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SUN LIFE FINANCIAL INC.
ANNUAL REPORT 2011

Table of contents

  • Page 1
    SUN LIFE FINANCIAL INC. A N N UA L R E P O R T 2 0 1 1

  • Page 2
    ...annual Management's Discussion and Analysis. SUN LIFE ASSURANCE COMPANY OF CANADA Financial strength ratings 09 20 GAAP 20 09 09 20 GAAP 09 20 GAAP 11 20 FRS 10 20IFRS 11 20 FRS 10 20IFRS 10 20IFRS C C C I I 11 20 FRS OPERATING NET INCOME 1 (C$ millions) I OPERATING RETURN ON EQUITY...

  • Page 3
    ... The world of Sun Life Financial Our highlights Our strategy Business strategies Our brand promise Public accountability Management's Discussion and Analysis Consolidated Financial Statements Sources of earnings Six-year summary by segment Eleven-year summary Board of Directors and Executive Team...

  • Page 4
    ...business. Finally, to our management and employees worldwide, thank you for helping to make life brighter under the sun for all our customers and shareholders. We look to the future with confidence and determination. JAMES H. SUTCLIFFE CHAIRMAN OF THE BOARD 2 Sun Life Financial Inc. Annual Report...

  • Page 5
    ...2011. In Canada, we achieved record life insurance sales. Sun Life Global Investments, our new mutual fund company, completed a highly successful first full year. Members of Sun Life Group Benefit and Retirement plans in Canada downloaded the industry's first mobile application for submitting health...

  • Page 6
    ... MEXICO CITY CHINA HONG KONG INDIA PHILIPPINES SINGAPORE TAIPEI INDONESIA Sun Life Financial around the world MFS headquartered in the U.S. MFS investment and marketing/services offices SAO PAULO BUENOS AIRES SYDNEY T H E W O R L D O F SUN LIFE F 4 Sun Life Financial Inc. Annual Report 2011

  • Page 7
    ... 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 Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India...

  • Page 8
    ...as of December 31, 2011. ™ MFS had record gross sales in 2011 of approximately US$57 billion. PRODUCT AND SERVICE INNOVATIONS ™ We introduced a new app to enable Canadian group plan members to go paperless, check their balances and process their benefits through their mobile devices - an industry...

  • Page 9
    ... Banking Corporation's two million customers in the Philippines. Sun Life Grepa Financial complements our existing successful partnerships with local Asian companies, including India's Birla Sun Life, China's Sun Life Everbright and Indonesia's CIMB Sun Life. ™ Our international business continues...

  • Page 10
    ... WHAT WE DO BEST TODAY TO CAPITALIZE ON WORLDWIDE OPPORTUNITIES TO: ™ BUILD ON OUR LEADERSHIP POSITION IN CANADA Expand our products and services, distribution and market penetration in insurance, wealth management and employee benefits. ™ FOCUS ON GROUP AND VOLUNTARY INSURANCE IN THE U.S. Grow...

  • Page 11
    ... that inform product and service developments and drive innovation. We will continue to use technology to deliver a better client experience - when and where our customers want it. We will leverage our service advantages to increase market share. And we will continue to pursue new business models...

  • Page 12
    ... and brand recognition provide an excellent platform for growth. SLF Canada's three business units - Individual Insurance and Investments, Group Benefits and Group Retirement Services - offer a full range of protection and wealth accumulation products and services. STRATEGY We will grow...

  • Page 13
    ... December 30, 2011, SLF U.S. discontinued all new sales of variable annuity and individual life products. The company provides ongoing, high-quality service to customers who have in-force fixed annuity, variable annuity and individual life insurance products. STRATEGY Our strategy is to deliver...

  • Page 14
    ... OF SUCCESSFUL LEADERSHIP. It provides the comfort of...strategy. We work hard to maintain the integrity of our brand. And we are absolutely confident in the integrity of the security we provide to our customers around the world. OUR COMMITMENT TO 12 Sun Life Financial Inc. Annual Report 2011

  • Page 15
    ... of financial products distributed by financial intermediaries. MFS services institutional clients by providing asset management for corporate retirement plans, separate accounts, public or government funds and insurance company assets through a direct sales force and a network of independent...

  • Page 16
    ... people's lives. And when we make a promise, we do absolutely everything we can to fulfill it. Our business is about people - and our commitment is to build mutually rewarding relationships that are grounded in respect. OUR COMMITMENT TO MAKE LIFE 14 Sun Life Financial Inc. Annual Report 2011

  • Page 17
    ... their retirement planning. Great brands improve with time and momentum - and we will continue to build on our many "wins" of the past few years. The return on investment is already clear: investors understand and support our strategy. Customers and distributors not only choose to work with Sun Life...

  • Page 18
    ... 2011 Public Accountability Statement and Sustainability Report, which provides more information about our governance, philanthropy, investment and sustainability activities. This report will be posted on sunlife.com in May 2012. 16 Public accountability Sun Life Financial Inc. Annual Report 2011

  • Page 19
    ... Accountability Risk Management Policies Risk Categories Credit Risk Market Risk Insurance Risk Operational Risk Strategic Risk CAPITAL and LIQUIDITY MANAGEMENT Principal Sources of Funds Liquidity Capital Shareholder Dividends Capital Adequacy Off-Balance Sheet Arrangements Commitments, Guarantees...

  • Page 20
    ..., Financial Objectives, Financial Performance, SLF Canada, SLF U.S., MFS Investment Management, SLF Asia, Corporate, Investments, Risk Management, Capital and Liquidity Management Critical Accounting Policies and Estimates and Changes in Accounting Policies. These statements represent our current...

  • Page 21
    ... and investigations; risks relating to product design and pricing; downgrades in financial strength or credit ratings; the ability to attract and retain employees; the performance of the Company's investments and investment portfolios managed for clients such as segregated and mutual funds; the...

  • Page 22
    ... today have operations in key markets worldwide, including Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India, China and Bermuda. As of December 31, 2011, the Sun Life Financial group of companies had total assets under management of $466...

  • Page 23
    ... private solutions for pension, savings and health care needs. For consumers, ongoing market volatility has highlighted the need for greater security and protection of retirement savings offered by life insurance companies. Financial Objectives Our financial objectives are reviewed each year based...

  • Page 24
    ... ($) Operating(1) Reported Basic EPS ($) Operating(1) Reported Return on equity Operating(1) Reported Dividends per common share Dividend payout ratio Dividend yield MCCSR ratio (Sun Life Assurance) Premiums & deposits Net premium revenue Segregated fund deposits Mutual fund sales Managed fund sales...

  • Page 25
    ... ROE, are non-IFRS financial measures. Operating net income excludes: (i) the impact of certain hedges in SLF Canada that do not qualify for hedge accounting; (ii) fair value adjustments on share-based payment awards at MFS; (iii) restructuring and other related costs recorded in the fourth quarter...

  • Page 26
    ... is provided in this document under the heading Revenue. Adjusted premiums and deposits. This measure excludes from premiums and deposits the impact of: (i) currency; (ii) reinsurance for the insured business in SLF Canada's Group Benefit operations; and (iii) the life reinsurance business that...

  • Page 27
    ... and changes in the value of derivative instruments and assets designated as FVTPL; and (iii) fee income received for services provided. ASO premium and deposit equivalents, as well as deposits received by the Company on investment contracts such as segregated funds, mutual funds and managed funds...

  • Page 28
    ... for the year ended December 31, 2011 increased by $2.2 billion primarily as a result of increased sales at MFS. Adjusted premiums and deposits adjusts for the impact of currency, reinsurance for the insured business in SLF Canada's Group Benefits operations, and the life reinsurance business that...

  • Page 29
    ...dynamic hedging program, based on our current hedging policy, for variable annuity and segregated fund products is reflected in the liabilities. This valuation change resulted in a charge to net income of $635 million in the fourth quarter, and an increase in the MCCSR ratio of Sun Life Assurance of...

  • Page 30
    ... was not deductible for tax purposes. Impact of Currency We have operations in key markets worldwide, including Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Indonesia, India, China and Bermuda, and generate revenues and incur expenses in local currencies in...

  • Page 31
    ... dynamic hedging program, based on our current hedging policy, for variable annuity and segregated fund products is reflected in the liabilities. This valuation change resulted in a charge to net income of $635 million, and an increase in the MCCSR ratio of Sun Life Assurance of approximately five...

  • Page 32
    .... This was partially offset by a higher level of new business strain as a result of higher sales in China. Operating net income in the fourth quarter of 2010 included higher levels of new business strain in Hong Kong. 30 Sun Life Financial Inc. Annual Report 2011 Management's Discussion and Analysis

  • Page 33
    ...2011, decreased by $1.7 billion from the same period last year primarily as a result of a large sale in the Hong Kong pension business in the fourth quarter of 2010. Adjusted premiums and deposits adjusts for the impact of currency, reinsurance for the insured business in SLF Canada's Group Benefits...

  • Page 34
    ... of 2011 was driven by reserve increases (net of increases in asset values including hedges) of $684 million after-tax related to steep declines in both equity markets and interest rate levels, and reflected primarily in the individual life and variable annuity businesses in SLF U.S. Updates to...

  • Page 35
    ... across all pension products in the December 2011 Benefits Canada magazine (based on June 2011 data). In September 2011, GRS completed the largest single-payout annuity sale since LIMRA began reporting in 1997. Sun Life Global Investments completed its first full year of mutual fund operations with...

  • Page 36
    ..., critical illness, long-term care and personal health insurance. We offer savings and retirement products, which include accumulation annuities, guaranteed investment certificates, payout annuities, mutual funds and segregated funds. Our products are marketed through a distinctive, multi-channel...

  • Page 37
    ... in mutual fund sales over 2010. Group Benefits Our Group Benefits business unit is a leading provider of group life and health insurance products in Canada, with a market share of 22%(1). We provide life, dental, drug, extended health care, disability and critical illness benefit programs to...

  • Page 38
    ...owned life insurance. The Annuities business unit includes variable annuities, a closed block of fixed annuity products, as well as investment management services. Effective December 30, 2011, SLF U.S. discontinued domestic U.S. variable annuity and individual life products to new sales. The Company...

  • Page 39
    ... and extensive distribution capabilities to provide group life, long-term and short-term disability, medical stop-loss, and dental insurance to over 10 million group plan members. EBG currently provides products and services to meet the group insurance needs of small- and medium-sized employers and...

  • Page 40
    ... business unit includes our in-force individual life insurance products, including participating whole life insurance, universal life, variable universal life insurance, no-lapse guarantee universal life, corporate-owned life insurance, and bank-owned life insurance. In late 2011, the Company...

  • Page 41
    ... presence in the Canadian market. MFS won the 2011 Lipper Fund Award for Best Overall Large Company, ranking first out of 46 fund firms in the U.S. MFS won the award based on the firm's consistently strong risk-adjusted performance across asset classes for the three-year period from January 1, 2008...

  • Page 42
    ... sharing of best practices and resources throughout the SLF Asia operations. Individual life and health insurance as well as group life insurance products are offered in all five markets. Pension and retirement products are offered in Hong Kong and India, and mutual funds are sold in the Philippines...

  • Page 43
    ... focus. Results by Business Unit Philippines Our Philippines operations, established in 1895, distribute a diverse range of protection and savings products largely through our career agency sales force. We offer individual and group life and health insurance products, as well as mutual funds...

  • Page 44
    ...group protection, savings and retirement products through a multi-channel distribution network, including a career agency sales force, bancassurance distribution, brokers and worksite marketing. In addition, Birla Sun Life Asset Management Company Limited, our asset management joint venture in India...

  • Page 45
    ... companies in the United Kingdom to create a more efficient operational and financial business structure. Under the reorganization, all the long-term policies of SLFC Assurance (UK) Limited were transferred to Sun Life Assurance Company of Canada (U.K.) Limited. Net income in SLF U.K. for the year...

  • Page 46
    ...and limitations for interest rate, credit, equity market, real estate market, liquidity, concentration, currency and derivative risks. Compliance with these policies is monitored on a regular basis and reported annually to the Risk Review Committee. The Investment Oversight Committee of the Board of...

  • Page 47
    ... assets on our Consolidated Statements of Financial Position as at December 31, 2011 with the exception of the following countries where we have business operations: Canada, the United States and the United Kingdom. Management's Discussion and Analysis Sun Life Financial Inc. Annual Report 2011 45

  • Page 48
    ... loan-to-value ratio in Canada if the mortgage is insured. The estimated weighted average debt service coverage is 1.6 times, consistent with prior year-end levels. The Canada Mortgage and Housing Corporation insures 22% of the Canadian commercial mortgage portfolio. As at December 31, 2011, the...

  • Page 49
    ...December 31, 2010 Canada United States United Kingdom Total mortgages Total loans Total mortgages and loans 2,272 223 - 2,495 - 2,495 5,167 5,592 48 10,807 - 10,807 7,439 5,815 48 13,302 12,732 26,034 In the United States, a gradual recovery of the commercial real estate market continues, but is...

  • Page 50
    ... as at December 31, 2011. Our investment properties are diversified by country, with 72% of the portfolio located in Canada, 25% in the United States and the remaining 3% in the United Kingdom and the Philippines as at December 31, 2011. The carrying value of real estate by geographic location as at...

  • Page 51
    ... life contracts and unit-linked pension products with guaranteed annuity rate options Interest rate exposure in relation to assetliability management Variable annuities, segregated funds and reinsurance on equity index annuity guarantees offered by other insurance companies Fixed index annuities...

  • Page 52
    ... of shareholder value while ensuring that the Company's ability to pay claims and fulfill long-term policyholder commitments is not compromised. Our risk appetite supports long-term credit and financial strength ratings, ongoing favourable access to capital markets and the continuing enhancement of...

  • Page 53
    ..., expectations, risk and reward perspectives and investment horizons of these stakeholders. Our risk management approach is designed to support long-term credit and financial strength ratings, strong capital levels, ongoing favourable access to capital markets and the continuing enhancement of our...

  • Page 54
    ... related to the management of the general fund investment portfolio, the approval and monitoring of the annual Investment Plan and monitoring the investment performance of enterprise pension and savings plans. The Board of Directors has delegated the approval of compliance risk management policies...

  • Page 55
    ... and positions, impairment reviews, quarterly financial information, the annual investment plan, new investment initiatives, investment finance systems/projects and investment control processes. Accountabilities Primary accountability for risk management is delegated by the Board of Directors to...

  • Page 56
    ...Business Group credit risk limits, independent validation of internal risk ratings and internal risk models, and development and coordination of enterprise-wide risk reporting to the appropriate executive and board committees. The Corporate Credit Committee enhances overall governance of Credit Risk...

  • Page 57
    ... general account products and variable annuity and segregated fund contracts, which contain explicit or implicit investment guarantees in the form of minimum crediting rates, guaranteed premium rates, settlement options and benefit guarantees. If investment returns fall below guaranteed levels, we...

  • Page 58
    ... changes in equity markets). (3) The market risk sensitivities include the expected mitigation impact of our hedging programs in effect as at December 31, and include new business added and product changes implemented during the year. (4) A portion of assets designated as AFS are required to support...

  • Page 59
    ... of our hedging program related to our sensitivity to a 50 basis point and 100 basis point decrease in interest rates and 10% and 25% decrease in equity markets for variable annuity and segregated fund contracts. Management's Discussion and Analysis Sun Life Financial Inc. Annual Report 2011 57

  • Page 60
    ... for variable annuities and segregated funds at 2% intervals (for 10% changes in equity markets) and at 5% intervals (for 25% changes in equity markets). Our hedging strategy is applied both at the line of business/product level and enterprise level using a combination of longer-dated put options...

  • Page 61
    ... provided. Information related to market risk sensitivities and guarantees related to variable annuity and segregated fund products should be read in conjunction with the information contained in the Outlook, Critical Accounting Policies and Estimates and Risk Management sections in our annual...

  • Page 62
    ... financing, privacy, and information security risk management. To ensure effective oversight and implementation, the framework is supported by an enterprise network of compliance officers and the general counsel in each business segment. The Chief Compliance Officer reports regularly to the Board...

  • Page 63
    ... system development protocol and process has been designed and implemented. Our global technology infrastructure is overseen by the Chief Information Officer. Outsourcing Risk We choose to outsource some services to external third parties, including information technology, operations and investment...

  • Page 64
    ...estimates related to the timing and payment of death and disability claims, policy surrenders, policy maturities, annuity payments, minimum guarantees on segregated fund products, policyholder dividends, amounts on deposit, commissions and premium taxes offset by contractual future premiums and fees...

  • Page 65
    ...for business and capital. Principal Sources of Funds Our 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...

  • Page 66
    ... we operate. The capital of our international subsidiaries is managed on a local statutory basis in a manner commensurate with their individual risk profiles. Sun Life Financial, including all of its business groups, engages in a capital planning process annually in which capital deployment options...

  • Page 67
    ... five years thereafter. Holders of Series 13QR Shares will be entitled to receive fixed non-cumulative quarterly dividends at an annual rate equal to the then 3-month Government of Canada treasury bill yield plus 2.73%. Management's Discussion and Analysis Sun Life Financial Inc. Annual Report 2011...

  • Page 68
    ... the Plan. In 2011, we cancelled 282 common shares as a result of updates to our policy records from demutualization. The Company grants stock options to certain employees and directors. These options are granted at the closing price of SLF Inc.'s common shares on the TSX on the grant date for stock...

  • Page 69
    ...rate risks Total capital required MCCSR ratio Sun Life Assurance's MCCSR ratio was 211% as at December 31, 2011, compared to 228% as at December 31, 2010. Low interest rates, volatile equity markets and the impact of OSFI's guidance for increased segregated fund capital requirements on new business...

  • Page 70
    ... has developed its own methodology for the assessment and subsequent rating of life insurance companies. The following table summarizes the financial strength ratings/claims paying ability for the two main life insurance operating subsidiaries of SLF Inc. January 31, 2012 Sun Life Assurance Sun Life...

  • Page 71
    ... the heading International Financial Reporting Standards. Benefits to Policyholders Our benefit payment obligations are estimated over the life of our annuity and insurance products based on internal valuation models and are recorded in our financial statements, primarily in the form of insurance...

  • Page 72
    ... and certain forms of universal life policies and annuities, policyholders share investment performance through routine changes in the amount of dividends declared or in the rate of interest credited. These products generally have minimum interest rate guarantees. Hedging programs are in place to...

  • Page 73
    ... swap interest rate curves, foreign exchange spot and forward rates, index prices, the value of underlying securities, projected dividends, volatility surfaces, and in limited circumstances, counterparty quotes. Management's Discussion and Analysis Sun Life Financial Inc. Annual Report 2011 71

  • Page 74
    ...at the reporting date. During the current reporting period, transfers into level 3 were primarily related to a significant reduction in the trading activity of certain types of securities, which resulted in a change to the pricing source. Transfers out of level 3 occur when the pricing inputs become...

  • Page 75
    ... plans offer some indexation of benefits. In addition, in some countries we provide certain post-retirement medical, dental and life insurance benefits to eligible qualifying employees and their dependents upon meeting certain requirements. Due to the long-term nature of these plans, the calculation...

  • Page 76
    ... our operations - the underlying economics and cash flows of our businesses remained unchanged. The International Accounting Standards Board ("IASB") continues to review and develop a number of accounting standards, including a financial reporting standard that addresses the measurement of insurance...

  • Page 77
    ...this portfolio, the investment strategy and the related hedges continue to be economically viable. This potential volatility could result in a favourable or unfavourable impact on net income in a reporting period. Management's Discussion and Analysis Sun Life Financial Inc. Annual Report 2011 75

  • Page 78
    ... loss. The amendments are effective for annual periods beginning on or after July 1, 2012. We are currently assessing the impact the adoption of these amendments will have on our Consolidated Financial Statements. 76 Sun Life Financial Inc. Annual Report 2011 Management's Discussion and Analysis

  • Page 79
    ... procedures that are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Company's CEO, Executive Vice-President and Chief Financial Officer ("CFO") and Executive Vice-President, Business Development and General Counsel...

  • Page 80
    ... laws. Management does not believe that the conclusion of any current legal or regulatory matters, either individually or in the aggregate, will have a material adverse effect on the Company's financial condition or results of operations. 78 Sun Life Financial Inc. Annual Report 2011 Management...

  • Page 81
    ...Note 18 Operating expenses Note 19 Share-based payments Note 20 Restructuring Note 21 Income taxes Note 22 Capital management Note 23 Segregated funds Note 24 Commitments, guarantees and contingencies Note 25 Related party transactions Note 26 Pension plans and other post-retirement benefits Note 27...

  • Page 82
    ... and the Audit Committee to discuss the results of their audit. Dean A. Connor President and Chief Executive Officer Colm J. Freyne Executive Vice-President and Chief Financial Officer Toronto, February 15, 2012 80 Sun Life Financial Inc. Annual Report 2011 Consolidated Financial Statements

  • Page 83
    ... exchange rates during the reporting periods: U.S. dollars U.K. pounds Earnings (loss) per share (Note 28) Basic Diluted Weighted average shares outstanding in millions (Note 28) Basic Diluted Dividends per common share The attached notes form part of these Consolidated Financial Statements. 2011...

  • Page 84
    ... benefit (expense) included in other comprehensive income (loss) The attached notes form part of these Consolidated Financial Statements. 2011 $ 2 (8) (8) 58 (5) (5) - 34 $ 2010 16 - (79) 23 (17) 2 (2) (57) $ $ 82 Sun Life Financial Inc. Annual Report 2011 Consolidated Financial Statements

  • Page 85
    ...for account of segregated fund holders (Note 24) Total liabilities Equity Issued share capital and contributed surplus Retained earnings and accumulated other comprehensive income Non-controlling interests (Note 17) Total equity Total liabilities and equity Exchange rates at the end of the reporting...

  • Page 86
    ...share purchase plan (Note 16) Balance, end of year Contributed surplus (Note 20) Balance, beginning of year Share-based payments Stock options exercised Balance, end of year Retained earnings Balance, beginning of year Net Income (loss) Dividends on common shares Dividends on preferred shares Change...

  • Page 87
    ...and 15) Issuance of preferred shares (Note 16) Issuance of common shares on exercise of stock options (Note 16) Dividends paid on common and preferred shares Interest expense paid Net cash provided by (used in) financing activities Changes due to fluctuations in exchange rates Increase (decrease) in...

  • Page 88
    ... diversified financial services organization providing savings, retirement and pension products, and life and health insurance to individuals and groups through our operations in Canada, the United States, the United Kingdom and Asia. We also operate mutual fund and investment management businesses...

  • Page 89
    ... as HFT. Debt securities, equity securities and other invested assets supporting insurance contract liabilities or investment contract liabilities measured at fair value have been designated as FVTPL. This Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2011 87

  • Page 90
    ...held to support products where investment returns are passed through to policyholders and therefore, changes in the fair value of those assets are significantly offset by changes in insurance contract liabilities. Available-for-Sale Financial Assets Financial assets classified as AFS are recorded at...

  • Page 91
    ... and other investment income in the Consolidated Statements of Operations. Cash Flow Hedges Certain equity forwards are designated as cash flow hedges of the anticipated payments of awards under certain share-based payment plans. Changes in fair value based on spot price changes are recorded to OCI...

  • Page 92
    ... the policyholder bears the risks associated with the underlying investments are classified as Insurance contracts for account of segregated fund holders in our Consolidated Statements of Financial Position. 90 Sun Life Financial Inc. Annual Report 2011 Notes to Consolidated Financial Statements

  • Page 93
    ...Contracts issued by us that do not transfer significant insurance risk and do not transfer financial risk from the policyholder to us are classified as service contracts. Service components of investment contracts are also accounted for as service contracts. Fee income earned from these contracts is...

  • Page 94
    ... contracts for account of segregated fund holders. The liabilities reported as insurance contracts for account of segregated fund holders are measured at the aggregate of the policyholder account balances. Changes in the fair value of the invested assets of the segregated funds are recorded in net...

  • Page 95
    ... of Changes in Equity. When options are exercised, new shares are issued, contributed surplus is reversed and the shares issued are credited to common shares in our Consolidated Statements of Changes in Equity. Other share-based payment plans based on the value of SLF Inc.'s shares are accounted for...

  • Page 96
    ...on our Consolidated Financial Statements. 2. IFRS 1 - First Time Adoption The Canadian Accounting Standards Board ("AcSB") requires that Canadian publicly accountable entities prepare their financial statements in accordance with IFRS for fiscal years beginning on or after January 1, 2011. As these...

  • Page 97
    ... GAAP that are no longer designated as hedges under IFRS. 2. Estimates Estimates made in accordance with IFRS at the Transition Date are consistent with estimates we previously made under Canadian GAAP. Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2011 95

  • Page 98
    ... at cost less accumulated depreciation Investment properties adjustment to fair value Deferred net realized gains on real estate reversed Limited partnerships and private equities to fair value Private debt reclassification to loans and receivables Investment contract liabilities remeasurements...

  • Page 99
    ... Transition Date may change due to fluctuations in the foreign exchange rates for each reporting period. 1. Reclassification of Non-Controlling Interests Under Canadian GAAP, non-controlling interests were presented separately from total equity in our Consolidated Statements of Financial Position...

  • Page 100
    ... accounted for at cost less accumulated depreciation and accumulated impairment loss. Under Canadian GAAP, owner-occupied properties were recorded as part of Real estate in the Consolidated Statements of Financial Position. IFRS 1 allows us to elect fair value as deemed cost on the Transition Date...

  • Page 101
    ...annuities Variable annuities Employee benefits group SLF Asia Hong Kong Corporate MFS Holdings(1) U.K. Reinsurance Total Impairment(2) $ (310) (333) - - (1,190 1,833) (1) The McLean Budden CGU, which had a goodwill balance of $74 at the Transition Date and was previously reported under SLF Canada...

  • Page 102
    ... common shares could be excluded from the calculation of diluted EPS since our past experience or policy provided a reasonable basis that these securities would be settled in cash rather than shares. 100 Sun Life Financial Inc. Annual Report 2011 Notes to Consolidated Financial Statements

  • Page 103
    .... (2) Adjustments have been presented on a gross basis with the related tax amount recorded in the deferred tax asset or deferred tax liabilities lines. The net of tax adjustment is recorded in total equity. Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2011 101

  • Page 104
    ... policy liabilities in our Consolidated Statements of Financial Position. Investment Contracts Contracts issued by us that do not transfer significant insurance risk but do transfer financial risk from the policyholder to us, are financial liabilities. This adjustment is to reclassify the balance...

  • Page 105
    ...insurance, investment management and annuities, mutual funds, and life retrocession. Revenues not attributed to the strategic business units are derived primarily from Corporate investments and earnings on capital. Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2011...

  • Page 106
    ... segment for the years ended December 31 are as follows: SLF Canada 2011 Gross premiums: Annuities Life insurance Health insurance Total gross premiums Less: ceded premiums Net Investment income (loss) Fee income Total revenue Total benefits and expenses Income tax expense (benefit) Total net income...

  • Page 107
    ... 5,313 119,436 $ $ (1) The carrying value includes other invested assets classified as FVTPL of $809, other invested assets classified as AFS of $155, and investments accounted for using the equity method. Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2011 105

  • Page 108
    ..., which include, but are not limited to, benchmark yields, reported trades of identical or similar instruments, broker dealer quotes, issuer spreads, bid prices, and reference data including market research publications. In limited circumstances, non-binding broker quotes are used. The fair value...

  • Page 109
    ...determined using quoted market prices in active markets or independent valuation information provided by investment management. The fair value of direct investments within investments for accounts of segregated fund holders, such as short term securities, government and corporate debt securities, is...

  • Page 110
    ...(2) Debt securities - available-for-sale(2) Equity securities - fair value through profit or loss Equity securities - available-for-sale Derivative assets Other invested assets Total invested assets Investments for account of segregated fund holders Total financial instrument assets measured at fair...

  • Page 111
    ...(1) Debt securities - available-for-sale(1) Equity securities - fair value through profit or loss Equity securities - available-for-sale Derivative assets Other invested assets Total invested assets Investments for account of segregated fund holders Total financial instrument assets measured at fair...

  • Page 112
    ...Total debt securities - available-for-sale Level 1 $ - - 393 393 $ $ Level 2 395 74 77 492 7,437 196 318 - 9 8,998 Level 3 $ - - - 2 71 25 - 42 - $ 140 $ $ Total 395 74 470 494 7,508 221 318 42 9 9,531 110 Sun Life Financial Inc. Annual Report 2011 Notes to Consolidated Financial Statements

  • Page 113
    ... within Net investment income (loss) in our Consolidated Statements of Operations. (2) During 2011, transfers into Level 3 occur when the inputs used to price the financial instrument lack observable market data and as a result, no longer meet the Level 1 or 2 definitions at the reporting date. In...

  • Page 114
    ... within Net investment income (loss) in our Consolidated Statements of Operations. (2) During 2010, transfers into Level 3 occur when the inputs used to price the financial instrument lack observable market data and as a result, no longer meet the Level 1 or 2 definitions at the reporting date. In...

  • Page 115
    ... As at Cash Cash equivalents Short term securities Cash, cash equivalents and short-term securities Less: Bank overdraft, recorded in Other liabilities Net cash, cash equivalents and short-term securities Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2011 113

  • Page 116
    ... foreign government Corporate Asset-backed securities: Commercial mortgage-backed securities Residential mortgage-backed securities Collateralized debt obligations Other Total debt securities Equity securities Total debt and equity securities 114 Sun Life Financial Inc. Annual Report 2011 Amortized...

  • Page 117
    ... related to the equity forwards are reclassified to net income as the liability is accrued for the share-based payment plan over the vesting period. We expect to reclassify losses of $5 from accumulated OCI to net income within the next 12 months. Notes to Consolidated Financial Statements Sun Life...

  • Page 118
    ... reinsurer represents an undue level of credit risk Stress-testing techniques, such as Dynamic Capital Adequacy Testing ("DCAT"), are used to measure the effects of large and sustained adverse credit developments Annual Report 2011 Notes to Consolidated Financial Statements Sun Life Financial Inc.

  • Page 119
    ... maintain policies which set counterparty exposure limits to manage the credit exposure for investments in any single issuer or any associated group of issuers. Exceptions exist for investments in securities which are issued or guaranteed by the Government of Canada, United States or United Kingdom...

  • Page 120
    ...-sale $ 1,312 170 1,202 426 3,110 2,900 1,009 596 1,307 552 616 6,980 541 $ 10,631 Total debt securities $ 3,448 7,443 3,078 4,779 18,748 12,453 8,744 2,407 6,573 2,763 2,792 35,732 4,133 $ 58,613 118 Sun Life Financial Inc. Annual Report 2011 Notes to Consolidated Financial Statements

  • Page 121
    ... corporate loans it is based on the country of the creditor's parent. Residential mortgages include mortgages for both single and multiple family dwellings. As at December 31, 2011 Canada United States United Kingdom Other Total mortgages and loans As at December 31, 2010 Canada United States United...

  • Page 122
    ... December 31, 2010 $ 1,013 4,207 2,697 4,886 12,803 January 1, 2010 $ 1,154 4,400 2,860 4,390 12,804 As at Due in 1 year or less Due in years 2-5 Due in years 6-10 Due after 10 years Total loans $ $ $ 120 Sun Life Financial Inc. Annual Report 2011 Notes to Consolidated Financial Statements

  • Page 123
    ... 1,125 302 3,588 607 $ 12,145 $ 139 - - 88 11,231 $ - - - - 20,438 $ 1,264 302 3,588 695 43,814 (1) These are covered short derivative positions that may include interest rate options, swaptions or floors. Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2011 121

  • Page 124
    ... describe our assessment of the credit quality of our financial assets. We monitor credit quality based on internal risk ratings as well as ratings assigned by external rating agencies where available. 122 Sun Life Financial Inc. Annual Report 2011 Notes to Consolidated Financial Statements

  • Page 125
    ... sovereign debts of certain developing countries, used in backing local liabilities, have been classified as investment grade. Mortgages and Loans by Credit Rating The credit quality of mortgages and loans is evaluated internally through regular monitoring of credit related exposures. We use...

  • Page 126
    ... arrangements may change substantially following the reporting date as the exposure is affected by each transaction subject to the arrangement. (3) Gross positive replacement cost after netting agreements. 124 Sun Life Financial Inc. Annual Report 2011 Notes to Consolidated Financial Statements

  • Page 127
    ... 2,457 $ $ $ 6.A.vi Impairment of Assets Management assesses debt and equity securities, mortgages and loans and other invested assets for objective evidence of impairment at each reporting date. We employ a portfolio monitoring process to identify assets or groups of assets that have objective...

  • Page 128
    ... prices, and loan-specific information such as delinquency rates and loan-to-value ratios. Equity Securities and Other Invested Assets Objective evidence of impairment for equity securities as well as investments in limited partnerships, segregated funds and mutual funds involves an assessment...

  • Page 129
    ... position and employ a wide range of liquidity risk management practices and controls, which are described below: • Liquidity is managed in accordance with our liquidity policies and operating guidelines. Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2011 127

  • Page 130
    ... market prices. We are exposed to equity risk from a number of sources. Our primary exposure to equity risk arises in connection with benefit guarantees on variable annuity and segregated fund annuity contracts (i.e. segregated fund products in SLF Canada, variable annuities in SLF U.S. and run...

  • Page 131
    ... Certain annuity and long-term disability contracts contain embedded derivatives as benefits are linked to the Consumer Price Index; however most of this exposure is hedged through the Company's ongoing asset liability management program. Notes to Consolidated Financial Statements Sun Life Financial...

  • Page 132
    ... related operating guidelines. Pricing models, methods and assumptions are subject to periodic internal peer reviews. New products are subject to a risk assessment process to identify key risks and must be approved by multi-disciplinary committees. Product development, design and pricing processes...

  • Page 133
    ...product development and pricing or model risk. Adverse mortality and morbidity experience could also occur through systemic anti-selection, which could arise due to poor plan design or underwriting process failure or the development of investor owned and secondary markets for life insurance policies...

  • Page 134
    ...carry on business through insolvency or regulatory action. New sales of our products can also be discontinued or changed to reflect developments in the reinsurance markets. In force reinsurance treaties are typically guaranteed for the life of the ceded policy, however, some reinsurance rates may be...

  • Page 135
    ... to investment properties Transfers from other assets Foreign exchange rate movements Balance, December 31, 2010 Additions Disposals Foreign exchange rate movements Balance, December 31, 2011 Accumulated depreciation and impairment losses Balance, January 1, 2010 Depreciation charge for the year...

  • Page 136
    ... insurance Individual wealth Group retirement services Group benefits SLF U.S. Variable annuities Employee benefits group SLF Asia Hong Kong Corporate MFS Holdings(3) U.K. Reinsurance Total (3) Goodwill of $74 previously allocated to the McLean Budden CGU within SLF Canada has been transferred...

  • Page 137
    ... management contracts are attributable to the MFS Holdings CGU, where their competitive position in, and the stability of, their respective markets support their classification as indefinite life intangible assets. Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report...

  • Page 138
    ... of Business The majority of the products sold by the Company are insurance contracts. These contracts include all forms of life, health and critical illness insurance sold to individuals and groups, life contingent annuities, accumulation annuities, and segregated fund products with guarantees. 11...

  • Page 139
    ... Other policy liabilities. (2) Consists of amounts on deposit, policy benefits payable, provisions for unreported claims, provisions for policyholder dividends and provisions for experience rating refunds. Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2011 137

  • Page 140
    ... enhancements to improve the projection of future cash flows across a number of our businesses. Lapse and other policyholder behaviour 405 Expense Investment returns 10 192 Model enhancements (207) 138 Sun Life Financial Inc. Annual Report 2011 Notes to Consolidated Financial Statements

  • Page 141
    ... the types of Investment contracts in force Term certain payout annuities in Canada and the U.S. Guaranteed Investment Contracts in Canada European Medium Term Notes and Medium Term Notes products issued in the U.S. Unit-linked products issued in the U.K. and Hong Kong; and Non-unit-linked pensions...

  • Page 142
    ...iv Changes in Investment Contract Liabilities Changes in investment contract liabilities without DPF are as follows: For the years ended December 31, 2011 Measured at fair value Balance, beginning of period Deposits Interest Withdrawals Fees Change in fair value Other Foreign exchange rate movements...

  • Page 143
    ... the years ended Balance, beginning of period Change in liabilities on in-force Liabilities arising from new policies Changes in assumptions or methodology Increase (decrease) in liabilities Liabilities before the following: Foreign exchange rate movements Balance, end of period $ December 31, 2011...

  • Page 144
    ... for Individual annuities. (2) Consists of amounts on deposit, policy benefits payable, provisions for unreported claims, provisions for policyholder dividends, and provisions for experience rating refunds. 142 Sun Life Financial Inc. Annual Report 2011 Notes to Consolidated Financial Statements

  • Page 145
    ... and $64 for Individual annuities. (2) Consists of amounts on deposit, policy benefits payable, provisions for unreported claims, provisions for policyholder dividends, and provisions for experience rating refunds. No impairment was incurred for fiscal year ended December 31, 2011. See Note 11 for...

  • Page 146
    .... 13.D Senior Financing On November 8, 2007, a SPE consolidated by SLF Inc. issued a U.S. $1,000 variable principal floating rate certificate (the "Certificate") to a financial institution (the "Lender"). At the same time, Sun Life Assurance Company of Canada-U.S. Operations Holdings, Inc...

  • Page 147
    ... five-year Government of Canada bond yield plus 3.40%. Fair value is based on market prices for the same or similar instruments as appropriate. Interest expense on Innovative capital instruments was $109 and $109 for 2011 and 2010, respectively. Notes to Consolidated Financial Statements Sun Life...

  • Page 148
    ...The terms of SLF Inc.'s outstanding preferred shares provide that for so long as Sun Life Assurance is a subsidiary of SLF Inc., no dividends on such preferred shares are to be declared or paid if the MCCSR ratio of Sun Life Assurance is then less than 120%. 146 Sun Life Financial Inc. Annual Report...

  • Page 149
    .... For dividend reinvestments, SLF Inc. may, at its option, issue common shares from treasury at a discount of up to 5% to the volume weighted average trading price or direct that common shares be purchased for participants through the Toronto Stock Exchange ("TSX") at the market price. Common shares...

  • Page 150
    ...Employee expenses for the years ended December 31 consist of the following: 2011 Salaries, bonus, employee benefits Share-based payments (Note 20) Other personnel costs Total employee expenses 148 Sun Life Financial Inc. Annual Report 2011 Notes to Consolidated Financial Statements 2010 $ 1,535 263...

  • Page 151
    ... life of the option (in years) Exercise price 2011 2.9% 35.3% 4.0% 6.3 $ 31.35 2010 2.9% 35.3% 4.0% 6.4 $ 30.21 Expected volatility is based on historical volatility of the common shares, implied volatilities from traded options on the common shares and other factors. The expected term of options...

  • Page 152
    ...rate as the dividends on common shares. The redemption value is the average closing price of a common share on the TSX on the five trading days immediately prior to the vesting date. PSU Plan/Incentive Share Unit ("ISU") Plan: As noted previously, the Sun Share plan has replaced the PSU plan for new...

  • Page 153
    ...For the years ended December 31 Compensation expense Income tax expense (benefit) $ $ 2011 206 (41) 2010 $ 181 $ (36) 21. Restructuring In the fourth quarter of 2011, we restructured our operations, primarily in the United States. The domestic U.S. variable annuity and individual life products were...

  • Page 154
    ... income tax expense (benefit): Current year Adjustments in respect of prior years, including resolution of tax disputes Total current income tax expense (benefit) $ $ 273 (58) 215 $ $ 2010 225 (120) 105 152 Sun Life Financial Inc. Annual Report 2011 Notes to Consolidated Financial Statements

  • Page 155
    ... 2011, the benefit of lower taxes on investment income amounted to $201, partially in relation to the appreciation of real estate classified as investment properties. The fair value gains over original cost on real estate are considered capital in nature and taxed at lower income tax rates in Canada...

  • Page 156
    ... of our capital programs and position is provided by the Capital Management Committee, whose members include senior management from the finance, actuarial and risk management functions. We engage in a capital planning process annually in which capital deployment options, fundraising and dividend...

  • Page 157
    ... short term securities Investment properties Mortgages Other assets Total assets Less: Liabilities arising from investing activities Total investments for account of segregated fund holders $ $ $ $ $ $ $ $ $ Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2011...

  • Page 158
    ... to the aforesaid indemnities, and we also maintain insurance policies that may provide coverage against certain of these claims. Guarantees made by us that can be quantified are included in Note 6.A.i. 156 Sun Life Financial Inc. Annual Report 2011 Notes to Consolidated Financial Statements

  • Page 159
    ... not believe that the conclusion of any current legal or regulatory matters, either individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations. Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2011 157

  • Page 160
    ...shares of McLean Budden Limited Other 26.D Other Related Party Transactions We provide investment management services for our pension plans. The services are provided on substantially the same terms as for comparable transactions with third parties. 158 Sun Life Financial Inc. Annual Report 2011...

  • Page 161
    ... to our pension plans, in Canada and the US, we provide certain post-retirement healthcare and life insurance benefits to eligible qualifying employees and to their dependants upon meeting certain requirements. Eligible retirees may be required to pay a portion of the premiums for these benefits and...

  • Page 162
    ... will change the health care cost as follows: 1% December 31, 2011 Effect on post-retirement benefit obligations Effect on aggregated service and interest costs Increase $ $ 20 1 Decrease $ $ (18) (1) 160 Sun Life Financial Inc. Annual Report 2011 Notes to Consolidated Financial Statements

  • Page 163
    ... to the long-term nature of the pension obligations and related cash flows, asset mix decisions are based on longterm market outlooks within the specified policy ranges. The long-term investment objectives of the defined benefit pension plans are to exceed the real rate of investment return assumed...

  • Page 164
    ...an adjustment of 1 million common shares related to the dilutive impact of stock options was excluded from the calculation of earnings per share since their effect is anti-dillutive when a loss is reported. 162 Sun Life Financial Inc. Annual Report 2011 Notes to Consolidated Financial Statements

  • Page 165
    ... the policy liabilities and reinsurance recoverables of Sun Life Financial Inc. and its subsidiaries for its Consolidated Statements of Financial Position at December 31, 2011, December 31, 2010 and January 1, 2010, and their change in the Consolidated Statements of Operations for the years ended...

  • Page 166
    ...operations, comprehensive income (loss), changes in equity and cash flows for the years ended December 31, 2011 and December 31, 2010, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management...

  • Page 167
    ... by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2011 of the Company and...

  • Page 168
    ... COMPANY INFORMATION Sources of Earnings Six-Year Summary by Segment Eleven-Year Summary Board of Directors and Executive Team Subsidiary and Affiliate Companies Major Offices Corporate and Shareholder Information 167 169 170 172 173 176 177 166 Sun Life Financial Inc. Annual Report 2011...

  • Page 169
    ... year 2011, assumption changes and management actions let to a pre-tax loss of $1,142 million due primarily to changes made to the valuation of Segregated Fund and Variable Annuity blocks to reflect the cost of dynamic hedging programs. Updates to lapse rates on term renewals in Canada and premium...

  • Page 170
    ...Policyholders' Income (Loss) Preferred Share Dividends Common Shareholders' Net Income (Loss) - Operating Basis Plus: Loss on sale of life retrocession operations Fair value adjustments on share-based payment awards in MFS Hedges in Canada that do not qualify for hedge accounting Common Shareholders...

  • Page 171
    ...) 24,287 2011 111,505 74,674 259,304 21,786 22,101 (23,840) 465,530 9,618 8,549 1,640 1,437 1,417 (80) 22,581 Total assets under management (As at December 31) SLF Canada SLF United States MFS SLF Asia Corporate Consolidation Adjustments Total Company Total revenue (For the year ended December 31...

  • Page 172
    ... as our India operations are now reported on Equity basis under IFRS. (3) Includes intercompany sales. Amounts in 2010 and 2009 have been restated to reflect the reclassification of the sales in Hong Kong pension business. 170 Sun Life Financial Inc. Annual Report 2011 Eleven-Year Summary

  • Page 173
    ... 14,905 n/a n/a n/a n/a n/a 9,437 4,162 3,216 16,815 9,486 1,697 4,377 n/a 306 68 881 - 881 881 628,206 39,466 31,953 5,851 11,702 Eleven-Year Summary Sun Life Financial Inc. Annual Report 2011 171

  • Page 174
    ... Saunders Executive Vice-President & Chief Information Officer Michael P. Stramaglia Executive Vice-President & Chief Risk Officer Kevin D. Strain(1) President, SLF Asia Westley V. Thompson President, SLF U.S. 172 Sun Life Financial Inc. Annual Report 2011 Board of Directors and Executive Team

  • Page 175
    ...and Annuity Company (Bermuda) Ltd. Sun Life Financial (India) Insurance Investments Inc. Birla Sun Life Insurance Company Limited Address of head or principal office Toronto, Canada Calgary, Canada Calgary, Canada Manitoba, Canada Hong Kong Whitby, Canada British Columbia, Canada Jakarta, Indonesia...

  • Page 176
    ... Investments (Bermuda) Ltd. Sun Life Financial LTC Solutions Inc. Sun Life Financial Trust Inc. Sun Life Hong Kong Limited Sun Life Hong Kong Advisory Limited Sun Life Trustee Company Limited Sun Life Information Services Canada, Inc. Sun Life Information Services Ireland Limited Sun Life Insurance...

  • Page 177
    ... K.K. MFS Service Center, Inc. Sun Life of Canada (U.S.) Holdings, Inc. Dental Holdings, Inc. California Benefits Dental Plan Professional Insurance Company Sun Canada Financial Co. Sun Life Administrators (U.S.), Inc. Sun Life Assurance Company of Canada (U.S.) 7101 France Avenue Manager, LLC 7101...

  • Page 178
    ... United Kingdom RG21 4DZ Call Centre: 0845-0720-223 Website: sloc.co.uk Sun Life Financial Asia Sun Life Financial Asia Regional Office 27/F Oxford House Taikoo Place 979 King's Road Hong Kong Tel: (852) 2918-3888 Website: sunlife.com.hk China Sun Life Everbright Life Insurance Company Limited...

  • Page 179
    ....PR.I Sun Life Financial Inc. common shares are listed on the Toronto (TSX), New York (NYSE) and Philippine (PSE) stock exchanges. Ticker Symbol: SLF As of February 10, 2012, there were 587,814,237 outstanding common shares, which are the only voting securities. SHAREHOLDER SERVICES For shareholder...

  • Page 180
    ... As a provider of products and services that help customers achieve lifetime financial security, Sun Life Financial recognizes that environmental sustainability is critical to our overall well-being. The use of Forest Stewardship Council (FSC®) and recycled paper for this Annual Report resulted in...