Sun Life 2012 Annual Report Download - page 34

Our effective tax rate in 2012 was below the expected range predominantly due to lower taxes on investment income, including lower
taxes related to appreciation of real estate classified as investment property in SLF Canada. Our effective tax rate further benefited
from the successful resolution of tax audits and recognition of previously unrecognized tax losses in SLF U.K.
Our effective tax rate in 2011 reflected various non-recurring tax impacts. During the year, we recorded favourable adjustments of
$45 million with respect to taxes of prior years due to the resolution of tax disputes. We also recorded a tax benefit of $68 million in
the fourth quarter related to previously unrecognized losses in SLF U.K. following the reorganization of our principal U.K. subsidiaries.
In 2011, we also benefited from lower taxes on investment income, particularly related to appreciation of real estate classified as
investment properties in SLF Canada, which increased our income tax recovery in 2011 by $34 million. Our 2011 tax recovery also
included the impact of the impairment of goodwill in SLF Canada, which was not deductible for tax purposes.
Impact of Foreign Exchange Rates
We have operations in many markets worldwide, including Canada, the United States, the United Kingdom, Ireland, Hong Kong, the
Philippines, Japan, Indonesia, India, China, Australia, Singapore, Vietnam and Bermuda, and generate revenues and incur expenses in
local currencies in these jurisdictions, which are translated to Canadian dollars. The bulk of our exposure to movements in foreign
exchange rates is to the U.S. dollar.
Items impacting our Consolidated Statements of Operations are translated to Canadian dollars using average exchange rates for the
respective period. For items impacting our Consolidated Statements of Financial Position, period end rates are used for currency
translation purposes. The following table provides the most relevant foreign exchange rates over the past several quarters.
Exchange Rate Quarterly Full year
Q4’12 Q3’12 Q2’12 Q1’12 Q4’11 2012 2011
Average
U.S. Dollar 0.991 0.995 1.010 1.002 1.023 1.000 0.989
U.K. Pounds 1.592 1.573 1.598 1.574 1.609 1.584 1.585
Period end
U.S. Dollar 0.992 0.984 1.017 0.998 1.019 0.992 1.019
U.K. Pounds 1.612 1.590 1.596 1.597 1.583 1.612 1.583
In general, our net income benefits from a weakening Canadian dollar and is adversely affected by a strengthening Canadian dollar as
net income from the Company’s international operations is translated back to Canadian dollars. However, in a period of losses, the
weakening of the Canadian dollar has the effect of increasing the losses. The relative impact of foreign exchange in any given period is
driven by the movement of currency rates as well as the proportion of earnings generated in our foreign operations. We generally
express the impact of foreign exchange on net income on a year-over-year basis. During the fourth quarter of 2012, our operating net
income decreased by $11 million as a result of movements in currency rates relative to the fourth quarter of 2011. For the year ended
December 31, 2012, our operating net income increased by $12 million as a result of movements in currency rates relative to the prior
year.
Fourth Quarter 2012 Performance
The following table sets out the differences between reported net income (loss) and our operating net income (loss). Unless indicated
otherwise, all other factors discussed in this MD&A that impact our results are applicable to both reported net income (loss) and
operating net income (loss).
Q4 2012
($ millions, after-tax)
SLF
Canada
SLF
U.S. MFS
SLF
Asia Corporate Total
Operating net income (loss) from Continuing Operations(1) 149 93 85 50 (44) 333
Items excluded from operating net income:
Certain hedges that do not qualify for hedge accounting 6––––6
Fair value adjustments on share-based payment awards – – 39 – – 39
Restructuring and other related costs ––––44
Goodwill and intangible asset impairment charges ––––––
Reported net income (loss) from Continuing Operations 143 93 46 50 (48) 284
Reported net Income (loss) 143 202 46 50 (46) 395
(1) Represents a non-IFRS financial measure. See Use of Non-IFRS Financial Measures.
Net Income
Our reported net income was $395 million in the fourth quarter of 2012, compared to a reported loss of $525 million in the fourth
quarter of 2011. Reported ROE was 11.3%, compared to negative 15.4% in the fourth quarter of 2011.
Operating net income was $453 million for the quarter ended December 31, 2012, compared to an operating loss of $221 million for the
quarter ended December 31, 2011. Operating ROE was 12.9%, compared to negative 6.5% in the fourth quarter of 2011.
32 Sun Life Financial Inc. Annual Report 2012 Management’s Discussion and Analysis