Sun Life 2010 Annual Report Download - page 44

During 2010, we reported a tax expense of $371 million on income before taxes and non-controlling interests of $2,079 million,
resulting in an effective tax rate of 17.8%. This compares to a tax recovery of $542 million on income before taxes and non-controlling
interests of $95 million in 2009, resulting in a negative effective tax rate of 571%.
In 2010, our tax expense included significant non-recurring items. In the second quarter of 2010 we recorded a tax benefit of
$76 million in relation to a favourable judgment received by the Company in a United Kingdom tax litigation case allowing us to carry
forward tax losses incurred before 2002 to reduce taxes payable for 2002 and subsequent years. This tax benefit was partially offset by
a valuation allowance of $23 million which resulted in a net tax benefit of $53 million representing the portion of the future tax asset that
is considered to be more likely than not to be realized.
Further, in December 2010, we sold our life reinsurance business. As a result, our income tax expense was higher than expected as
the goodwill associated with this business was not deductible for tax purposes.
The net unfavourable impact of the above items on our tax expense in 2010 was reduced by a higher than expected tax benefit from
lower-taxed investment income due to improved market conditions during the year, as well as the favourable resolution of uncertain tax
positions, resulting in the overall effective tax rate of 17.8%.
In 2009 we recorded a tax benefit of $174 million as a result of the enactment of the Canadian tax rules relating to CICA Handbook
Section 3855 Financial Instruments – Recognition and Measurement. We also released a valuation allowance on future tax assets in
the amount of $101 million relating to investment impairment losses previously recorded in SLF U.S. The impact of the above items,
combined with losses in higher tax jurisdictions, such as the United States, contributed to the income tax recovery in 2009.
Impact of Currency
We have operations in key markets worldwide, including the United States, the United Kingdom, Ireland, Hong Kong, the Philippines,
Indonesia, India, China and Bermuda, and generate earnings in local currencies in these jurisdictions, which are translated into
Canadian dollars. The bulk of our exposure to movements in foreign exchange rates is to the U.S. dollar. Items impacting our
Consolidated Statement of Operations are translated back to Canadian dollars using average exchange rates for the respective period.
For items impacting the Consolidated Balance Sheet, period end rates are used for currency translation purposes.
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. In a period of net losses, the
weakening of the Canadian dollar can exacerbate losses. The relative impact of currency 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 currency on net income on a year-over-year basis. During the fourth quarter of 2010 and for the full year 2010, our overall reported
net income decreased by $16 million and by $77 million, respectively, as a result of movements in foreign exchange rates.
Fourth Quarter 2010 Performance
Net income attributable to common shareholders was $508 million for the quarter ended December 31, 2010, compared to net income
of $296 million in the fourth quarter of 2009. Net income in the fourth quarter of 2010 was favourably impacted by $181 million from
improvements in equity markets and $113 million from increased interest rates. This was partially offset by the impact of changes to
actuarial estimates and assumptions of $58 million related primarily to mortality, higher levels of expenses, which included several non-
recurring items, and the unfavourable impact of currency movements.
Results in the fourth quarter of 2009 benefited from the positive impact of asset-liability re-balancing, improvements in equity markets,
increased interest rates and an overall tax recovery. These impacts were partially offset by net impairments, downgrades on the
investment portfolio and lower asset reinvestment gains from changes in credit spreads.
Return on equity (ROE) for the fourth quarter of 2010 was 12.4%, compared with 7.6% for the fourth quarter of 2009. The increase in
ROE was primarily the result of higher earnings, which increased to $0.88 per share in the fourth quarter of 2010 from $0.52 per share
in the fourth quarter of 2009.
Performance by Business Group
SLF Canada had net income of $182 million in the fourth quarter of 2010 compared to $243 million in the fourth quarter of 2009.
Earnings in the fourth quarter of 2010 reflected the net unfavourable impact of interest rate movements, including swap spreads,
changes to actuarial estimates and assumptions related primarily to mortality and the unfavourable impact of asset-liability re-
balancing. This was partially offset by improved equity markets and related tax impacts. Earnings in the fourth quarter of 2009 reflected
improvements in equity markets, the favourable impact of asset-liability re-balancing, increased interest rates, and various tax-related
items, including a one-time benefit of the tax rate reductions enacted in Ontario.
SLF U.S. had net income of US$263 million in the fourth quarter of 2010 compared to a loss of US$8 million in the fourth quarter of
2009. Results in the fourth quarter of 2010 reflected the favourable impact of improved equity markets, increased interest rates and
lower credit impairments and downgrades. The loss in the fourth quarter of 2009 was primarily attributable to net credit impairments,
reserve increases for downgrades on the investment portfolio, and lower asset reinvestment gains from changes in credit spreads. This
was partially offset by the favourable impact of asset-liability re-balancing, equity markets and increased interest rates
MFS had net income of US$56 million in the fourth quarter of 2010 compared to earnings of US$47 million in the fourth quarter of 2009.
The increase in earnings from the fourth quarter of 2009 was primarily due to higher net average assets, which increased to
US$214 billion in the fourth quarter of 2010 from US$181 billion in the fourth quarter of 2009 as a result of improved performance in
financial markets and strong net sales driven by record gross sales of US$53 billion in 2010.
SLF Asia had net income of $28 million in the fourth quarter of 2010 compared to earnings of $27 million in the fourth quarter of 2009.
Earnings in the fourth quarter of 2010 reflected improved results in India as a lower level of sales resulted in reduced levels of new
40 Sun Life Financial Inc. Annual Report 2010 Management’s Discussion and Analysis