Sun Life 2012 Annual Report Download - page 33

2012 Assumption Changes and Management Actions from Continuing Operations by Type
($ millions)
Increase/
(Decrease)
in operating
net income Comments
Mortality/Morbidity (4) Driven primarily by updates to reflect recent experience in SLF U.S. and SLF Canada
Lapse and other
policyholder
behaviour
–
Expense 32 Reflects the positive impact of updates to expenses
Investment returns 16 Resulting primarily from updates to our economic scenario generator, offset by an increase
in average long-term credit spreads and favourable impact from implementing additional
hedges
Model enhancements
and other
177 Reflects the impact of modelling enhancements, management actions in SLF Canada and
SLF U.S. and assumptions relating to our ability to recapture certain reinsurance treaties in
the U.S.
Total 221
Additional information on estimates relating to our policyholder obligations, including the methodology and assumptions used in their
determination, can be found in this MD&A under the heading Accounting and Control Matters – Critical Accounting Policies and
Estimates and in Note 11 in our 2012 Consolidated Financial Statements.
Impact of the Low Interest Rate Environment
Sun Life Financial’s overall business and financial operations are affected by the global economic and capital market environment. Our
results are sensitive to interest rates, which have declined in response to more challenging conditions in the European Union and
monetary policy actions in the United States.
During 2012, we incurred charges of $88 million due to declines in fixed income reinvestment rates in our insurance contract liabilities.
Assuming continuation of December 31, 2012 interest rate levels through the end of 2015, our net income from Continuing Operations
for the 2013 to 2015 period would be reduced by up to $350 million due to declines in fixed income reinvestment rates. This reflects a
$150 million improvement from the estimate we disclosed in the third quarter of 2012 related to increased interest rates, the impact of
methodology changes for determining liabilities in SLF Asia and the removal of the impact from Discontinued Operations. This is
forward-looking information and assumes the continuation of December 31, 2012 interest rate levels through the end of 2015, as
applied to the block of business in force and using other assumptions in effect at December 31, 2012.
In addition to the impact on fixed income reinvestment rates in insurance contract liabilities, a prolonged period of low interest rates can
pressure our earnings, regulatory capital requirements and our ability to implement our business strategy and plans in several ways,
including:
(i) lower sales of certain protection and wealth products, which can in turn pressure our operating expense levels;
(ii) shifts in the expected pattern of redemptions (surrenders) on existing policies;
(iii) higher equity hedging costs;
(iv) higher new business strain reflecting lower new business profitability;
(v) reduced return on new fixed income asset purchases;
(vi) the impact of changes in actuarial assumptions driven by capital market movements;
(vii) impairment of goodwill; and
(viii) additional valuation allowances against our deferred tax assets.
Actuarial Standards
On December 21, 2012, the Actuarial Standards Board proposed to revise the Canadian actuarial standards of practice with respect to
economic reinvestment assumptions. Any impact of such revision to our liabilities has not yet been determined.
Annual Goodwill and Intangibles Impairment Testing
The Company completed its annual goodwill and intangibles impairment testing in the fourth quarter. No impairment charges were
taken as a result of this testing. However, in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations,
we have written down $6 million of intangibles and have recorded this charge in Discontinued Operations.
At the end of 2011, we took an impairment charge in our Canadian Individual Wealth CGU. Although no further impairment charge is
required in 2012, the excess of fair value over carrying value for this CGU remains small as a result of low interest rates, market
volatility affecting the cost of hedging and uncertainty regarding future capital requirements for segregated funds. The goodwill
associated with this CGU was $160 million at December 31, 2012.
Income Taxes
In 2012, for Continuing Operations, we had an income tax expense of $210 million on our reported income before taxes of
$1,711 million, representing an effective income tax rate of 12.3%. This compares to an income tax recovery of $151 million on
reported income before taxes of $190 million and an effective tax recovery rate of 79.5% for Continuing Operations in 2011. Our
Combined Operations in 2012 reported an income tax expense of $277 million on income before taxes of $1,958 million, which resulted
in an effective income tax rate of 14.1%. This compares to an income tax recovery of $488 million on our reported loss before taxes of
$742 million and an effective tax rate of 65.8% for Combined Operations in 2011.
The Company’s statutory tax rate is 26.5% in 2012 (28% in 2011). Our statutory tax rate is normally reduced by various tax benefits,
such as lower taxes on income subject to tax in foreign jurisdictions, a range of tax exempt investment income and other sustainable
tax benefits that are expected to decrease our effective tax rate to a range of 18% to 22%.
Management’s Discussion and Analysis Sun Life Financial Inc. Annual Report 2012 31