Sun Life 2012 Annual Report Download - page 166

Sources of Earnings
The following is provided in accordance with the OSFI guideline requiring Sources of Earnings (SOE) disclosure. SOE is not a
International generally accepted accounting principles (GAAP) measure. There is no standard SOE methodology. The calculation of
SOE is dependent on, and sensitive to, the methodology, estimates and assumptions used.
SOE identifies various sources of International GAAP net income. It provides an analysis of the difference between actual net income
and expected net income based on business in-force and assumptions made at the beginning of the reporting period. The terminology
used in the discussion of sources of earnings is described below:
Expected profit on in-force business
The portion of the consolidated pre-tax net income on business in-force at the start of the reporting period that was expected to be
realized based on the achievement of the best-estimate assumptions made at the beginning of the reporting period. Expected profit for
asset management companies is set equal to their pre-tax net income.
Impact of new business
The point-of-sale impact on pre-tax net income of writing new business during the reporting period. Issuing new business may produce
a loss at the point-of sale, primarily because valuation assumptions are conservative relative to pricing assumptions and actual
acquisition expenses may exceed those assumed in pricing. New business losses are often produced by sales of individual life
insurance, where valuation margins and acquisition expenses are relatively high.
Experience gains and losses
Pre-tax gains and losses that are due to differences between the actual experience during the reporting period and the best-estimate
assumptions at the start of the reporting period.
Management actions and changes in assumptions
Impact on pre-tax net income resulting from changes in actuarial methods and assumptions or other management actions.
Earnings on surplus
Pre-tax net investment income earned on the Company’s surplus assets less pre-tax debt service costs.
ANALYSIS OF RESULTS
For the year ended December 31, 2012, the pre-tax expected profit on in-force business of $1,893 million was $132 million higher than
the 2011 level. The increase in expected profits was primarily driven by an insurance contract liability valuation methodology change
implemented at December 31, 2011 that prefunded the costs of hedging our existing variable annuity and segregated fund contracts,
higher net assets in MFS and normal business growth.
The new business issued in 2012 led to pre-tax income loss of $185 million compared to $224 million a year ago. The change was
primarily due to the decision to discontinue sales of US Domestic Individual Life and Annuity products, the favourable impact of
improved mix and product re-pricing actions in Canadian Individual Life and the favourable impact of methodology changes to prefund
the cost of hedging in Canadian Segregated Funds. These impacts were offset partially by the adverse impact of lower interest rates on
the Segregated Fund products and higher acquisition costs in the US Group and Voluntary blocks.
The 2012 experience loss of $(72) million pre-tax was primarily due to the impact of lower interest rates, the impact of adverse
expenses and adverse policyholder behaviour impacts offset partially by favourable equity and credit experience.
The 2011 experience losses of $(910) million pre-tax was primarily due to adverse equity market and interest rate impacts, offset
partially by the favourable impact of investing activity. Higher expense levels from business initiatives were also an adverse impact
during the year.
For the year 2012, assumption changes and management actions led to a pre-tax gain of $140 million due primarily to the favourable
impact of insurance contract liability modelling enhancements and management actions in Canada and the US. These impacts were
offset partially by the adverse impact of a reduction in the US variable annuity lapse assumption to reflect recent company and industry
experience and an update to mortality assumptions.
For the year 2011, assumption changes and management actions let to a pre-tax loss of $1,253 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 persistency in the US and to reflect new Canadian Institute of Actuaries guidance on
the valuation of life insurance mortality improvements were adverse. Partially offsetting these impacts was the favourable impact of
changes related to the investment income tax on Universal Life products in Canada.
Net pre-tax earnings on surplus of $373 million in 2012 were $32 million lower than a year ago. The decrease is due primarily to lower
investment gains versus the prior year.
164 Sun Life Financial Inc. Annual Report 2012 Sources of Earnings