabilities lack observable market data and as a result, no longer meet the Level 1 or 2 definitions at the reporting date. In addition, transfers out of Level 3 occur when the pricing inputs become more transparent and satisfy the Level 1 or 2 criteria and are primarily the result of observable market data being available at the reporting date, thus removing the requirement to rely on inputs that lack observability. If an asset or a liability is transferred into and out of Level 3 during the same period, it is not included in the above table.

(3) 

Total gains and losses in net income (loss) and OCI are calculated assuming transfers into or out of Level 3 occur at the beginning of the period. For an asset and liability that transfers into Level 3 during the reporting period, the entire change in fair value for the period is included in the table above. For transfers out of Level 3 during the reporting period, the change in fair value for the period is excluded from the table above.

(4) 

Foreign currency translation relates to the foreign exchange impact of translating from functional currencies of Level 3 assets and liabilities in foreign subsidiaries to Canadian dollars.

(5) 

For liabilities, gains are indicated in negative numbers.

The fair value of investment properties is determined by using the discounted cash flows methodology, as described in our 2012 Annual Consolidated Financial Statements. The key unobservable inputs used in the valuation of investment properties as at March 31, 2013 include the following:

 

 

Estimated rental value: The estimated rental value (per square feet, per annum) is estimated based on gross income less vacancy, non-recoverable expenses, collection losses, lease incentives, maintenance cost, agent and commission costs and other operating and management expenses. An increase (decrease) in estimated rental value would result in a higher (lower) fair value. The estimated rental value varies depending on the property types, which include retail, office and industrial properties. The current estimated rental value ranges from $12 to $35 for retail and office properties and from $3.50 to $6.50 for industrial properties.

 

Rental growth rate: The rental growth rate (per annum) is typically estimated based on expected market behavior, which is influenced by the type of property and geographic region of the property. An increase (decrease) in rental growth rate would result in a higher (lower) fair value. The current rental growth rate ranges from 1% to 3%.

 

Long term vacancy rate: The long term vacancy rate is typically estimated based on expected market behavior, which is influenced by the type of property and geographic region of the property. An increase (decrease) in long term vacancy rate would result in a lower (higher) fair value. The current long term vacancy rate ranges from 2% to 10%.

 

Discount rate: The discount rate is derived from market activity across various property types and geographic regions and is a reflection of the expected rate of return to be realized on the investment over the next 10 years. An increase (decrease) in the discount rate would result in a lower (higher) fair value. The current discount rate ranges from 6% to 9.5%.

 

Terminal capitalization rate: The terminal capitalization rate is derived from market activity across various property types and geographic regions and is a reflection of the expected rate of return to be realized on the investment over the remainder of its life after the 10 year period. An increase (decrease) in the terminal capitalization rate would result in a lower (higher) fair value. The current terminal capitalization rate ranges from 5.5% to 9%.

Changes in the estimated rental value are positively correlated with changes in the rental growth rate. Changes in the estimated rental value are negatively correlated with changes in the long term vacancy rate, the discount rate and the terminal capitalization rate.

 

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   Sun Life Financial Inc.   First Quarter 2013   47


5.B Cash, Cash Equivalents and Short-Term Securities

Cash, cash equivalents and short-term securities presented in the Interim Consolidated Statements of Financial Position and Net cash, cash equivalents and short-term securities presented in the Interim Consolidated Statements of Cash Flows consist of the following:

 

As at         March 31,
2013
     December 31,
2012(1)
     March 31,
2012(1)
 

Cash

     $ 1,230       $ 1,475       $ 1,168   

Cash equivalents

       2,910         1,980         2,999   

Short-term securities

         2,586         3,571         4,096   

Cash, cash equivalents and short-term securities

     6,726         7,026         8,263   

Less: Bank overdraft, recorded in Other liabilities

     26         3         60   

Net cash, cash equivalents and short-term securities

   $     6,700       $     7,023       $       8,203   

 

(1) 

Balances have been restated. Refer to Note 2.

5.C Asset Classification

The carrying values of our debt securities, equity securities and other invested assets presented in our Interim Consolidated Statements of Financial Position consist of the following:

 

As at   

Fair value
through profit or
loss

    

Available-

for-sale

     Other(1)      Total  

March 31, 2013

             

Debt securities

         $ 43,401       $ 10,913       $       $ 54,314   

Equity securities

         $ 4,314       $ 895       $       $ 5,209   

Other invested assets

         $ 881       $ 117       $        444       $ 1,442   

December 31, 2012

             

Debt securities

         $ 43,773       $ 10,589       $       $     54,362   

Equity securities

         $ 4,169       $ 857       $       $ 5,026   

Other invested assets

         $ 786       $ 111       $ 375 (2)     $ 1,272   

March 31, 2012

             

Debt securities

         $     50,794       $     11,052       $       $ 61,846   

Equity securities

         $ 4,009       $ 910       $       $ 4,919   

Other invested assets

           $ 857       $ 162       $ 387 (2)     $ 1,406   

 

(1) 

Other consists primarily of investments accounted for using the equity method of accounting.

(2) 

Balances have been restated. Refer to Note 2.

5.D Change in Fair Value Through Profit or Loss Assets and Liabilities

Change in fair value through profit or loss assets and liabilities recorded to net income for the three months ended March 31 consist of the following:

 

For the three months ended
March 31,
             2013      2012  

Cash, cash equivalents and short-term securities

       $ 1       $ 3   

Debt securities

         (102      (426

Equity securities

         126         162   

Derivative investments

         (423      (442

Other invested assets

         24         23   

Investment properties

             26         110   

Total change in fair value through profit or loss assets and liabilities

   $       (348    $         (570

5.E Impairment of Available-For-Sale Assets

We wrote down $6 and $1 of available-for-sale assets recorded at fair value during the three months ended March 31, 2013 and 2012, respectively.

 

48   Sun Life Financial Inc.    First Quarter 2013   CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


6.    Financial Instrument Risk Management

 

 

Our risk management policies and procedures for managing risks related to financial instruments and insurance can be found in Notes 6 and 7, respectively, of our 2012 Annual Consolidated Financial Statements.

Our financial instrument market risk sensitivities are included in our Management Discussion and Analysis (“MD&A”) for the three months ended March 31, 2013. The shaded text and tables in the Risk Management section of the MD&A represent our disclosures on market risk sensitivities in accordance with IFRS 7 and include discussions on how we measure our risk and our objectives, policies and methodologies for managing this risk. Therefore, the shaded text and tables represent an integral part of these Interim Consolidated Financial Statements.

7.    Insurance Contract Liabilities and Investment Contract Liabilities

 

 

7.A Insurance Contract Liabilities

7.A.i Changes in Insurance Contract Liabilities and Reinsurance Assets

Changes in Insurance contract liabilities and Reinsurance assets for the period are as follows:

 

For the three months ended March 31, 2013    Insurance
contract
liabilities
     Reinsurance
assets
     Net  

Balances as at January 1,

   $ 82,202       $ 2,984       $ 79,218   

Change in balances on in-force policies

     (291      85         (376

Balances arising from new policies

     531         23         508   

Changes in assumptions or methodology

     (18      (1      (17

Increase (decrease) in Insurance contract liabilities and Reinsurance assets

     222         107         115   

Balances before the following:

     82,424         3,091         79,333   

Foreign exchange rate movements

     350         54         296   

Balances before Other policy liabilities and assets

     82,774         3,145         79,629   

Other policy liabilities and assets

     5,139         225         4,914   

Total Insurance contract liabilities and Reinsurance assets

   $     87,913       $     3,370       $     84,543   

 

For the three months ended March 31, 2012(1)   

Insurance

contract

liabilities

    

Reinsurance

assets

     Net  

Balances as at January 1,

   $     91,425       $     3,275       $     88,150   

Change in balances on in-force policies

     (1,827      141         (1,968

Balances arising from new policies

     639         28         611   

Changes in assumptions or methodology

     25         31         (6

Increase (decrease) in Insurance contract liabilities and Reinsurance assets

     (1,163      200         (1,363

Balances before the following:

     90,262         3,475         86,787   

Foreign exchange rate movements

     (682      (42      (640

Balances before Other policy liabilities and assets

     89,580         3,433         86,147   

Other policy liabilities and assets

     5,241         218         5,023   

Total Insurance contract liabilities and Reinsurance assets

   $ 94,821       $ 3,651       $ 91,170   

 

(1) 

2012 balances are on a combined basis. For discontinued operation, see Note 3.

 

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   Sun Life Financial Inc.   First Quarter 2013   49


7.B Investment Contract Liabilities

7.B.i Changes in Investment Contract Liabilities

Changes in investment contract liabilities without discretionary participation features (“DPF”) are as follows:

 

For the three months ended
March 31, 2013
            

Measured at

fair value

    

Measured at

amortized cost

 

Balances as at January 1,

       $ 35       $     1,772   

Deposits

                 139   

Interest

                 7   

Withdrawals

         (14      (93

Fees

                    –         (1

Other

         (4      5   

Foreign exchange rate movements

                 1   

Balances as at March 31

       $ 17       $ 1,830   
For the three months ended
March 31, 2012(1)
            

Measured at

fair value

    

Measured at

amortized cost

 

Balances as at January 1,

       $ 966       $ 1,620   

Deposits

                 102   

Interest

         2         9   

Withdrawals

         (19      (64

Other

                 4   

Foreign exchange rate movements

         (19      (3

Balances as at March 31

       $ 930       $ 1,668   

 

(1) 

2012 balances are on a combined basis. For discontinued operation, see Note 3.

Changes in investment contract liabilities with DPF are as follows:

 

For the three months ended March 31,         2013      2012  

Balances as at January 1,

     $        496       $         487   

Change in liabilities on in-force policies

       (8        

Liabilities arising from new policies

         17         6   

Increase (decrease) in liabilities

         9         6   

Liabilities before the following:

       505         493   

Foreign exchange rate movements

         6         (8

Balances as at March 31

       $ 511       $ 485   

7.C Gross Claims and Benefits Paid

Gross claims and benefits paid consist of the following:

 

For the three months ended March 31,         2013      2012  

Maturities and surrenders

     $ 696       $ 682   

Annuity payments

       282         277   

Death and disability benefits

       736         694   

Health benefits

       952         926   

Policyholder dividends and interest on claims and deposits

     245         223   

Total gross claims and benefits paid

       $     2,911       $     2,802   

 

50   Sun Life Financial Inc.    First Quarter 2013   CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


8.    Income Tax Expense (Benefit)

 

 

Our effective income tax rate differs from the combined Canadian federal and provincial statutory income tax rate as follows:

 

For the three months ended March 31,            2013              2012  
                %                  %   

Total net income (loss)

   $     433          $     438      

Add: Income tax expense (benefit)

     85                  67            

Total net income (loss) before income taxes

   $ 518                $ 505            

Taxes at the combined Canadian federal and provincial statutory income tax rate

   $ 137         26.5       $ 134         26.5   

Increase (decrease) in rate resulting from:

           

Higher (lower) effective rates on income subject to taxation in foreign jurisdictions

     (14      (2.7      (28      (5.5

Tax (benefit) cost of unrecognized tax losses

                     (3      (0.6

Tax exempt investment income

     (39      (7.5      (41      (8.1

Tax rate and other legislative changes(1)

                     4         0.8   

Adjustments in respect of prior periods, including resolution of tax disputes

     4         0.8         (2      (0.4

Other

     (3      (0.7      3         0.6   

Total tax expense (benefit) and effective income tax rate

   $ 85         16.4       $ 67         13.3   

 

(1) 

The net impact of new tax legislation enacted in the U.K. in March 2012 reduced the statutory tax rate from 25% to 24% effective April 1, 2012.

In 2006 and later periods the Canadian federal government and certain provinces enacted legislation reducing corporate income tax rates. As a result of these enactments, our statutory income tax rate declined to 26.5% in 2012 and 2013.

Statutory tax rates in the jurisdictions in which we conduct business range from 0% to 35% which creates a tax rate differential and corresponding tax provision difference compared to the Canadian federal and provincial statutory rate when applied to foreign income not subject to tax in Canada. These differences are reported in the line Higher (lower) effective rates on income subject to taxation in foreign jurisdictions.

For the three months ended March 31, 2013, the benefit in line Higher (lower) effective rates on income subject to taxation in foreign jurisdictions of $14 ($28 for the three months ended March 31, 2012) reflects the impact of higher earnings in lower tax jurisdictions.

Our benefit of lower taxes on investment income for the three months ended March 31, 2013 amounted to $39 ($41 for the three months ended March 31, 2012) which included a tax benefit of $3 ($12 for the three months ended March 31, 2012) related the appreciation of investment properties in Canada.

9.    Capital Management

 

 

9.A Capital and Capital Transactions

Our capital base is structured to exceed minimum regulatory and internal capital targets and maintain strong credit and financial strength ratings while maintaining a capital efficient structure. We strive to achieve an optimal capital structure by balancing the use of debt and equity financing. 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 group level under the principles appropriate to the jurisdiction in which each operates. We manage the capital for all of our international subsidiaries on a local statutory basis in a manner commensurate with their individual risk profiles. Further details on our capital and how it is managed are included in Note 23 of our 2012 Annual Consolidated Financial Statements.

Sun Life Assurance is subject to the Minimum Continuing Capital and Surplus Requirements (“MCCSR”) of the Office of the Superintendent of Financial Institutions, Canada (“OSFI”). Sun Life Assurance’s MCCSR ratio as at March 31, 2013 was above the minimum levels that would require any regulatory or corrective action. The risk-based capital of Sun Life (U.S.), our principal operating subsidiary in the United States, was above the minimum level as at March 31, 2013. In addition, other foreign subsidiaries of SLF Inc. that must comply with local capital or solvency requirements in the jurisdiction in which they operate maintained capital levels above minimum local requirements as at March 31, 2013.

As at January 1, 2013, Sun Life Assurance elected the phase-in of the impact on available capital of adopting the revisions to IAS 19 relating to cumulative changes in liabilities for defined benefit plans, as per OSFI’s 2013 MCCSR Guideline. Sun Life Assurance will phase in a reduction of approximately $155 to its available capital over eight quarters, ending in the fourth quarter of 2014.

The 2013 MCCSR Guideline reduced the lapse risk capital requirement, effective this quarter. The reduced requirement will be immediately implemented with no transition. The impact to the MCCSR ratio for Sun Life Assurance is expected to be an increase of three percentage points.

 

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   Sun Life Financial Inc.   First Quarter 2013   51


Our capital base consists mainly of common shareholders’ equity, participating policyholders’ equity, preferred shareholders’ equity and certain other capital securities that qualify as regulatory capital.

9.B Significant Capital Transactions

Dividend Reinvestment and Share Purchase Plan

In the first quarter of 2013, under the dividend reinvestment and share purchase plan (“DRIP”), SLF Inc. issued 2.4 million common shares (3.0 million common shares in 2012) from treasury at discounts of 2% to the average market price, as determined in accordance with the DRIP, for dividend reinvestments and issued an insignificant number of common shares from treasury at no discount for optional cash purchases.

10.    Segregated Funds

 

 

We have sold segregated fund products, including variable annuities and unit-linked products, within Canada, the U.S., the United Kingdom and Asia. Under these contracts, the benefit amount is contractually linked to the fair value of the investments in the particular segregated fund. Policyholders can select from a variety of categories of segregated fund investments. Although the underlying assets are registered in our name and the segregated fund contract holder has no direct access to the specific assets, the contractual arrangements are such that the segregated fund policyholder bears the risk and rewards of the funds’ investment performance. Therefore, net realized gains and losses, other net investment income earned and expenses incurred on the segregated funds are attributable to policyholders and not to us. However, certain contracts include guarantees from us. We are exposed to equity market risk and interest rate risk as a result of these guarantees. Further details on these guarantees and our risk management activities related to these guarantees are included in the “Risk Management” section of the MD&A.

We derive fee income from segregated funds. Market value movements in the investments held for segregated fund holders impact the management fees earned on these funds.

The segregated fund types offered, by percentage of total investments for account of segregated fund holders, from our continuing operations only, have been in the following ranges at January 1, 2012 and December 31, 2012:

 

Type of Fund    %  

Money Market

     5-10   

Fixed Income

     10-15   

Balanced

     35-40   

Equity

     40-45   

Money market funds include investments that have a term to maturity of less than one year. Fixed income funds are funds that invest primarily in investment grade fixed income securities and where less than 25% can be invested in diversified equities or high-yield bonds. Balanced funds are a combination of fixed income securities with a larger equity component. The fixed income component is greater than 25% of the portfolio. Equity consists primarily of broad based diversified funds that invest in a well-diversified mix of Canadian, U.S. or global equities. Other funds in this category include low volatility funds, intermediate volatility funds and high volatility funds.

10.A Investments for Account of Segregated Fund Holders

The carrying value of investments held for segregated fund holders are as follows:

 

As at   

March 31,

2013

    

December 31,

2012

    

March 31,

2012

 

Segregated and mutual fund units

   $     55,673       $     53,363 (1)     $     74,361 (1) 

Equity securities

     8,738         8,060 (1)       8,067 (1) 

Debt securities

     2,766         2,797         8,704   

Cash, cash equivalents and short term securities

     488         558         2,564   

Investment properties

     267         276         313   

Mortgages

     18         18         21   

Other assets

     211         100         2,982   

Total assets

   $ 68,161       $ 65,172       $ 97,012   

Less: Liabilities arising from investing activities

   $ 213       $ 185       $ 5,078   

Total investments for account of segregated fund holders

   $ 67,948       $ 64,987       $ 91,934   

 

(1) 

Certain security classifications have been reclassified to be consistent with the 2013 classification of these securities.

 

52   Sun Life Financial Inc.    First Quarter 2013   CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


10.B Changes in Insurance Contracts and Investment Contracts for Account of Segregated Fund Holders

Changes in insurance contracts and investment contracts for account of segregated fund holders are as follows:

 

For the three months ended March 31, 2013    Insurance
Contracts
     Investment
Contracts
 

Balances as at January 1,

   $     59,025       $     5,962   

Additions to segregated funds:

     

Deposits

     2,125         32   

Net transfers (to) from general funds

     (4        

Net realized and unrealized gains (losses)

     2,947         451   

Other investment income

     135         36   

Total additions

   $ 5,203       $ 519   

Deductions from segregated funds:

     

Payments to policyholders and their beneficiaries

     2,059         125   

Management fees

     164         15   

Taxes and other expenses

     40         5   

Foreign exchange rate movements

     150         203   

Total deductions

   $ 2,413       $ 348   

Net additions (deductions)

   $ 2,790       $ 171   

Balances as at March 31

   $ 61,815       $ 6,133   
For the three months ended March 31, 2012   

Insurance

Contracts

    

Investment

Contracts

 

Balances as at January 1,

   $ 82,650       $ 5,533   

Additions to segregated funds:

     

Deposits

     2,082         31   

Net transfers (to) from general funds

     120           

Net realized and unrealized gains (losses)

     4,279         351   

Other investment income

     125         38   

Total additions

   $ 6,606       $ 420   

Deductions from segregated funds:

     

Payments to policyholders and their beneficiaries

     2,244         110   

Management fees

     280         18   

Taxes and other expenses

     50         4   

Foreign exchange rate movements

     605         (36

Total deductions

   $ 3,179       $ 96   

Net additions (deductions)

   $ 3,427       $ 324   

Balances as at March 31

   $ 86,077       $ 5,857   

 

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   Sun Life Financial Inc.   First Quarter 2013   53


11.    Commitments, Guarantees and Contingencies

 

 

Guarantees of Sun Life Assurance Preferred Shares and Subordinated Debt

SLF Inc. has provided a subordinated guarantee of certain preferred shares and a guarantee of certain subordinated debt issued by Sun Life Assurance. As a result of these guarantees, Sun Life Assurance is entitled to rely on exemptive relief from most continuous disclosure and the certification requirements of Canadian securities laws.

The following tables set forth certain consolidating summary financial information for SLF Inc. and Sun Life Assurance (Consolidated):

 

Results for the three months ended  

SLF Inc.

(unconsolidated)

   

Sun Life

Assurance

(consolidated)

   

Other

subsidiaries

of SLF Inc.

(combined)

   

Consolidation

adjustment

   

SLF Inc.

(consolidated)

 

March 31, 2013

         

Revenue

  $         108      $         1,854      $         2,012      $ (184   $         3,790   

Shareholders’ net income (loss) from continuing operations

  $ 542      $ 398      $ (9   $ (492   $ 439   

Shareholders’ net income (loss) from discontinued operation

  $      $      $ 114      $ (11   $ 103   

March 31, 2012

         

Revenue

  $ 119      $ 2,686      $ 553      $ (183   $ 3,175   

Shareholders’ net income (loss) from continuing operations(1)

  $ 715      $ 365      $ 28      $ (672   $ 436   

Shareholders’ net income (loss) from discontinued operation

  $      $      $ 281      $      $ 281   

 

(1)  Balances have been restated. Refer to Note 3.

 

         
Assets as at   SLF Inc.
(unconsolidated)
    Sun Life
Assurance
(consolidated)
    Other
subsidiaries of
SLF Inc.
(combined)
    Consolidation
adjustment
    SLF Inc.
(consolidated)
 

March 31, 2013

         

Invested assets

  $ 19,056      $ 99,922      $ 5,807      $ (18,615   $ 106,170   

Total other general fund assets

    8,341        12,552        31,878        (25,072     27,699   

Investments for account of segregated fund holders

           68,150        28,537               96,687   

Insurance contract liabilities

           88,475        2,031        (2,593     87,913   

Investment contract liabilities

           2,358                      2,358   

Total other general fund liabilities

  $ 10,333      $ 9,524      $ 31,747      $ (25,205   $ 26,399   

December 31, 2012

         

Invested assets(1)

  $ 18,658      $ 99,454      $ 5,725      $ (18,167   $ 105,670   

Total other general fund assets(1)

    8,239        13,455        33,081        (27,274     27,501   

Investments for account of segregated fund holders

           65,177        27,478               92,655   

Insurance contract liabilities

           89,160        682        (2,567     87,275   

Investment contract liabilities

           2,303                      2,303   

Total other general fund liabilities(1)

  $ 10,287      $ 9,799      $ 34,449      $ (27,488   $ 27,047   

March 31, 2012

         

Invested assets(1)

  $ 17,733      $     93,735      $     20,078      $ (16,192   $     115,354   

Total other general fund assets(1)

    8,701        13,905        19,431        (28,161     13,876   

Investments for account of segregated fund holders

           63,349        28,585               91,934   

Insurance contract liabilities

           85,338        13,358        (3,875     94,821   

Investment contract liabilities

           2,117        966               3,083   

Total other general fund liabilities(1)

  $     10,297      $ 9,405      $ 22,657      $     (27,017   $ 15,342   

 

(1) 

Balances have been restated. Refer to Note 2.

 

54   Sun Life Financial Inc.    First Quarter 2013   CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


12.    Earnings (Loss) Per Share

 

 

Details of the calculation of the net income (loss) and the weighted average number of shares used in the EPS computations are as follows:

 

For the three months ended March 31,    2013      2012  

Basic EPS:

     

Common shareholders’ net income (loss) from continuing operations

   $ 410       $ 405   

Common shareholders’ net income (loss) from discontinued operation

   $ 103       $ 281   

Weighted average number of common shares outstanding (in millions)

     600         588   

Basic EPS:

     

Continuing operations

   $ 0.68       $ 0.69   

Discontinued operation

   $ 0.17       $ 0.48   

Total

   $ 0.85       $ 1.17   

Diluted EPS:

     

Common shareholders’ net income (loss) from continuing operations

   $ 410       $ 405   

Add: increase in income due to convertible instruments(1)

   $ 3       $ 3   

Common shareholders’ net income (loss) from continuing operations on a diluted basis

   $ 413       $ 408   

Common shareholders’ net income (loss) from discontinued operation

   $ 103       $ 281   

Weighted average number of common shares outstanding (in millions)

     600         588   

Add: dilutive impact of stock options(2) (in millions)

     1           

Add: dilutive impact of convertible securities(1) (in millions)

     8         11   

Weighted average number of common shares outstanding on a diluted basis (in millions)

     609         599   

Diluted EPS:

     

Continuing operations

   $ 0.68       $ 0.68   

Discontinued operation

   $ 0.17       $ 0.47   

Total

   $     0.85       $     1.15   

 

(1) 

The convertible instruments are the SLEECS B issued by Sun Life Capital Trust.

(2) 

The number of stock options that have not been included in the weighted average number of common shares used in the calculation of diluted EPS because these stock options were anti-dilutive amounted to 8 million for the three months ended March 31, 2013 (11 million for the three months ended March 31, 2012).

13.    Reinsurance (Expenses) Recoveries

 

 

Reinsurance (expenses) recoveries are comprised of the following:

 

For the three months ended March 31,    2013      2012  

Recovered claims and benefits

   $ 1,062       $ 1,045   

Commissions

     12         13   

Reserve adjustments

     63         38   

Operating expenses and other

     121         114   

Reinsurance (expenses) recoveries

   $     1,258       $     1,210   

14.    Subsequent Events

 

 

On April 12, 2013, in connection with a strategic partnership between Sun Life Assurance and Khazanah Nasional Berhad (“Khazanah”), Sun Life Assurance acquired 49% of each of CIMB Aviva Assurance Berhad, a Malaysian insurance company and CIMB Aviva Takaful Berhad, a Malaysian takaful company (together, “CIMB Aviva”) from Aviva International Holdings Limited and, subsequently, Khazanah acquired 49% of CIMB Aviva from CIMB Group Holdings Berhad (“CIMB Group”). CIMB Group has retained a two percent share in CIMB Aviva. The transaction includes an exclusive right to distribute insurance products of CIMB Aviva, including takaful products, through CIMB Bank’s network across Malaysia. Sun Life Assurance’s contribution to the transaction is valued at $301.

On May 8, 2013 SLF Inc. announced its intention to redeem all of the outstanding $350 principal amount of Series 2008-2 Subordinated Unsecured 5.12% Fixed/Floating Debentures due 2018 (the “Debentures”). The Debentures are redeemable at SLF Inc.’s option on June 26, 2013 (the “Redemption Date”) at a redemption price per Debenture equal to the principal amount together with accrued and unpaid interest to the Redemption Date.

 

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   Sun Life Financial Inc.   First Quarter 2013   55