Interim Results - Part 2.
Sun Life Fin.Services of Canada Inc
25 July 2001
PART 2
SECOND QUARTER 2001
INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
Six Months Ended
June 30, 2001
SUN LIFE FINANCIAL SERVICES OF CANADA INC.
Interim Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in millions of Canadian dollars,
except for per share amounts)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
2001 2000 2001 2000
REVENUE
Premium income:
Annuities $ 945 $ 1,149 $ 2,204 $ 2,010
Life insurance 906 906 1,864 1,729
Health insurance 350 325 694 633
------- ------- ------- -------
2,201 2,380 4,762 4,372
Net investment income 925 980 1,866 1,955
Fee income 819 812 1,650 1,594
------- ------- ------- -------
3,945 4,172 8,278 7,921
------- ------- ------- -------
POLICY BENEFITS AND EXPENSES
Payments to policyholders,
beneficiaries and depositors:
Maturities and surrenders 454 547 986 1,151
Annuity payments 232 240 468 467
Death and disability
benefits 276 270 586 562
Health benefits 278 259 538 523
Policyholder dividends and
interest on claims and
deposits 240 260 513 531
------- ------- ------- -------
1,480 1,576 3,091 3,234
Net transfers to segregated
funds 756 640 1,493 1,289
Increase in actuarial
liabilities 377 630 999 792
Commissions 344 336 702 660
Operating expenses 640 611 1,304 1,183
Premium taxes 30 38 55 60
Interest expense 43 40 85 83
------- ------- ------- -------
3,670 3,871 7,729 7,301
------- ------- ------- -------
OPERATING INCOME BEFORE
INCOME TAXES 275 301 549 620
Income taxes 64 108 137 230
------- ------- ------- -------
TOTAL NET INCOME 211 193 412 390
Less:
Net income from mutual
operations (prior to
demutualization) - - - 179
Participating policyholders'
net income (loss) (after
demutualization) (1) (4) (2) (4)
------- ------- ------- -------
SHAREHOLDERS' NET INCOME
(AFTER DEMUTUALIZATION) $ 212 $ 197 $ 414 $ 215
Basic and diluted earnings
per share (Note 2) $ 0.50 $ 0.47 $ 0.98 $ 0.51*
* Basic and diluted earnings per share cover period from March 22 to June 30,
2000.
Interim Consolidated Financial Statements
(unaudited, in millions of Canadian dollars)
AS AT
JUNE 30 DECEMBER 31 JUNE 30
2001 2000 2000
ASSETS
Bonds $ 27,354 $ 27,534 $ 26,390
Mortgages 10,633 10,179 9,970
Stocks 4,456 4,583 4,854
Real estate 2,270 2,327 2,304
Cash, cash equivalents and short-term
securities 4,279 3,962 3,111
Policy loans and other invested assets 2,452 2,416 2,392
-------- -------- --------
Invested assets 51,444 51,001 49,021
Other assets 5,031 4,801 4,500
-------- -------- --------
Total general fund assets $ 56,475 $ 55,802 $ 53,521
-------- -------- --------
Segregated funds net assets 45,863 $ 48,741 $ 48,479
LIABILITIES AND EQUITY
Actuarial liabilities and other policy
liabilities $ 35,742 $ 35,022 $ 34,337
Amounts on deposit 3,960 3,864 3,736
Deferred net realized gains 3,712 3,725 3,565
Other liabilities 4,488 4,845 3,907
-------- -------- --------
Total general fund liabilities 47,902 47,456 45,545
Subordinated debt 755 749 743
Cumulative capital securities of a
subsidiary 912 900 888
Total equity 6,906 6,697 6,345
-------- -------- --------
Total general fund liabilities and
equity $ 56,475 $ 55,802 $ 53,521
-------- -------- --------
Segregated funds contract
liabilities $ 45,863 $ 48,741 $ 48,479
Approved on behalf of the Board of Directors
D.A. Stewart
Chairman and Chief Executive Officer
R.W. Osborne
Director
Interim Consolidated Financial Statements
Consolidated Statements of Equity
(unaudited, in millions of Canadian dollars)
FOR THE SIX MONTHS ENDED
PARTICIPATING JUNE 30 JUNE 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
policyholders at
demutualization - - - (576)
Net income (loss) as a stock
company (2) 414 412 211
Dividends paid to shareholders - (101) (101) -
Purchase and cancellation of
common shares (Note 3) - (33) (33) -
--------- -------- ----- -------
Balance, end of period 76 5,758 5,834 5,189
--------- -------- ----- -------
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) - (67) (67) (8)
Balance, end of period 1 278 279 361
--------- -------- ----- -------
Total equity $ 77 $ 6,829 $ 6,906 $ 6,345
--------- -------- ----- -------
Condensed Consolidated Statements of Cash Flows
(unaudited, in millions of Canadian dollars)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
2001 2000 2001 2000
CASH FLOWS PROVIDED BY
(USED IN) OPERATING ACTIVITIES
Total net income $ 211 $ 193 $ 412 $ 390
New mutual fund business
acquisition costs
capitalized (62) (111) (143) (218)
Items not affecting cash 457 747 389 1,007
------- ------- ------- -------
Net cash provided by operating
activities 606 829 658 1,179
------- ------- ------- -------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES
Borrowed funds (30) (184) 78 (492)
Payments to certain participating
policyholders and underwriters
at demutualization - (11) - (658)
Issuance of common shares - 268 - 844
Purchase and cancellation of
common shares (Note 3) - - (35) -
Dividends paid to shareholders (50) - (101) -
------- ------- ------- -------
Net cash provided by (used in)
financing activities (80) 73 (58) (306)
------- ------- ------- -------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Sales, maturities and
repayments of bonds,
mortgages, stocks and
real estate 3,768 2,742 8,410 7,877
Purchases of bonds, mortgages,
stocks and real estate (4,079) (3,598) (8,647) (8,826)
Policy loans (21) 2 (44) (18)
Short-term securities (54) 23 (303) (205)
Other investments (48) (42) (31) 24
Disposal - - - 160
------- ------- ------- -------
Net cash used in investing
activities (434) (873) (615) (988)
------- ------- ------- -------
Net cash provided by (used in)
discontinued operations (2) 48 49 26
Changes due to fluctuations in
the exchange rates (70) (1) 21 12
------- ------- ------- -------
Increase (decrease) in cash and
cash equivalents 20 76 55 (77)
Cash and cash equivalents,
beginning of period 2,538 1,845 2,503 1,998
------- ------- ------- -------
Cash and cash equivalents,
end of period 2,558 1,921 2,558 1,921
Short-term securities,
end of period 1,721 1,190 1,721 1,190
------- ------- ------- -------
Cash, cash equivalents and
short-term securities,
end of period $ 4,279 $ 3,111 $ 4,279 $ 3,111
------- ------- ------- -------
Supplementary Information
Cash and cash equivalents:
Cash $ 535 $ 335
Cash equivalents 2,023 1,586
------- -------
$ 2,558 $ 1,921
------- -------
Cash disbursements made for:
Interest on borrowed funds,
subordinated debt and
cumulative capital
securities $ 64 $ 60 $ 85 $ 82
------- ------- ------- -------
Income taxes, net of refunds $ 54 $ 127 $ 174 $ 208
------- ------- ------- -------
Consolidated Statements of Changes in Segregated Funds Net Assets
(unaudited, in millions of Canadian dollars)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
2001 2000 2001 2000
ADDITIONS TO SEGREGATED FUNDS
Deposits:
Annuities $ 1,264 $ 1,429 $ 3,171 $ 2,574
Life insurance 215 751 254 813
------- ------- ------- -------
1,479 2,180 3,425 3,387
Net transfers from general
funds 756 640 1,493 1,289
Net realized and unrealized
gains (losses) 721 (1,473) (5,184) 457
Other investment income 513 372 921 667
------- ------- ------- -------
3,469 1,719 655 5,800
------- ------- ------- -------
DEDUCTIONS FROM SEGREGATED FUNDS
Payments to policyholders and
their beneficiaries 1,370 1,448 3,098 3,007
Management fees 136 115 273 247
Taxes and other expenses 32 8 29 36
Effect of changes in currency
exchange rates 1,410 (276) 133 45
------- ------- ------- -------
2,948 1,295 3,533 3,335
------- ------- ------- -------
Net additions (deductions) to
segregated funds for the
period 521 424 (2,878) 2,465
Segregated funds net assets,
beginning of period 45,342 48,055 48,741 46,014
------- ------- ------- -------
Segregated funds net assets,
end of period $45,863 $ 48,479 $ 45,863 $ 48,479
------- ------- ------- -------
Consolidated Statements of Segregated Funds Net Assets
(unaudited, in millions of Canadian dollars)
AS AT
JUNE 30 DECEMBER 31 JUNE 30
2001 2000 2000
ASSETS
Stocks $ 39,324 $ 42,225 $ 42,664
Bonds 4,989 5,146 4,194
Cash, cash equivalents and short-term
securities 1,839 1,412 1,862
Real estate 748 817 812
Mortgages 317 338 332
Other assets 424 648 841
-------- -------- --------
$ 47,641 $ 50,586 $ 50,705
-------- -------- --------
LIABILITIES 1,778 1,845 2,226
-------- -------- --------
Net assets applicable to segregated
funds policyholders $ 45,863 $ 48,741 $ 48,479
-------- -------- --------
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 change in accounting policy 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 six For the period
months ended months ended March 22 to June 30
June 30 June 30 June 30 June 30 2000
2001 2000 2001 2000
Net income available
to shareholders $ 212 $ 197 $ 414 $ 378 (2) $ 215
Less: Effect of
stock options of
subsidiaries (1) 2 1 3 1
----- ----- ----- ----- -----
Net income available
to shareholders on
a diluted basis $ 210 $ 196 $ 411 $ 214
Weighted average
number of shares
outstanding
(in millions) 421 421 421 411 419
Basic and adjusted
(2) earnings per
share $0.50 $0.47 $0.98 $0.92 (2) $0.51
Diluted earnings
per share $0.50 $0.47 $0.98 $0.51
(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 $390 from January 1 to June 30, 2000 was adjusted for the net
income of $16 attributed to pre-demutualization participating policyholders and
the net loss of $4 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 June 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 period ended June 30, 2001 is as
follows:
2001
Weighted average Weighted
remaining contractual Number of average
life (years) stock options exercise price
Granted 5,276,400 $29.51
Forfeited 21,500 29.49
Balance, June 30 (exercise
prices: $29.49 to $33.53) 9.75 5,254,900 $29.51
---------------------------
Exercisable, June 30 2,000 $31.00
---------------------------
5. Acquisitions
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
third 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 six months ended June 30, 2001 consists
of interest of $32 and $68, respectively ($36 and $70, respectively, in 2000)
and fee income of $8 and $15, respectively ($10 and $17, respectively, in 2000).
RESULTS BY SEGMENT FOR THE THREE MONTHS ENDED JUNE 30, 2001
United States United Consolidation
Canada Sun Life MFS Kingdom Asia Other Adjustments Total
REVENUE
Wealth
management $ 318 $ 1,009 $ 587 $ 197 $ - $ 3 $ (8) $ 2,106
Protection 604 743 - 340 106 5 - 1,798
Corporate and
other 10 3 - 1 - 59 (32) 41
----------------------------------------------------------------
$ 932 $ 1,755 $ 587 $ 538 $ 106 $ 67 $ (40) $ 3,945
----------------------------------------------------------------
TOTAL NET INCOME
(LOSS)
Wealth
management $ 18 $ 1 $ 65 $ 35 $ (1) $ 2 $ (7) $ 113
Protection 30 35 - 44 11 1 - 121
Corporate and
other 6 (9) - (29) - 2 7 (23)
---------------------------------------------------------------
$ 54 $ 27 $ 65 $ 50 $ 10 $ 5 $ - $ 211
---------------------------------------------------------------
RESULTS BY SEGMENT FOR THE THREE MONTHS ENDED JUNE 30, 2000
United States United Consolidation
Canada Sun Life MFS Kingdom Asia Other Adjustments Total
REVENUE
Wealth
management $387 $ 1,122 $ 581 $ 245 $ - $ 3 $ (10) $ 2,328
Protection 610 685 - 376 100 4 - 1,775
Corporate and
other 11 39 - (1) - 56 (36) 69
------------------------------------------------------------------
$ 1,008 $ 1,846 $ 581 $ 620 $ 100 $ 63 $ (46) $ 4,172
------------------------------------------------------------------
TOTAL NET INCOME
(LOSS)
Wealth
management $ 17 $ 14 $ 62 $ 36 $ (2) $ 2 $ (8) $ 121
Protection 14 24 - 20 7 - - 65
Corporate and
other 9 18 - (23) - (5) 8 7
-------------------------------------------------------------------
$ 40 $ 56 $ 62 $ 33 $ 5 $ (3) $ - $ 193
-------------------------------------------------------------------
RESULTS BY SEGMENT FOR THE SIX MONTHS ENDED JUNE 30, 2001
United States United Consolidation
Canada Sun Life MFS Kingdom Asia Other Adjustments Total
REVENUE
Wealth
management $ 677 $ 2,276 $ 1,190 $ 415 $ - $ 6 $ (15) $ 4,549
Protection 1,271 1,473 - 677 209 7 - 3,637
Corporate and
other 14 27 - 3 - 116 (68) 92
------------------------------------------------------------------
$ 1,962 $ 3,776 $ 1,190 $ 1,095 $ 209 $ 129 $ (83) $ 8,278
------------------------------------------------------------------
TOTAL NET INCOME
(LOSS)
Wealth
management $ 39 $ 14 $ 123 $ 64 $ (2) $ 6 $ (15) $ 229
Protection 51 64 - 51 20 1 - 187
Corporate and
other 12 (1) - (26) - (4) 15 (4)
------------------------------------------------------------------
$ 102 $ 77 $ 123 $ 89 $ 18 $ 3 $ - $ 412
------------------------------------------------------------------
ASSETS
General fund
assets $17,389 $18,611 $1,735 $13,657 $1,579 $3,637 $ (133) $56,475
Segregated
funds net
assets $ 8,426 $26,970 $ - $10,467 $ - $ - $ - $45,863
Other assets
under
Management $23,851 $ 1,629 $220,087 $3,015 $ 12 $ - $(24,484)$224,110
RESULTS BY SEGMENT FOR THE SIX MONTHS ENDED JUNE 30, 2000
United States United Consolidation
Canada Sun Life MFS Kingdom Asia Other Adjustments Total
REVENUE
Wealth
management $ 808 $ 1,934 $ 1,139 $ 441 $ - $ 5 $ (17) $ 4,310
Protection 1,221 1,313 - 770 195 8 - 3,507
Corporate and
other 10 58 - (2) - 108 (70) 104
------------------------------------------------------------------
$ 2,039 $ 3,305 $ 1,139 $1,209 $ 195 $ 121 $ (87) $ 7,921
------------------------------------------------------------------
TOTAL NET INCOME
(LOSS)
Wealth
management $ 45 $ 29 $ 124 $ 67 $ (2) $ 4 $ (15) $ 252
Protection 38 47 - 15 14 - - 114
Corporate and
other 6 47 - (32) - (12) 15 24
------------------------------------------------------------------
$ 89 $ 123 $ 124 $ 50 $ 12 $ (8) $ - $ 390
------------------------------------------------------------------
ASSETS
General fund
assets $17,256 $16,336 $ 1,568 $13,738 $1,427 $3,453 $(257) $53,521
Segregated
funds net
assets $ 9,482 $27,006 $ - $11,991 $ - $ - $ - $48,479
Other assets under
Management $24,684 $ 707 $225,104 $ 3,784 $ - $ - $(26,577)$227,702
7. Change in Accounting Policy
The Company adopted Earnings Per Share, the Canadian Institute of Chartered
Accountants 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.
8. 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
$742 ($799 as at June 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 six 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 six months of 2001 and 2000 and the total cost since
inception is $1,176. During the first six months of 2001, the Company paid
compensation of $94 ($48 in the first six months of 2000), for total
compensation payments since inception of $606. At June 30, 2001, the Company had
provisions of $433 ($662 as at June 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 June 30, 2001, the
actuarial liabilities for these annuities were $422 ($451 as at June 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.
9. 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. The cost to the Company
will be partially offset by the effect in the actuarial liabilities of having
lower operating expenses.
SUN LIFE FINANCIAL SERVICES OF CANADA INC.
Management's Discussion and Analysis
for the three months ended June 30, 2001
Sun Life Financial Services of Canada Inc. (NYSE/TSE: 'SLC') reported record
shareholder net income of $212 million for the quarter ending June 30, 2001,
an increase of 8 per cent over the $197 million earned in the same period in
2000. Earnings per share of $0.50 were up 6 per cent from the $0.47 per share
earned in the second quarter, a year ago. Revenues for the quarter were
$3,945 million, compared with $4,172 million in the second quarter of 2000, a
decrease of 5 per cent. Assets under management were $326 billion at quarter
end, an increase of 3 per cent compared with the $316 billion at the end of
the first quarter of 2001, and a decline of 1 per cent relative to assets
under management of $329 billion at June 30, 2000. Return on equity was 12.3
per cent in the second quarter, up from 12.0 per cent in the first quarter of
2001.
Summary
Quarterly Results Six Month Results
2Q'01 1Q'01 2Q'00 2001 2000
Shareholder Net Income ($) 212 202 197 414 378*
Earnings Per Share ($) .50 .48 .47 .98 .92*
Revenues ($) 3,945 4,333 4,172 8,278 7,921
Return on Equity (per cent) 12.3 12.0 12.9 12.3 12.7*
Average Share Outstanding 420.7 421.4 421.0 421.0 410.5
*Proforma
(in millions, except per share amounts and Return on Equity)
Sun Life Financial's second quarter results demonstrated the Corporation's
ability to maintain stable earnings performance in a challenging financial
environment. A combination of strong sales in a number of its businesses and
prudent attention to costs across all operations helped to produce record net
income for the quarter. While Sun Life Financial's wealth management focus
results in an inherent sensitivity to North American capital markets, the
diversity of the Company's business model was successful in mitigating the
impact of the market on its performance.
The strategic positions of the Corporation's major operating units continued
to advance. This was especially true in its Canadian operations and at MFS
Investment Management as both units achieved strong growth relative to the
first quarter. Assets under management recovered nicely from the first
quarter, providing the foundation for continued profitability enhancements
going forward. In addition, Sun Life Financial is progressing with its plans
to close on the Keyport/IFMG acquisition in the third quarter.
The capital which will be used to fund the Keyport/IFMG acquisition was kept
in liquid form during the second quarter, and this liquidity had a
restraining impact on the quarter's profitability and return on equity which
was 12.3 per cent. Nevertheless, progress was made, particularly by lowering
expenses by $24 million relative to expense levels in the first quarter.
FINANCIAL REVIEW
At June 30, 2001, assets under management were $326 billion, a decrease of $3
billion or 1 per cent relative to the $329 billion at June 30, 2000. The
year-over-year decrease was attributable to the downturn in North American
equity markets over the past year. Relative to assets under management of
$316 billion as at March 31, 2001, assets under management produced an
increase of 10 billion, or 3 per cent. This rebound was largely attributable
to strong net sales of mutual funds and managed funds totalling $8.1 billion
in the second quarter.
Total revenue in the second quarter was $3.9 billion, a decrease of $388
million, or 9 per cent, compared to the $4.3 billion recorded in the quarter
ending March 31, 2001. Contributing to this decline, were decreased sales of
European Medium Term Notes and annuities in the U.S, in addition. Group Life
premiums in Canada were lower.
Shareholder earnings for the first six months of 2001 were $414 million, up 9
per cent over the earnings of $378 million for the first six months of 2000.
Shareholders' net income for the second quarter was $212 million, up $15
million, or 8 per cent from the $197 million earned in the second quarter of
2000. Net income, which includes earnings attributable to policyholders, was
$211 million, an increase of 18 million, or 9 per cent, as compared to the
$193 million earned in the second quarter of 2000.
Net cash flows in the second quarter of 2001 were $20 million compared to net
cash flows of $76 million in the second quarter of 2000. Net cash flows in
the first six months of 2001 were $55 million compared to negative cash flows
of $77 million in the first six months of 2000. At June 30, 2001 cash, cash
equivalents and short-term investments were $4.3 billion compared to $3.1
billion a year earlier and $4.0 billion at December 31, 2000.
PERFORMANCE BY COUNTRY
Canada
Quarterly Results Six Month Results
2Q'01 1Q'01 2Q'00 2001 2000
Individual Life 8 10 4 18 3
Group Life and Health 23 12 12 35 23
Group Retirement Services 12 11 8 23 21
Spectrum and Other 6 10 9 16 24
Investment Portfolio 6 6 9 12 6
Total 55 49 42 104 77
Canadian net income for the first six months of 2001 was $104 million, an
increase of $27 million or 35 per cent, over the $77 million earned in the
first half of 2000. Favourable morbidity experience in the Group Health
operation added $12 million to first half earnings. Reserve strengthening
depressed Individual Life earnings in the first six months of 2000.
Canadian Operations earned $55 million in the second quarter of 2001, an
increase of $13 million, or 31 per cent, relative to the $42 million earned in
the second quarter of 2000. This increase was primarily the result of an $11
million increase in earnings from Group Life and Health.
- Individual Life reported earnings of $8 million for the current quarter, an
increase of $4 million relative to the $4 million earned in the second
quarter of 2000. The earnings increase resulted from enhanced cost
efficiencies.
- Group Life and Health earned $23 million in the quarter, an increase of $ll
million or 92 per cent, relative to the $12 million earned in the second
quarter of 2000. Improved mortality and morbidity experience and reduced
expenses added to earnings in the second quarter.
- Group Retirement Services earned $12 million in the second quarter of 2001,
an increase of $4 million, or 50 per cent, relative to the second quarter of
2000. Reduced new business strain and lower expenses contributed to the
increase in earnings.
- Spectrum and Other earnings declined to $6 million in the current quarter
from $9 million in the second quarter of 2000. The earnings decrease resulted
primarily from a $1.2 billion reduction in assets under management as equity
markets valuations declined.
United States Annuity and Insurance Operations
Quarterly Results Six Month Results
2Q'01 1Q'01 2Q'00 2001 2000
Retirement Products and 1 13 14 14 29
Services
Individual Life 25 23 20 48 41
Group Life and Health 10 6 6 16 6
Investment Portfolio (9) 8 18 (1) 47
Total 27 50 58 77 123
U.S. Annuity and Insurance Operations earned $77 million for the first six
months of 2001, a decrease of $46 million or 37 per cent from earnings of
$123 million reported for the first six months of 2000. Declining assets
under management in the Retirement Product & Services line contributed to a
$15 million reduction in earnings. In the first six months of 2000, the U.S.
operations included a $20 million gain from venture capital. There were no
such gains in the first six months of 2001
In the second quarter of 2001, U.S. Annuity and Insurance Operations earned
$27 million compared to $58 million in the second quarter of 2000, a decrease
of $31 million, or 53 per cent. This decline was largely as the result of
earnings declines in Retirement Products and Services and in the Investment
Portfolio. The earnings of the Investment Portfolio were reduced by a more
tightly hedged book.
- Retirement Products and Services reported earnings of $l million, a decline
of $13 million or 93 per cent relative to the $14 million earned in the
second quarter of 2000. Margins were lower due to declining market
valuations.
- Individual Life had a solid quarter earning $25 million, an increase of $5
million, or 25 per cent, relative to the $20 million earned in the second
quarter of 2000. Contributing to the increase in earnings were favourable
experience gains.
- Group Life and Health earned $10 million in the second quarter, a $4
million increase relative to the $6 million reported in the second quarter of
2000. The profitability growth reflects premium growth in the stop loss line
and favourable claims experience in the Long Term Disability business.
MFS Investment Management
Quarterly Results Six Month Results
20'01 1Q'01 2Q'00 2001 2000
MFS Net Income (C$mm) 65 58 62 123 124
Assets Under
Management (C$Billions) 220 209 225 220 225
Net New Sales (C$Billions) 7.8 12.4 8.4 20.2 14.7
Market
Movement/Currency 3.7 (24.8) (2.5) (21.1) 11.5
(C$Billions)
Net income earned by MFS for the first six months of 2001 was $123 million
compared to $124 million for the first six months of 2000, a decrease of only
$1 million, despite a decline in assets under management of $5 billion.
MFS earned $65 million in the second quarter, an increase of $3 million, or 5
per cent, relative to the $62 million earned in the second quarter of 2000.
Relative to performance in the first quarter of 2001 earnings in the second
quarter increased by $7 million, or 12 per cent. Two factors were responsible
for MFS' ability to report relatively stable earnings performance during this
period of steep declines in U.S. equity markets: (1) net funds inflows
provided a partial offset to asset valuation declines, and (2) aggressive
cost control offset pressure on profit margins.
- Net new sales for the quarter were $7.8 billion.
- No2 ranking for net new retail mutual fund flows in the non-proprietary
channel with new flows of US$4,576 million (Year-to-date May 31, 2001)
- Captured 16 per cent of retail mutual fund industry's net funds flows
through the non-proprietary channel.
- No4 ranking for overall mutual fund net new flows. (Year-to-date May 31,
2001).
- No9 ranking by size among U.S. mutual fund companies with U5$90 billion in
long term mutual fund assets under management (May 31, 2001).
- 52 per cent of domestic retail mutual fund assets reside in one of MFS' 25
funds with a 4 or 5 Star Overall Morningstar Rating (May 31, 2001).
United Kingdom
Quarterly Results Six Month Results
2Q'1 1Q'O1 2Q'00 2001 2000
UK Net Income 50 39 33 89 50
U.K. net income was $89 million in the first half of 2001, compared to $50
million in the first six months of 2000, an increase of $39 million or 78 per
cent for the period. The reduction in recurring costs associated with exiting
the direct sales force distribution business led to stronger earnings in the
first half of 2001.
On February 15, 2001. Sun Life Financial announced its decision to exit the
direct sales force distribution business in the U.K. The sales force was
terminated on March 30, 2001.
Earnings for the U.K. were $50 million in the second quarter of 2001, an
increase of $17 million, or 51.5 per cent, relative to earnings of $33
million in the second quarter of 2000. The beneficial impact of closing the
block to new business contributed to the increase in U.K. earnings.
Asia
Quarterly Results Six Month Results
2Q'1 1Q'O1 2Q'00 2001 2000
Asia Net Income 10 8 5 18 12
The Asian Operations earned $18 million in the first half of 2001, an
increase of $6 million, or 50 per cent, relative to the $12 million earned in
the first half of 2000. Improved performance in the Philippines, Hong Kong
and Indonesia all contributed to the earnings increase.
Earnings for Asia in the second quarter were $10 million, an increase of 5
million, or 100 per cent relative to earnings in the second quarter of 2000,
largely due to increased net income in the Philippines. Current period
earnings include the impact of continuing investments in the Asian market in
pursuit of longer-term growth prospects.
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