Sun Life 2010 Annual Report Download - page 43

Management Actions and Assumption Changes
We make judgments involving assumptions and estimates relating to our obligations to policyholders, some of which relate to matters
that are inherently uncertain. The determination of these obligations is fundamental to our financial results and requires us to make
assumptions about equity market performance, interest rates, asset default, mortality and morbidity rates, policy terminations,
expenses and inflation, and other factors over the life of our products. Our benefit payment obligations are estimated over the life of our
annuity and insurance products, based on internal valuation models, and are recorded in its financial statements, primarily in the form
of actuarial liabilities. We review these assumptions each year, generally in the third and fourth quarters, and revise these
assumptions, if appropriate.
Management actions (included with changes in valuation method and assumption) are items that affect reported earnings in the period
by changing the valuation of policy liabilities in ways other than changes to actuarial methods and assumptions. Examples include
changes to investment policies, changes to contractually adjustable product features, and changes to existing reinsurance
arrangements or reinsurance terms.
In 2010, the net impact of management actions and the review and update of actuarial method and assumption changes resulted in an
increase in net income of $31 million. Details of changes in assumptions made in 2010 by major category are provided below.
Management Actions
and Assumption
Changes
Increase/(Decrease)
in net income Comments
($ millions)
Mortality/Morbidity 173 Largely due to favourable changes to the mortality basis in Individual Insurance
in SLF U.S., Reinsurance in Corporate, and mortality/morbidity in the Company’s
Group businesses in SLF Canada and SLF U.S.
Lapse and other
policyholder behaviour
(223) Reflects the impact of higher persistency as a result of low interest rates in
Individual Insurance in SLF U.S., as well as higher lapse rates on term insurance
renewals in SLF Canada
Expense (55) Impact of reflecting recent experience studies across the Company
Investment returns 16 Primarily from refinements related to re-investment strategies and the impact of
Company wide revisions to equity and interest rate return assumptions
Other 120 Primarily model refinements to improve the projection of future cash flows and
the restructuring of Sun Life Everbright in SLF Asia
Total 31
Additional information on estimates relating to our obligation to policyholders, including the methodology and assumptions used in their
determination, can be found in the Accounting and Control Matters section of this MD&A under the heading Critical Accounting Policies
and Estimates and in Note 9 to our 2010 Consolidated Financial Statements.
Expenses and Other
Expenses & Other
($ millions) 2010 2009 2008
Commissions 1,591 1,662 1,545
Operating expenses 3,357 3,142 2,979
Intangibles amortization 47 34 24
Premium taxes 218 222 227
Interest expenses 440 403 366
Income taxes 371 (542) (343)
Non-controlling interests in net income of subsidiaries 23 15 23
Participating policyholders’ net income 992
Dividends to preferred shareholders 93 79 70
Total 6,149 5,024 4,893
Commission expenses decreased by $71 million in 2010 from the 2009 amount of $1.7 billion mainly from lower sales of fixed annuities
in SLF U.S.
Operating expenses of $3.4 billion in 2010 were $214 million higher than 2009. The strengthening of the Canadian dollar relative to the
foreign currencies reduced 2010 expenses by $206 million compared to 2009 rates. Excluding the impact of currency, expenses
increased by $434 million primarily as a result of higher business volumes and project costs for strategic initiatives in SLF Canada,
increased incentive compensation at MFS based on improved performance and higher costs from the Lincoln U.K. acquisition in the
fourth quarter of 2009 along with integration and new business restructuring costs in SLF U.K.
Interest expense rose by $37 million over 2009 to $440 million in 2010, reflecting the full year cost of debt and preferred share
issuances in 2009, as well as the incremental cost of preferred shares issued in May, 2010.
Income Taxes
The Company has a statutory tax rate of 30.5%, which is reduced by various tax benefits such as lower taxes on income subject to tax
in foreign jurisdictions, a range of tax exempt investment income sources and other sustainable tax benefit streams that, in combination
with a normal level of pre-tax income, decrease the Company’s effective tax rate to an expected range of 18% to 22%.
Management’s Discussion and Analysis Sun Life Financial Inc. Annual Report 2010 39