Sun Life 2012 Annual Report Download - page 29

The following table reconciles our net income measures and sets out the impact that other notable items had on our net income in
2012. Unless indicated otherwise, all other factors discussed in this MD&A that impact our results are applicable to both reported net
income (loss) and operating net income (loss).
($ millions, after-tax) 2012
Reported net income 1,554
Certain hedges that do not qualify for hedge accounting in SLF Canada (7)
Fair value adjustments on share-based payment awards at MFS (94)
Restructuring and other related costs (18)
Goodwill and intangible asset impairment charges (6)
Operating net income 1,679
Equity market impact
Net impact from equity market changes 192
Net basis risk impact 68
Net equity market impact(1) 260
Interest rate impact
Net impact from interest rate changes (46)
Net impact of decline in fixed income reinvestment rates (88)
Net impact of credit spread movements (54)
Net impact of swap spread movements (28)
Net interest rate impact(2) (216)
Net gains from increases in the fair value of real estate 62
Actuarial assumption changes driven by changes in capital market movements (27)
Operating net income excluding the net impact of market factors 1,600
Impact of other notable items on our net income:
Experience related items(3)
Impact of investment activity on insurance contract liabilities 142
Mortality/morbidity (6)
Credit 38
Lapse and other policyholder behaviour (31)
Expenses (90)
Other (96)
Other Assumption Changes and Management Actions (excludes actuarial assumption changes driven by changes in
capital market movements) 135
Other items(4) 30
(1) Net equity market impact consists primarily of the effect of changes in equity markets during the year, net of hedging, that differ from the best estimate assumptions used in
the determination of our insurance contract liabilities of approximately 8% growth per year in equity markets. Net equity market impact also includes the income impact of the
basis risk inherent in our hedging program, which is the difference between the return on underlying funds of products that provide benefit guarantees and the return on the
derivative assets used to hedge those benefit guarantees.
(2) Net interest rate impact includes the effect of interest rate changes on investment returns that differ from best estimate assumptions, and on the value of derivative
instruments used in our hedging programs. Our exposure to interest rates varies by product type, line of business and geography. Given the long-term nature of our
business, we have a higher degree of sensitivity in respect of interest rates at long durations. Net interest rate impact also includes the income impact of declines in fixed
income reinvestment rates and of credit and swap spread movements.
(3) Experience related items reflects the difference between actual experience during the reporting period and best estimate assumptions used in the determination of our
insurance contract liabilities.
(4) Primarily related to net realized gains on sales of AFS securities, tax related benefits in SLF U.K. and a gain on the sale of the private wealth business at MFS McLean
Budden in Canada, partially offset by a premiums receivable account reconciliation issue in SLF U.S. and excess financing costs.
Our reported net income for 2012 included items that are not operational or ongoing in nature and are, therefore, excluded in our
calculation of operating net income. The net impact of certain hedges that do not qualify for hedge accounting in SLF Canada, fair
value adjustments on share-based awards at MFS, restructuring and other related costs and goodwill and intangible asset impairment
charges reduced reported net income by $125 million in 2012, compared to a reduction of $404 million in 2011. The 2011 charge
included $266 million for goodwill and intangible asset impairments.
Net income in 2012 reflected favourable impacts from equity markets, basis risk and increases in the fair value of real estate classified
as investment properties, offset by declines in the fixed income reinvestment rates in our insurance contract liabilities that were driven
by the continued low interest rate environment, and unfavourable impact from credit spread and swap spread movements. Investment
activity on insurance contract liabilities and credit experience contributed positively, but were offset by unfavourable expense-related
items, largely comprised of project-related and non-recurring costs, model experience and other refinements in our variable annuity
products being sold, as well as lapse and other policyholder behaviour experience. Net realized gains on sales of AFS securities and
assumption changes and management actions contributed to net income in 2012.
Net income in 2011 was unfavourably impacted by the net impact of assumption changes and management actions of $910 million,
including a $635 million charge to net income in the fourth quarter related to the valuation of our variable annuity and segregated fund
insurance contract liabilities (“Hedging in the Liabilities”). Results in 2011 were also unfavourably impacted by declines in equity
markets and interest rate levels, which reduced net income by $356 million and $224 million, respectively. This was partially offset by
the favourable impact of investment activity on insurance contract liabilities, net realized gains on AFS securities, a net tax benefit from
the reorganization of our U.K. operations and increases in the fair value of real estate classified as investment properties.
Management’s Discussion and Analysis Sun Life Financial Inc. Annual Report 2012 27