Sun Life 2012 Annual Report Download - page 154

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.
In 2012, the benefit of lower taxes on investment income amounted to $200 partially in relation to the appreciation of real estate
classified as investment properties in Canada. The fair value gains over original cost on real estate are considered capital in nature and
taxed at lower income tax rates in Canada. As a result of the appreciation of these properties our income tax expense included a tax
benefit of $44 in 2012. Our tax expense in 2012 was further reduced due to adjustments related to prior years, mostly due to the
successful resolution of tax audits, and recognition of previously unrecognized tax losses in the U.K.
In 2011, line Higher (lower) effective rates on income subject to taxation in foreign jurisdictions reflected the impact of losses in lower
tax jurisdictions incurred during the year. Our benefit of lower taxes on investment income in 2011 amounted to $201 including a tax
benefit of $34 related the appreciation of investment properties in Canada. In December 2011, we recorded a tax benefit of $68, mostly
relating to previously unrecognized losses, following the reorganization of our principal U.K. subsidiaries. Of this benefit, $58 has been
classified as Tax benefit of unrecognized losses and the remaining benefit of $10 is included in Higher (lower) effective rates on
income subject to taxation in foreign jurisdictions. Our income tax recovery in 2011 was reduced by $54 as a result of the write-off of
goodwill in SLF Canada that was not deductible for tax purposes. This impact is reported in Other in the table above.
23. Capital Management
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.
The Board is responsible for the annual review and approval of the Company’s capital plan. The Risk Review Committee of the Board
of Directors reviews and approves SLF Inc.’s capital policy annually. Management oversight of our capital programs and position is
provided by the Executive Risk Committee, the membership of which includes 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 recommendations are
presented to the Risk Review Committee. Capital reviews are regularly conducted which consider the potential impacts under various
business, interest rate and equity market scenarios. Relevant components of these capital reviews, including dividend
recommendations, are presented to the Risk Review Committee on a quarterly basis.
The capital policy is designed to ensure that adequate capital is maintained to provide the flexibility necessary to take advantage of
growth opportunities, to support the risks associated with our businesses and to optimize return to our shareholders. This policy is also
intended to provide an appropriate level of risk management over capital adequacy risk, which is defined as the risk that capital is not
or will not be sufficient to withstand adverse economic conditions, to maintain financial strength or to allow us and our subsidiaries to
support ongoing operations and to take advantage of opportunities for expansion.
OSFI has established Guideline A-2 – Capital Regime for Regulated Insurance Holding Companies and Non-Operating Life
Companies, which sets out the framework within which OSFI will assess whether regulated non-operating life companies, and
insurance holding companies (collectively, “Insurance Holding Companies”) are maintaining adequate capital. Under this guideline,
Insurance Holding Companies, such as SLF Inc., are expected to manage their capital in a manner commensurate with their risk profile
and control environments. The Company’s regulated subsidiaries are expected to comply with the capital adequacy requirements
imposed in the jurisdictions in which they operate. Our principal operating life insurance subsidiary in Canada, Sun Life Assurance, is
subject to the MCCSR capital rules and our principal operating life insurance subsidiary in the United States, Sun Life (U.S.) is subject
to the risk-based capital rules issued by the National Association of Insurance Commissioners (“NAIC”).
OSFI may intervene and assume control of an insurance holding company or a Canadian life insurance company if it deems the
amount of available capital insufficient. Capital requirements may be adjusted by OSFI in the future, as experience develops or the risk
profile of Canadian life insurers changes or to reflect other risks. SLF Inc. exceeded levels that would require regulatory or corrective
action as at December 31, 2012 and December 31, 2011.
Sun Life Assurance is subject to the MCCSR capital rules for a life insurance company in Canada. We expect to maintain an MCCSR
ratio for Sun Life Assurance at or above 200%. With an MCCSR ratio of 209% as at December 31, 2012, Sun Life Assurance’s capital
ratio is well above OSFI’s supervisory target ratio of 150% and regulatory minimum ratio of 120%. In the U.S., the risk-based capital of
Sun Life Assurance Company of Canada (U.S.) exceeded the levels under which any remedial or regulatory action would be required
as at December 31, 2012 and December 31, 2011.
In addition, other foreign operations and foreign subsidiaries of SLF Inc. must comply with local capital or solvency requirements in the
jurisdictions in which they operate. We maintained capital levels above minimum local requirements as at December 31, 2012 and
December 31, 2011.
Sun Life Assurance adopted IFRS as at January 1, 2011. Under OSFI’s IFRS transition guidance, companies can elect to phase in the
impact of the conversion to IFRS on adjusted tier 1 available capital over eight quarters ending in the fourth quarter of 2012. Sun Life
Assurance made this election and has now completed phasing in a reduction of approximately $300 to its adjusted tier 1 available
capital over this period, largely related to the recognition of deferred actuarial losses on defined benefit pension plans.
As at January 1, 2013, Sun Life Assurance elected the phase-in of the initial impact on gross tier 1 available capital of adopting the
revisions to IAS 19 relating to accumulated defined benefit OCI remeasurements, as per OSFI’s 2013 MCCSR Guideline. Sun Life
Assurance will phase in a reduction of approximately $152 to its gross tier 1 available capital over eight quarters, ending in the fourth
quarter of 2014.
152 Sun Life Financial Inc. Annual Report 2012 Notes to Consolidated Financial Statements