ConsFinancial Statements-Pt 1
Sun Life Fin.Services of Canada Inc
24 October 2001
PART 1
THIRD QUARTER 2001
INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2001
SUN LIFE FINANCIAL SERVICES OF CANADA INC.
Consolidated Statements of Operations
(unaudited, in millions of Canadian dollars,
except for per share amounts)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
2001 2000 2001 2000
REVENUE
Premium income:
Annuities $ 657 $ 1,319 $ 2,861 $ 3,329
Life insurance 867 789 2,731 2,518
Health insurance 349 344 1,043 977
------- ------- ------- -------
1,873 2,452 6,635 6,824
Net investment income 891 929 2,757 2,884
Fee income 762 868 2,412 2,462
------- ------- ------- -------
3,526 4,249 11,804 12,170
======= ======= ======= =======
POLICY BENEFITS AND EXPENSES
Payments to policyholders,
beneficiaries and depositors:
Maturities and surrenders 519 492 1,505 1,643
Annuity payments 233 247 701 714
Death and disability benefits 289 246 875 808
Health benefits 266 260 804 783
Policyholder dividends and
interest on claims and
deposits 248 252 761 783
------- ------- ------- -------
1,555 1,497 4,646 4,731
Net transfers to segregated
funds 547 586 2,040 1,875
Increase in actuarial
liabilities 156 847 1,155 1,639
Commissions 360 323 1,062 983
Operating expenses 550 612 1,854 1,795
Premium taxes 25 24 80 84
Interest expense 42 37 127 120
------- ------- ------- -------
3,235 3,926 10,964 11,227
======= ======= ======= =======
OPERATING INCOME BEFORE INCOME
TAXES 291 323 840 943
Income taxes 77 121 214 351
------- ------- ------- -------
TOTAL NET INCOME 214 202 626 592
Less:
Net income from mutual
operations (prior to
demutualization) - - - 179
Participating policyholders'
net income (loss) (after
demutualization) (1) (1) (3) (5)
------- ------- ------- -------
SHAREHOLDERS' NET INCOME
(AFTER DEMUTUALIZATION) $ 215 $ 203 $ 629 $ 418
======= ======= ======= =======
Basic earnings per share
(Note 2) $ 0.51 $ 0.48 $ 1.49 $ 0.99*
Diluted earnings per share
(Note 2) $ 0.50 $ 0.48 $ 1.48 $ 0.99
* Basic and diluted earnings per share cover period from March 22 to September
30, 2000.
Consolidated Balance Sheets
(unaudited, in millions of Canadian dollars)
AS AT
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
2001 2000 2000
ASSETS
Bonds $ 28,604 $ 27,534 $ 26,416
Mortgages 11,035 10,179 10,148
Stocks 4,583 4,583 4,820
Real estate 2,337 2,327 2,264
Cash, cash equivalents and short-term
securities 4,486 3,962 3,674
Policy loans and other invested assets 2,588 2,416 2,385
Invested assets 53,633 51,001 49,707
Other assets 5,191 4,801 4,857
Total general fund assets $ 58,824 $ 55,802 $ 54,564
Segregated funds net assets $ 42,016 $ 48,741 $ 50,198
LIABILITIES AND EQUITY
Actuarial liabilities and other policy
liabilities $ 37,132 $ 35,022 $ 35,222
Amounts on deposit 4,282 3,864 3,822
Deferred net realized gains 3,859 3,725 3,505
Other liabilities 4,464 4,845 3,844
Total general fund liabilities 49,737 47,456 46,393
Subordinated debt 773 749 749
Cumulative capital securities of a
subsidiary 948 900 900
Total equity 7,366 6,697 6,522
Total general fund liabilities and equity $ 58,824 $ 55,802 $ 54,564
Segregated funds contract liabilities $ 42,016 $ 48,741 $ 50,198
Approved on behalf of the Board of Directors
D.A. Stewart
Chairman and Chief Executive Officer
R.W. Osborne
Director
Consolidated Statements of Equity
(unaudited, in millions of Canadian dollars)
FOR THE NINE MONTHS ENDED
PARTICIPATING SEPTEMBER 30 SEPTEMBER 30
POLICYHOLDERS SHAREHOLDERS 2001 2000
COMMON STOCK
Balance, beginning of period $ - $ 795 $ 795 $ -
New common shares issued - - - 844
Commissions and offering
costs, net of taxes - - - (49)
Purchase and cancellation of
common shares (Note 3) - (2) (2) -
Balance, end of period - 793 793 795
RETAINED EARNINGS/SURPLUS
Balance, beginning of period 78 5,478 5,556 5,489
Demutualization costs, net of
taxes - - - (114)
Net income as a mutual company - - - 179
Balance, March 22, 2000, as at
demutualization 78 5,478 5,556 5,554
Cash distribution to policy-
holders at demutualization - - - (576)
Net income (loss) as a stock
company (3) 629 626 413
Dividends paid to shareholders - (152) (152) -
Purchase and cancellation of
common shares (Note 3) - (33) (33) -
Balance, end of period 75 5,922 5,997 5,391
CURRENCY TRANSLATION ACCOUNT
Balance, beginning of period 1 345 346 389
Changes for the period (prior
to demutualization) - - - (20)
Changes for the period (after
demutualization) 2 228 230 (33)
Balance, end of period 3 573 576 336
Total equity $ 78 $ 7,288 $ 7,366 $ 6,522
Condensed Consolidated Statements of Cash Flows
(unaudited, in millions of Canadian dollars)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
2001 2000 2001 2000
CASH FLOWS PROVIDED BY (USED
IN) OPERATING ACTIVITIES
Total net income $ 214 $ 202 $ 626 $ 592
Net mutual fund business
acquisition costs
capitalized (28) (104) (171) (322)
Items not affecting cash 262 822 713 1,829
Net cash provided by
operating activities 448 920 1,168 2,099
CASH FLOWS PROVIDED BY (USED
IN) FINANCING ACTIVITIES
Borrowed funds (221) (150) (143) (642)
Payments to certain
participating policyholders
and underwriters at
demutualization - - - (658)
Issuance of common shares - - - 844
Purchase and cancellation of
common shares (Note 3) - - (35) -
Dividends paid to shareholders (51) - (152) -
Net cash used in financing
activities (272) (150) (330) (456)
CASH FLOWS PROVIDED BY (USED
IN) INVESTING ACTIVITIES
Sales, maturities and repayments
of bonds, mortgages, stocks
and real estate 4,091 3,216 12,501 11,093
Purchases of bonds, mortgages,
stocks and real estate (4,216) (3,437) (12,863) (12,263)
Policy loans (17) (3) (61) (21)
Short-term securities 385 (517) 82 (722)
Other investments (43) (12) (136) 12
Disposal - - - 160
Net cash provided by (used in)
in investing activities 200 (753) (477) (1,741)
Net cash provided by (used in)
discontinued operations 10 (19) 59 7
Changes due to fluctuations in
the exchange rates 117 22 138 34
Increase (decrease) in cash and
cash equivalents 503 20 558 (57)
Cash and cash equivalents,
beginning of period 2,558 1,921 2,503 1,998
Cash and cash equivalents, end
of period 3,061 1,941 3,061 1,941
Short-term securities, end of
period 1,425 1,733 1,425 1,733
Cash, cash equivalents and
short-term securities, end
of period $ 4,486 $ 3,674 $ 4,486 $ 3,674
Supplementary Information
Cash and cash equivalents:
Cash $ 310 $ 487
Cash equivalents 2,751 1,454
------- -------
$ 3,061 $ 1,941
Cash disbursements made for:
Interest on borrowed funds,
subordinated debt and
cumulative capital
securities $ 19 $ 17 $ 104 $ 99
Income taxes, net of refunds $ 61 $ 94 $ 235 $ 302
Consolidated Statements of Changes in Segregated Funds Net Assets
(unaudited, in millions of Canadian dollars)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
2001 2000 2001 2000
ADDITIONS (REDUCTIONS) TO
SEGREGATED FUNDS
Deposits:
Annuities $ 940 $ 1,959 $ 4,111 $ 4,533
Life insurance 32 102 286 915
------- ------- ------- -------
972 2,061 4,397 5,448
Net transfers from general
funds 547 586 2,040 1,875
Net realized and unrealized
gains (losses) (5,774) 512 (10,958) 969
Other investment income 245 299 1,166 966
Effect of changes in currency
exchange rates 1,833 64 1,700 19
------- ------- ------- -------
(2,177) 3,522 (1,655) 9,277
DEDUCTIONS FROM SEGREGATED FUNDS
Payments to policyholders and
their beneficiaries 1,553 1,659 4,651 4,666
Management fees 128 163 401 410
Taxes and other expenses (11) (19) 18 17
------- ------- ------- -------
1,670 1,803 5,070 5,093
Net additions (deductions) to
segregated funds for the
period (3,847) 1,719 (6,725) 4,184
Segregated funds net assets,
beginning of period 45,863 48,479 48,741 46,014
Segregated funds net assets,
end of period $42,016 $50,198 $42,016 $50,198
Consolidated Statements of Segregated Funds Net Assets
(unaudited, in millions of Canadian dollars)
AS AT
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
2001 2000 2000
ASSETS
Stocks $ 34,898 $ 42,225 $ 44,590
Bonds 5,372 5,146 4,249
Cash, cash equivalents and short-term
securities 2,085 1,412 1,244
Real estate 787 817 796
Mortgages 340 338 335
Other assets 415 648 370
-------- -------- --------
43,897 50,586 51,584
LIABILITIES 1,881 1,845 1,386
Net assets applicable to segregated funds
policyholders $ 42,016 $ 48,741 $ 50,198
Condensed Notes to the Interim Consolidated Financial Statements
(unaudited, in millions of Canadian dollars, except for per share amounts and
where otherwise stated)
1. Basis of Presentation
Sun Life Financial Services of Canada Inc. and its subsidiaries are collectively
referred to as 'Sun Life Financial' or 'the Company'. Sun Life Financial
prepares its Consolidated Financial Statements according to Canadian generally
accepted accounting principles (GAAP) including the requirements of the Office
of the Superintendent of Financial Institutions Canada. These Interim
Consolidated Financial Statements follow the same accounting policies and
methods of computation as the annual 2000 Consolidated Financial Statements,
with the exception of the changes in accounting policies as described in Note 7.
The Interim Consolidated Financial Statements should be read in conjunction with
the most recent annual Consolidated Financial Statements, as they do not include
all information and notes required by GAAP for annual Consolidated Financial
Statements.
Sun Life Financial Services of Canada Inc., a publicly traded company, is the
holding company of Sun Life Assurance Company of Canada. Sun Life Assurance
Company of Canada was organized as a mutual life insurance company until March
22, 2000, at which date it demutualized. For financial statement purposes, the
surplus, results of operations and cash flows of Sun Life Assurance Company of
Canada and its subsidiaries (Sun Life Assurance) have been presented in the
Interim Consolidated Financial Statements of Sun Life Financial on a continuity
of interest basis as a continuation of the historical operations of Sun Life
Assurance.
2. Earnings Per Share
BASIC, ADJUSTED AND DILUTED EARNINGS PER SHARE
For the three For the nine For the period
months ended months ended from March 22
Sept.30 Sept.30 Sept.30 Sept.30 to Sept. 30
2001 2000 2001 2000 2000
Net income available to
shareholders $215 $203 $629 $ 581(2) $418
Less: Effect of stock
options of subsidiaries(1) 1 2 4 3
Net income available to
shareholders on a diluted
basis $214 $201 $625 $415
Weighted average number of
shares outstanding
(in millions) 421 422 421 414 420
Add: Options of Sun Life
Financial Services of
Canada Inc. 1 - - -
Weighted average number of
shares outstanding on a
diluted basis
(in millions) 422 422 421 420
Basic and adjusted(2)
earnings per share $0.51 $0.48 $1.49 $1.40(2) $0.99
Diluted earnings per share $0.50 $0.48 $1.48 $0.99
(1) The effect of stock options of the subsidiaries is calculated based on the
treasury stock method requirements which assume that any proceeds from the
exercise of the options would be used to purchase common shares of the
subsidiaries at the average market prices during the period.
(2) Adjusted earnings per share is calculated as if demutualization occurred and
the offering, excluding the underwriters' over-allotment, closed on January
1, 2000. Net income of $592 from January 1 to September 30, 2000 was
adjusted for the net income of $16 attributed to pre-demutualization
participating policyholders and the net loss of $5 attributed to post-
demutualization participating policyholders.
3. Normal Course Issuer Bid
On May 11, 2000, the Company announced that the Board of Directors (Board) had
authorized the purchase of up to 21 million common shares (Shares), representing
5% of the Shares issued and outstanding at that time. The purchases were made
under a normal course issuer bid program in accordance with the rules of The
Toronto Stock Exchange (Exchange). The normal course issuer bid program covered
the period from May 15, 2000 to May 14, 2001. Regulatory approval for the normal
course issuer bid program was received on May 16, 2000. Transactions were
executed on the Exchange at the prevailing market price in amounts and times
determined by the Company. The Company made no purchases of Shares other than
open-market purchases. Any Shares purchased as part of the normal course issuer
bid program were cancelled. As at September 30, 2001, the Company had purchased
and cancelled approximately one million of its Shares at an average price of $32
per share and had 421 million (422 million in 2000) Shares issued and
outstanding.
4. Stock-based Compensation
On April 25, 2001, shareholders of the Company approved the Executive Stock
Option Plan, the Director Stock Option Plan and the Senior Executives' Deferred
Share Unit Plan at the Annual and Special Meeting. The Company granted stock
options to certain employees and directors under the Executive Stock Option Plan
and the Director Stock Option Plan and to all eligible employees under the
Special 2001 Stock Option Award Plan. These options may be exercised at the
closing price of the Shares on the Toronto Stock Exchange on the trading day
preceding the grant date. The options granted under the stock option plans will
vest at various times: over a five-year period under the Executive Stock Option
Plan, two years after the grant date under the Special 2001 Stock Option Award
Plan and over a two-year period or immediately upon death or attainment of the
mandatory age for retirement under the Director Stock Option Plan. All options
have a maximum exercise period of 10 years. The maximum number of Shares that
may be issued under the Executive Stock Option Plan, the Special 2001 Stock
Option Award Plan and the Director Stock Option Plan are 29,525,000 Shares,
1,150,000 Shares and 150,000 Shares, respectively. The Company follows the
intrinsic value method of accounting for the stock options. Since the exercise
price is set at the closing price of the Shares on the trading day preceding the
grant date, no compensation expense is recognized on the grant date. When
options are exercised, the proceeds received by the Company are credited to
common stock in the Consolidated Statements of Equity.
The activity in the stock option plans for the nine months ended September 30,
2001 is as follows:
2001
Weighted average Weighted
remaining contractual Number of average
life (years) stock options exercise price
Granted 5,289,300 $29.53
Forfeited 79,100 29.49
Balance, September 30
(exercise prices: $29.49 to $38.50) 9.5 5,210,200 $29.53
Exercisable, September 30 2,000 $31.00
Effective October 1, 2001, the Company began matching employees' contributions
to the Sun Life Financial Employee Stock Plan (Plan). Eligible employees in
Canada may contribute from 1% to 20% of their base earnings to the Plan. The
Company matches 50% of the lower of the employee contributions and 5% of the
employee's base earnings to an annual maximum of one thousand five hundred
dollars. The Company's contributions vest immediately.
5. Acquisition and Disposal
On May 2, 2001, the Company signed an agreement of purchase and sale with
Liberty Financial Companies, Inc. to acquire both Keyport Life Insurance Company
and Independent Financial Marketing Group, Inc. for $2.6 billion. Subject to the
approvals of the relevant Canadian and U.S. regulators and the shareholders of
Liberty Financial Companies, Inc., the acquisition is expected to close in the
fourth quarter of 2001.
On September 14, 2001, the Company signed an agreement of purchase and sale to
sell all of the common shares of Sun Bank plc, a bank specializing in mortgage
and savings products, for approximately $218. The sale, which will create a
small gain, is subject to regulatory approval and financing and is expected to
close in the fourth quarter of 2001.
6. Segmented Information
The Company's reportable segments reflect the Company's management structure and
internal financial reporting. Each of these segments has its own management. All
of these segments operate in the financial services industry. They derive their
revenues principally from wealth management operations (mutual funds, investment
management, annuities, trust operations and banking) and protection services
(life and health insurance). Corporate and other represents amounts not
attributed to wealth management and protection. It primarily includes
investments of a corporate nature and earnings on capital not attributed to the
strategic business units.
Other operations include those operations for which management responsibility
resides in head office. Total net income or loss in this category is shown net
of certain expenses borne centrally. Transactions occurring between segments
consist primarily of internal financing agreements. Inter-segment transactions
are measured at market values prevailing when the arrangements were negotiated.
Inter-segment revenue for the three and nine months ended September 30, 2001
consists of interest of $36 and $104, respectively ($37 and $107, respectively,
in 2000) and fee income of $17 and $32, respectively ($11 and $28, respectively,
in 2000).
RESULTS BY SEGMENT FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
United States United Consolidation
Canada Sun Life MFS Kingdom Asia Other Adjustments Total
REVENUE
Wealth
management $ 307 $ 757 $ 541 $ 179 $ - $ 2 $ (5) $ 1,781
Protection 586 757 - 268 107 1 - 1,719
Corporate and
other 3 14 - 2 - 55 (48) 26
$ 896 $ 1,528 $ 541 $ 449 $ 107 $ 58 $ (53) $ 3,526
TOTAL NET INCOME
(LOSS)
Wealth
management $ 18 $ 15 $ 58 $ 23 $ - $ 1 $ (7) $ 108
Protection 29 44 - 42 3 (1) - 117
Corporate and
other 3 (4) - (28) - 11 7 (11)
$ 50 $ 55 $ 58 $ 37 $ 3 $ 11 $ - $ 214
RESULTS BY SEGMENT FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
United States United Consolidation
Canada Sun Life MFS Kingdom Asia Other Adjustments Total
REVENUE
Wealth
management $ 344 $ 1,360 $ 629 $ 214 $ - $ 2 $ (11) $ 2,538
Protection 628 626 - 333 103 3 - 1,693
Corporate and
other 8 10 - (1) - 38 (37) 18
$ 980 $ 1,996 $ 629 $ 546 $ 103 $ 43 $ (48) $ 4,249
TOTAL NET INCOME
(LOSS)
Wealth
management $ 17 $ 29 $ 72 $ 18 $ - $ 2 $ (8) $ 130
Protection 20 20 - 30 9 2 - 81
Corporate and
other 7 14 - (16) - (22) 8 (9)
$ 44 $ 63 $ 72 $ 32 $ 9 $(18) $ - $ 202
RESULTS BY SEGMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
United States United Consolidation
Canada Sun Life MFS Kingdom Asia Other Adjustments Total
REVENUE
Wealth
management $ 984 $ 3,033 $1,731 $ 594 $ - $ 8 $ (20) $ 6,330
Protection 1,857 2,230 - 945 316 8 - 5,356
Corporate and
other 17 41 - 5 - 171 (116) 118
$ 2,858 $ 5,304 $1,731 $ 1,544 $ 316 $187 $(136) $11,804
TOTAL NET INCOME
(LOSS)
Wealth
management $ 57 $ 29 $ 181 $ 87 $ (2) $ 7 $ (22) $ 337
Protection 80 108 - 93 23 - - 304
Corporate and
other 15 (5) - (54) - 7 22 (15)
$ 152 $ 132 $ 181 $ 126 $ 21 $ 14 $ - $ 626
ASSETS
General fund
assets $17,627 $19,265 $1,753 $14,693 $1,737 $3,741 $ 8 $58,824
Segregated funds
net assets $ 7,842 $ 24,091 $ - $10,083 $ - $ - $ - $42,016
Other assets
under Manage-
ment $22,929 $ 1,682 $192,238 $2,856 $ 15 $ - $(21,362) $198,358
RESULTS BY SEGMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
United States United Consolidation
Canada Sun Life MFS Kingdom Asia Other Adjustments Total
REVENUE
Wealth
management $ 1,152 $ 3,294 $1,768 $ 655 $ - $ 7 $ (28) $ 6,848
Protection 1,849 1,939 - 1,103 298 11 - 5,200
Corporate and
other 18 68 - (3) - 146 (107) 122
$ 3,019 $ 5,301 $1,768 $1,755 $ 298 $ 164 $ (135) $12,170
TOTAL NET INCOME
(LOSS)
Wealth
management $ 62 $ 58 $ 196 $ 85 $ (2) $ 6 $ (23) $ 382
Protection 58 67 - 45 23 2 - 195
Corporate and
other 13 61 - (48) - (34) 23 15
$ 133 $ 186 $ 196 $ 82 $ 21 $ (26) $ - $ 592
ASSETS
General fund
assets $ 17,440 $ 17,222 $1,708 $13,534 $1,467 $3,515 $ (322) $54,564
Segregated
funds net
assets $ 9,609 $ 28,790 $ - $11,799 $ - $ - $ - $50,198
Other assets
under Manage-
ment $25,154 $ 1,348 $237,995 $3,675 $ 7 $ - $(28,112)$240,067
7. Changes in Accounting Policies
The Company adopted Earnings Per Share, the Canadian Institute of Chartered
Accountants (CICA) Handbook Section 3500, on January 1, 2001, which requires the
use of treasury stock method to determine the dilutive effect of options,
warrants and equivalents in the calculation of earnings per share. This new
standard does not materially impact the Company's earnings per share
disclosures.
The Company adopted Business Combinations, CICA Handbook Section 1581, on July
1, 2001. The new standard requires that acquisitions of businesses be accounted
for using the purchase method. This method involves allocating the purchase
price of the acquisition to the assets acquired, including the identifiable
intangible assets, and the liabilities assumed based on their fair values at the
date of acquisition. Any excess is then recorded as goodwill. The Company also
adopted the transitional provisions of Goodwill and Other Intangible Assets,
CICA Handbook Section 3062, on July 1, 2001. These provisions require that
goodwill and intangible assets with indefinite lives arising from acquisitions
after that date not be amortized. The impact of this change in accounting policy
was not material to these Interim Consolidated Financial Statements.
The Company adopted Transfers of Receivables, CICA Handbook Accounting Guideline
12, to account for asset securitizations made on or after July 1, 2001. The new
standard requires securitizations to be recorded as sales, when control over the
assets has been surrendered and consideration other than beneficial interests in
these transferred assets has been received in exchange. The impact of this
change in accounting policy was not material to these Interim Consolidated
Financial Statements.
8. Loans Securitization
On July 1, 2001, the Company sold commercial mortgages with a carrying value of
$265 to a trust which subsequently issued securities backed by the commercial
mortgages. The Company was retained to service and administer the mortgages.
This transaction was accounted for under the new Accounting Guideline 12.
Transfers of Receivables and resulted in a gain of approximately $4 before
taxes.
9. Provisions for Certain Contingencies
REINSURANCE MATTERS
The Company adopted a formal plan of disposal for its reinsurance operations on
December 15, 1999. On April 10, 2000, the transaction to sell the life
retrocession and financial reinsurance lines of its reinsurance business closed
after receiving all of the necessary regulatory approvals. The portion of the
reinsurance business which is not included in the sale, primarily the accident
and health reinsurance business, has been discontinued as the Company has
stopped writing such business and closed its existing block of business. The
actuarial liabilities and provisions remaining with the Company amount to $709
($855 as at September 30, 2000). Certain of the arrangements in the business
remaining with the Company are subject to litigation or arbitration. The
liabilities of the Company under these arrangements are subject to measurement
uncertainty, but this is not expected to have a material adverse effect on the
consolidated financial position of the Company.
UNICOVER
The Company is engaged in arbitration proceedings in the United States with
Cragwood Managers, LLC (formerly Unicover Managers, Inc.) and the members of the
Unicover reinsurance pool. The Company is seeking rescission of, or damages in
respect of, certain contracts of reinsurance of accident and health insurance
components of workers' compensation insurance policies written by U.S. insurers.
The amounts involved are substantial.
The Company is also engaged in arbitration proceedings in the United States and
in England with three of the companies that have contracts to provide
reinsurance to the Company. Those contracts would provide coverage for Unicover-
related claims (as well as non-Unicover claims). Those companies are disputing
their obligation to provide coverage to the Company under their respective
contracts of reinsurance. Other reinsurers of the Company may institute similar
proceedings.
Based on its investigation of the facts currently available and on the advice of
counsel, the Company believes that it has strong grounds on which to rescind the
contracts with the Unicover pool members. However, the arbitration proceedings
may be lengthy and the outcome of the arbitration proceedings is uncertain. The
final liabilities of the Company in respect of Unicover-related claims are not
expected to have a material adverse effect on the consolidated financial
position of the Company regardless of the outcome of these arbitration
proceedings.
The Company established provisions of $150 after taxes during 1999 in connection
with the Unicover business based on information known to it at the time. The
financial terms of certain settlements that the Company has entered into to date
in connection with Unicover-related claims are consistent with these provisions.
No additional provisions were established during the first nine months of 2001.
LEGAL PROCEEDINGS
Sun Life Financial and its subsidiaries are engaged in litigation arising in the
ordinary course of business. None of this litigation is expected to have a
material adverse effect on the consolidated financial position of the Company
other than those mentioned elsewhere in this note.
PROVISIONS IN THE UNITED KINGDOM
In the United Kingdom, the life insurance industry is being required to
compensate certain policyholders under the Financial Services Authority
guidelines on sales of pension products. The compensation is for sales which
occurred from 1988 to 1994. These guidelines have been significantly expanded
for the second phase of required compensation, which has required the entire
industry to significantly increase its provisions. The Financial Services
Authority is continuing to provide more specific guidance for this compensation.
The liability has been determined by the use of estimates derived from the
regulatory guidance or the Company's prior experience. The Company's future
experience may be different from these estimates and consequently there is still
uncertainty in measuring its ultimate costs. There was no increase in the
provisions for the first nine months of 2001 and 2000 and the total cost since
inception is $1,176. During the first nine months of 2001, the Company paid
compensation of $132 ($67 in the first nine months of 2000), for total
compensation payments since inception of $644. At September 30, 2001, the
Company had provisions of $419 ($617 as at September 30, 2000) for future
compensation payments and related expenses.
In 1998, the Company significantly increased its actuarial liabilities in
connection with certain annuities with minimum annuity rates issued prior to
1994 by Confederation Life (U.K.) in the United Kingdom. At September 30, 2001,
the actuarial liabilities for these annuities were $438 ($439 as at September
30, 2000). The Company has instituted a hedging program with the objective of
limiting losses that would otherwise arise upon further declines in interest
rates in the United Kingdom. This program provides a substantial, although not
complete, hedge against declines in interest rates. There can be no certainty
that additional liabilities will not be required in the future as a result of
interest rate changes or other factors.
10. Restructuring of the United Kingdom Operations
In February 2001, the Board approved a restructuring plan of the Company's
United Kingdom operations. As part of the restructuring plan, the Company
decided to exit the direct sales force distribution channel and significantly
reduce the scale of its operations by the end of 2003. For the nine months ended
September 30, 2001, severance and other related costs of approximately $77 were
paid and expensed as part of the operating expenses in the Consolidated
Statements of Operations. Cost savings relating to exiting the direct sales
force distribution channel were also realized during this period. The net
impact of the restructuring costs and the expense reductions was not material to
these Interim Consolidated Financial Statements.
11. Subsequent Events
On October 4, 2001, the Company issued 11 million Shares at $30 per share for
$330. Underwriting commissions and offering costs of issuing the Shares amounted
to $15 and will be deducted from the shareholders' equity of the Company.
On October 19, 2001, Sun Life Capital Trust (Trust), a controlled trust of Sun
Life Assurance Company of Canada, issued $950 of non-voting Sun Life
ExchangEable Capital Securities - Series A (SLEECS). Holders of the SLEECS will
be entitled to receive a semi-annual non-cumulative fixed cash distribution of
$34.325 per SLEECS, representing an annual yield of 6.865% of the one thousand
dollars initial issue price, payable out of the Trust's net distributable funds.
If Sun Life Assurance Company of Canada has not declared dividends on its Class
B Non-cumulative Preferred Shares Series A or, if there are public preferred
shares outstanding, on any of its preferred shares listed on a stock exchange,
cash distributions will not be made on the SLEECS. Subject to regulatory
approval, the Trust may redeem the SLEECS at any time after the fifth
anniversary of the date of issuance and, in certain limited circumstances, may
also redeem the SLEECS during the first five years. The holders of the SLEECS
will have the right at any time to surrender each one thousand dollars face
amount of SLEECS and to receive from the Trust in exchange 40 Class A Non-
cumulative Preferred Shares Series Z of Sun Life Assurance Company of Canada,
subject to compliance with the Declaration of Trust.
Proceeds of issuing the SLEECS and Shares are intended to be used to finance in
part the acquisition of Keyport and IFMG.
On October 14, 2001, the Company signed an agreement of purchase and sale to
sell all of the common shares of SLC Asset Management Limited, an asset
management company, and two other affiliated companies. The sale, which will
create a gain, is subject to regulatory approval and is expected to close in the
fourth quarter of 2001. Proceeds from the sale are intended to be used for
general corporate purposes.
THIRD QUARTER 2001
MANAGEMENT'S
DISCUSSION AND ANALYSIS
Three Months Ended
September 30, 2001
SUN LIFE FINANCIAL SERVICES OF CANADA INC.
Management's Discussion and Analysis
for the three months ended September 30, 2001
Sun Life Financial Services of Canada Inc. reported shareholder net income of
$215 million for the quarter ending September 30, 2001, an increase of 6 per
cent over the $203 million earned in the same period in 2000. Earnings per share
of 50.51 were up 6 per cent from the $0.48 per share earned in the third quarter
a year ago. Expense savings relative to the second quarter more than offset the
earnings impact of an 11 per cent decline in revenues. Revenues for the quarter
were $3,526 million, compared with $3,945 million in the second quarter of 2001.
Assets under management were $299.2 billion at quarter end, a decrease of 8 per
cent compared with the $326.4 billion at June 30, 2001, and a decline of 13 per
cent relative to assets of $344.8 billion at September 30, 2000. Return on
equity was 12.1 per cent in the third quarter, down from 12.3 per cent in the
second quarter of 2001.
Financial Summary
Nine
Quarterly Results Month Results
3Q'01 2Q'01 3Q'00 2001 2000
Shareholder Net Income ($mm) 215 212 203 629 581
Earnings Per Share ($) .51 .50 .48 1.49 1.40
Revenues ($mm) 3,526 3,945 4,249 11,804 12,170
Return on Equity (%) 12.1 12.3 12.8 12.2 12.7
Average Shares Outstanding (mm) 420.7 420.7 421.7 420.9 414.3
Sun Life Financial maintained solid earnings momentum in the third quarter
despite a number of significant challenges confronting financial services firms
especially those with a focus on wealth management. The Company's solid
performance during this difficult period reflects its balanced business profile
with its strategic diversity of protection and wealth management businesses.
Company management has said for some time that they intended to pursue a
strategy which balanced the stability of insurance businesses' earnings with the
higher long-term growth prospects of wealth management.
The Company's US Annuity and Insurance business line had a strong quarter
earning $55 million, more than double that unit's earnings of the second
quarter. Individual Life led this US performance with earnings of $33 million
for the quarter, up more than 30 per cent from the second quarter.
MFS Investment Management earned $58 million in the third quarter, down 11 per
cent from the $65 million earned in the second quarter. This earnings decline
resulted from the impact that retreating equity markets had on MFS' revenues.
Nevertheless, MFS continued to record enviable net funds inflows of $3.9 billion
for the quarter, which compares very favourably to the net redemptions
experienced by much of the investment management industry.
The strength of the Sun Life Financial growth strategy was demonstrated by its
ability to readily access the capital markets in late September and early
October to secure financing for the Keyport/IFMG acquisition. The market's
continuing enthusiasm for Sun Life Financial's securities has allowed the
Company to smoothly execute its growth strategy undeterred by disruptions in the
financial markets. The Company also made progress in reconfiguring its business
profile in announcing agreements to sell Sun Bank and SLC Asset Management, both
headquartered in the UK. These sales will repatriate more than $400 million in
capital for redeployment against more attractive business opportunities.
FINANCIAL REVIEW
At September 30, 2001, assets under management were $299.2 billion, a decrease
of $45.6 billion or 13 per cent relative to the $344.8 billion at September 30,
2000. Relative to assets under management of $326.4 billion at June 30, 2001,
assets under management declined by $27.2 billion, or 8 per cent. These declines
are attributable to the sustained decline in international equity markets over
the course of the past year, partially offset by net sales of mutual funds and
managed funds, of $4.1 billion in the third quarter.
Total revenue in the third quarter was $3,526 million, a decrease of $419
million, or 11 per cent, compared to the $3,945 million recorded in the quarter
ending June 30, 2001. The three components of revenues, fee income, investment
income and premiums, each recorded declines for the quarter. Fee revenues
declined by $57 million or 7 per cent to $762 million primarily as a result of
the adverse impact of declining international equity markets on the Company's
wealth management businesses. Investment income declined by $34 million
resulting primarily from declines in the market value of the Company's equity
portfolio. Premium revenues also declined, with annuity premiums declining by
$288 million and life insurance premiums declining $39 million. The decline in
life insurance premiums was primarily a result of the $29 million decline in
life insurance premiums from the UK where the Company exited the direct sales
force business earlier this year. Annuity premiums in the third quarter declined
$662 million compared to annuity premiums recorded in the third quarter of 2000
primarily due to United States Annuity and Insurance Operations. This decline
did not have a significant impact on net income in the quarter.
Earnings attributable to shareholders for the third quarter were $215 million,
up $12 million, or 6 per cent from the $203 million earned in the third quarter
of 2000. Total net income, which includes earnings attributable to
policyholders, was $214 million, an increase of $12 million, or 6 per cent, as
compared to the $202 million earned in the third quarter of 2000. Net cash flows
in the third quarter of 2001 were $503 million compared to $20 million in the
third quarter of 2000. At September 30, 2001 cash, cash equivalents and short-
term investments were $4.5 billion compared to $3.7 billion a year earlier and
$4.3 billion at June 30, 2001.
Year-to-date earnings of $629 million were $48 million, or 8 per cent, higher
than the $581 million earned on a proforma basis, in the comparable period of
2000 with improved earnings in Canadian Operations, UK Operations, and Corporate
Capital, partially offset by lower earnings in US Operations and MFS. The
earnings decline in US Operations was primarily due to lower venture capital
gains, and the MFS decline resulted from the decline in equity values.
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