MFS increases gross sales by 22%,
expands global retail presence and achieves retail net inflows of
US$2 billion.
The information in this document is based on the unaudited
interim financial results of Sun Life Financial Inc. ("SLF Inc.")
for the period ended June 30, 2019.
SLF Inc., its subsidiaries and, where applicable, its joint
ventures and associates are collectively referred to as "the
Company", "Sun Life", "we", "our", and "us". Unless otherwise
noted, all amounts are in Canadian dollars.
TORONTO,
July 31, 2019
/CNW/ - Sun Life Financial Inc. (TSX: SLF) (NYSE: SLF) today
announced its results for the second quarter ended June 30, 2019. Second quarter reported net income
was $595 million and underlying net
income(1) was $739
million.
|
|
|
|
Quarterly
results
|
Year-to-date
|
Profitability
|
Q2'19
|
Q2'18
|
2019
|
2018
|
|
Reported net income ($
millions)
|
595
|
706
|
1,218
|
1,375
|
|
Underlying net
income(1) ($ millions)
|
739
|
729
|
1,456
|
1,499
|
Reported
EPS(2) ($)
|
1.00
|
1.16
|
2.04
|
2.25
|
|
Underlying
EPS(1)(2) ($)
|
1.24
|
1.20
|
2.44
|
2.46
|
Reported
ROE(1)
|
11.0%
|
13.5%
|
11.3%
|
13.3%
|
|
Underlying
ROE(1)
|
13.7%
|
14.0%
|
13.5%
|
14.5%
|
Growth
|
Q2'19
|
Q2'18
|
2019
|
2018
|
|
Insurance
sales(1) ($ millions)
|
657
|
633
|
1,437
|
1,298
|
|
Wealth
sales(1) ($ billions)
|
37.0
|
30.8
|
73.0
|
70.6
|
|
Value of new
business(1) ($millions)
|
235
|
266
|
617
|
600
|
|
Assets under
management(1) ($ billions)
|
1,024.8
|
986.1
|
1,024.8
|
986.1
|
Financial Strength
|
Q2'19
|
Q4'18
|
2019
|
2018
|
|
LICAT
ratios(3) Sun
Life Financial Inc.
|
144%
|
144%
|
144%
|
149%
|
|
Sun Life
Assurance(4)
|
133%
|
131%
|
133%
|
134%
|
Financial leverage
ratio(1)
|
20.4%
|
21.2%
|
20.4%
|
21.8%
|
"We delivered underlying net income of $739 million in the second quarter, up from
$729 million in the prior year," said
Dean Connor, President & CEO of
Sun Life. "Interest rates declined in the quarter leading to lower
reported net income, while balance sheet strength continued with a
144% LICAT ratio, $2.2 billion of
cash at the holding company level and a low Financial leverage
ratio. We are pleased to announce a new share buyback program for
the repurchase of up to 15 million shares, subject to regulatory
approval."
"We had a number of key developments in our Asset
Management businesses this quarter. MFS achieved a pre-tax net
operating profit margin ratio of 37%, expanded its non-U.S.
distribution, launched two products for European distribution,
increased gross sales by 22% and delivered positive net retail fund
flows of US$2 billion," Connor added.
"We also rebranded our alternatives asset management business to
SLC Management. We consolidated our fixed income businesses, Prime
Advisors, Ryan Labs and Sun Life
Institutional Investments, under this one brand to create an
integrated distribution team that offers institutional Clients our
broad spectrum of solutions. SLC Management's real estate arm
completed the acquisition of a majority stake in
BentallGreenOak."
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial Measures in
this document.
|
(2)
|
All EPS measures
refer to fully diluted EPS, unless otherwise stated.
|
(3)
|
For further
information on the Life Insurance Capital Adequacy Test ("LICAT"),
see section E - Financial Strength in this document.
|
(4)
|
Sun Life Assurance
Company of Canada ("Sun Life Assurance") is SLF Inc.'s principal
operating life insurance subsidiary.
|
Financial and Operational Highlights - Quarterly
Comparison (Q2 2019 vs. Q2 2018)
Our strategy is focused on four key pillars of growth,
where we aim to be a leader in the markets in which we operate,
with our continued progress detailed below.
($ millions, unless
otherwise noted)
|
|
Reported
net income (loss)
|
Underlying
net income (loss)(1)
|
Insurance
sales(1)
|
Wealth
sales(1)
|
|
Q2'19
|
Q2'18
|
change
|
Q2'19
|
Q2'18
|
change
|
Q2'19
|
Q2'18
|
change
|
Q2'19
|
Q2'18
|
change
|
Canada(3)
|
148
|
262
|
(44)%
|
243
|
245
|
(1)%
|
194
|
266
|
(27)%
|
3,248
|
3,039
|
7%
|
U.S.(3)
|
94
|
105
|
(10)%
|
110
|
125
|
(12)%
|
225
|
155
|
45%
|
—
|
—
|
—
|
Asset
Management(3)
|
229
|
214
|
7%
|
245
|
216
|
13%
|
—
|
—
|
—
|
31,929
|
25,263
|
26%
|
Asia(3)
|
134
|
133
|
1%
|
147
|
145
|
1%
|
238
|
212
|
12%
|
1,799
|
2,502
|
(28)%
|
Corporate(3)
|
(10)
|
(8)
|
nm(2)
|
(6)
|
(2)
|
nm(2)
|
—
|
—
|
—
|
—
|
—
|
—
|
Total
|
595
|
706
|
(16)%
|
739
|
729
|
1%
|
657
|
633
|
4%
|
36,976
|
30,804
|
20%
|
|
|
(1)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial Measures in
this document.
|
(2)
|
Not
meaningful.
|
(3)
|
Prior to the second
quarter of 2019, these business segments were referred to as Sun
Life Financial Canada, Sun Life Financial U.S., Sun Life Financial
Asset Management, Sun Life Financial Asia, and Corporate,
respectively, in our interim and annual management's discussion and
analysis.
|
Our reported net income of $595
million in the second quarter of 2019 decreased $111 million compared to the second quarter of
2018, primarily reflecting unfavourable market related and
assumption changes and management
actions(1) ("ACMA") impacts.
Underlying net income in the second quarter of 2019 increased
$10 million to $739 million compared to the same period in 2018,
primarily driven by business growth, favourable expense experience
and benefits from tax related items primarily in the U.S.,
partially offset by unfavourable morbidity experience in
Canada and the U.S., lower new
business gains in International in Asia, and lower available-for-sale ("AFS")
gains in the U.S.
Our reported ROE(1) was 11.0% in the second
quarter of 2019. Underlying ROE(1) was 13.7%, compared
to 14.0% in the second quarter of 2018, reflecting higher
underlying net income offset by increased common shareholders'
equity due to higher retained earnings and the impact of market
movements reflected in other comprehensive income. SLF Inc. and its
wholly-owned holding companies ended the quarter with $2.2 billion in cash and other liquid assets,
reflecting the redemption of $250
million of subordinated debt which also decreased our
financial leverage ratio(1) to 20.4%.
A Leader in Insurance and Wealth Solutions in our
Canadian Home Market
Canada's reported net income was $148 million in the second quarter of 2019, a
decrease of $114 million compared to
the same period in 2018, predominantly reflecting unfavourable
market related and ACMA impacts. Underlying net income was
$243 million, in line with the same
period in 2018, reflecting favourable expense experience and
continued business growth, offset by unfavourable morbidity and
credit experience.
Canada insurance sales
decreased 27% to $194 million in the
second quarter of 2019, reflecting lower sales in Group Benefits
("GB") due to timing of large case sales and individual insurance.
Wealth sales were up 7%, driven by increased sales in Group
Retirement Services ("GRS"), which continues to lead the industry
in assets under administration(1)(2)("AUA").
We are continuing to shape the Canadian market through
innovation and digital capabilities that enhance our Client's
experience. Our digital platform, Lumino Health, provides Canadians
one point of contact for a comprehensive range of health resources,
including empowering Canadians to find the health care providers
and health innovations they need. Our Sun Life Health platform
delivers value to Canadians, as evidenced by over 10 million health
care provider user ratings and average usage of approximately
10,000 searches per day.
|
|
|
|
|
(1)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial Measures in
this document.
|
(2)
|
Benefits Canada's
2018 CAP supplier survey, based on June 30, 2018 AUA.
|
A Leader in U.S. Group
Benefits
U.S.'s reported net
income was $94 million in the second
quarter of 2019, a decrease of $11
million compared to the second quarter of 2018, reflecting
more unfavourable market related impacts, partially offset by lower
integration costs. Underlying net income was $110 million, a decrease of $15 million from the same period in the prior
year, reflecting less favourable morbidity experience and lower AFS
gains, partially offset by improved lapse and other policyholder
behaviour experience and benefits from tax related items. The
after-tax profit margin for Group
Benefits1 was 7.3% as of the
second quarter of 2019 compared to 6.5% as of the second quarter of
2018.
U.S. Group Benefits sales increased 40% compared to the
second quarter of 2018, driven primarily by continued strong
momentum and our leadership position in medical stop-loss. Medical
stop-loss business in-force increased to US$1.8 billion, up 22% from the same period in
the prior year.
During the quarter, the U.S. launched a program to help
employers auto-enroll employees in disability coverage, which
provides an extra layer of income protection and financial security
when members cannot work because of a serious illness or injury,
helping to close gaps in coverage for our members. In addition, as
the leading independent provider of medical stop-loss coverage, we
analyzed our deep database of medical claims and released our
annual High-cost claims and injectable drug trends
report2, which provides
employers with actionable recommendations about the trends and
costs affecting their health plans, enabling them to bend the
medical cost curve.
A Leader in Global Asset
Management
Asset Management's reported net
income was $229 million in the second
quarter of 2019, an increase of $15
million from the second quarter of 2018, driven by the
change in underlying net income, partially offset by higher fair
value adjustments in MFS's share based payment awards and
acquisition costs in SLC Management. Underlying net income was
$245 million, an increase of
$29 million from the same quarter
last year, driven by expense management, investment income
including returns on seed capital and the favourable impact of
foreign exchange. The pre-tax net operating profit margin ratio for
MFS(1) was 37% in the second quarter of 2019, compared
to 36% in the same period last year.
Asset Management ended the second quarter with
$708.1 billion in assets under
management, consisting of $639.9
billion (US $488.8 billion) in
MFS Investment Management ("MFS") and $68.2
billion in SLC Management. MFS experienced net outflows of
$8.1 billion (US$6.1 billion) in the quarter, which included
positive net retail fund flows of $2.6
billion (US$2.0
billion).
In the second quarter of 2019, 93%, 92% and 84% of MFS's
U.S. retail fund assets ranked in the top half of their Lipper
categories based on ten-, five- and three-year performance,
respectively.
On July 1, 2019, we
completed the acquisition of our majority stake in BentallGreenOak,
which was the product of the merger of the Bentall Kennedy group of
companies and GreenOak Real Estate, a global real estate investment
firm. This acquisition increases our global real estate investment
footprint, while adding organizational depth and a full spectrum of
solutions including equity and debt real estate strategies. The
expected reduction to Total shareholders' equity as a result of the
acquisition is approximately $850
million, primarily driven by the establishment of financial
liabilities associated with the anticipated increase of our future
ownership in BentallGreenOak.
A Leader in Asia
through Distribution Excellence in Higher Growth
Markets
Asia's reported net income was $134 million in the second quarter of 2019, which
was in line with the second quarter of 2018, as unfavourable market
related impacts were offset by the impact of acquisition,
integration and restructuring costs in the second quarter of 2018.
Underlying net income of $147 million
was in line with the second quarter of 2018, reflecting favourable
expense experience, favourable credit experience, and continued
business growth, largely offset by lower new business gains in
International.
Asia insurance sales were
$238 million in the second quarter of
2019, up 12% compared to the second quarter of 2018, with
double-digit growth in most markets. International experienced
lower sales but saw improvements from the prior quarter as a result
of a new product launch. Asia
wealth sales were down by 28% to $1.8
billion in the second quarter of 2019, primarily due to
lower sales in India as a result
of weak market sentiments.
In Asia, we continue to
execute our growth strategy. Agency sales in Asia were up 21% from the prior year, backed
by our Most Respected Advisor program and digital enhancements to
our advisor applications to improve the Advisor and Client
experience. We also continued to improve our digital service
experience for Clients. For example, Hong
Kong launched a group medical app, which had positive
adoption with both Client registrations and outpatient claim
submissions, and Bowtie(3)
launched its online platform and first medical insurance product in
April.
|
|
|
|
|
(1)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial Measures in
this document.
|
(2)
|
The 2019 High-cost
claims and injectable drug trends report can be accessed at
https://sunlife.showpad.com/share/7SzmNmJJs1a6msorM0DZA.
|
(3)
|
We have a strategic
investment in Bowtie Life Insurance Company, the first virtual
insurer in Hong Kong approved under the Fast Track
process.
|
Sun Life Financial Inc.
For the period ended June 30,
2019
Dated July 31,
2019
Table of Contents
|
A.
|
How We Report Our
Results
|
B.
|
Financial
Summary
|
C.
|
Profitability
|
D.
|
Growth
|
E.
|
Financial
Strength
|
F.
|
Performance by
Business Group
|
|
1.
|
Canada
|
|
2.
|
U.S.
|
|
3.
|
Asset
Management
|
|
4.
|
Asia
|
|
5.
|
Corporate
|
G.
|
Investments
|
H.
|
Risk
Management
|
I.
|
Additional Financial
Disclosure
|
J.
|
Legal and Regulatory
Matters
|
K.
|
Changes in Accounting
Policies
|
L.
|
Internal Control Over
Financial Reporting
|
M.
|
Non-IFRS Financial
Measures
|
N.
|
Forward-looking
Statements
|
About Sun Life
Sun Life Financial
Inc. ("SLF Inc.") is a leading international financial services
organization providing insurance, wealth and asset management
solutions to individual and corporate Clients. Sun Life has
operations in a number of markets worldwide, including Canada, the United
States, the United Kingdom,
Ireland, Hong Kong, the
Philippines, Japan,
Indonesia, India, China,
Australia, Singapore, Vietnam, Malaysia and Bermuda. As of June 30,
2019, Sun Life had total assets under management ("AUM") of
$1,025 billion. For more information
please visit www.sunlife.com.
Sun Life Financial Inc. trades on the Toronto (TSX), New
York (NYSE) and Philippine (PSE) stock exchanges under the
ticker symbol SLF.
A. How We Report Our Results
SLF Inc., its subsidiaries and, where applicable, its
joint ventures and associates are collectively referred to as "the
Company", "Sun Life", "we", "our", and "us". We manage
our operations and report our financial results in five business
segments: Canada, United States ("U.S."), Asset Management,
Asia, and Corporate. Prior to the
second quarter of 2019, these business segments were referred to as
Sun Life Financial Canada, Sun Life Financial U.S., Sun Life
Financial Asset Management, Sun Life Financial Asia, and Corporate,
respectively, in our interim and annual management's discussion and
analysis ("MD&A"). Information concerning these segments is
included in our annual and interim consolidated financial
statements and accompanying notes ("Annual Consolidated Financial
Statements" and "Interim Consolidated Financial Statements",
respectively, and "Consolidated Financial Statements",
collectively) and interim and annual MD&A. We
prepare our unaudited Interim Consolidated Financial Statements
using International Financial Reporting Standards ("IFRS"),
including in accordance with the International Accounting Standard
("IAS") 34 Interim Financial Reporting. Reported net income
(loss) refers to Common shareholders' net income (loss) determined
in accordance with IFRS.
The information in this document is in Canadian dollars
unless otherwise noted.
1. Use of Non-IFRS Financial Measures
We report certain financial information using non-IFRS
financial measures, as we believe that these measures provide
information that is useful to investors in understanding our
performance and facilitate a comparison of our quarterly and full
year results from period to period. These non-IFRS financial
measures do not have any standardized meaning and may not be
comparable with similar measures used by other companies. For
certain non-IFRS financial measures, there are no directly
comparable amounts under IFRS. These non-IFRS financial measures
should not be viewed as alternatives to measures of financial
performance determined in accordance with IFRS. Additional
information concerning these non-IFRS financial measures and
reconciliations to the closest IFRS measures are available in
section M - Non-IFRS Financial Measures in this document. Non-IFRS
Financial Measures and reconciliations are also included in our
annual and interim MD&A and the Supplementary Financial
Information packages that are available on
www.sunlife.com under Investors – Financial
results and reports.
2. Forward-looking Statements
Certain statements in this document are forward-looking
statements within the meaning of certain securities laws, including
the "safe harbour" provisions of the United States Private
Securities Litigation Reform Act of 1995 and applicable Canadian
securities legislation. Additional information concerning
forward-looking statements and important risk factors that could
cause our assumptions, estimates, expectations and projections to
be inaccurate and our actual results or events to differ materially
from those expressed in or implied by such forward-looking
statements can be found in section N - Forward-looking Statements
in this document.
3. Additional Information
Additional information about SLF Inc. can be found in the
Consolidated Financial Statements, the annual and interim MD&A
and SLF Inc.'s Annual Information Form ("AIF") for the year ended
December 31, 2018. These documents
are filed with securities regulators in Canada and are available at
www.sedar.com. SLF Inc.'s Annual Consolidated
Financial Statements, annual MD&A and AIF are filed with the
United States Securities and Exchange Commission ("SEC") in SLF
Inc.'s annual report on Form 40-F and SLF Inc.'s interim MD&A
and Interim Consolidated Financial Statements are furnished to the
SEC on Form 6-Ks and are available at
www.sec.gov.
B. Financial
Summary
|
Quarterly
results
|
Year-to-date
|
($ millions, unless
otherwise noted)
|
Q2'19
|
Q1'19
|
Q2'18
|
2019
|
2018
|
Profitability
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
Reported net income
(loss)
|
595
|
623
|
706
|
1,218
|
1,375
|
|
Underlying net income
(loss)(1)
|
739
|
717
|
729
|
1,456
|
1,499
|
|
Diluted Earnings per share ("EPS")
($)
|
|
|
|
|
|
|
Reported EPS
(diluted)
|
1.00
|
1.04
|
1.16
|
2.04
|
2.25
|
|
Underlying EPS
(diluted)(1)
|
1.24
|
1.20
|
1.20
|
2.44
|
2.46
|
|
Reported basic EPS ($)
|
1.00
|
1.04
|
1.16
|
2.05
|
2.26
|
Return on equity ("ROE") (%)
|
|
|
|
|
|
Reported
ROE(1)
|
11.0%
|
11.5%
|
13.5%
|
11.3%
|
13.3%
|
|
Underlying
ROE(1)
|
13.7%
|
13.3%
|
14.0%
|
13.5%
|
14.5%
|
Growth
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
Insurance
sales(1)
|
657
|
780
|
633
|
1,437
|
1,298
|
|
Wealth
sales(1)
|
36,976
|
35,993
|
30,804
|
72,969
|
70,629
|
|
Value of new
business(1)
|
235
|
382
|
266
|
617
|
600
|
|
Premiums and deposits
|
|
|
|
|
|
|
Net premium
revenue
|
4,480
|
4,370
|
4,315
|
8,850
|
8,960
|
|
Segregated fund
deposits
|
2,872
|
3,064
|
2,703
|
5,936
|
6,098
|
|
Mutual fund
sales(1)
|
23,703
|
23,664
|
19,265
|
47,367
|
43,321
|
|
Managed fund
sales(1)
|
10,539
|
9,976
|
8,967
|
20,515
|
21,312
|
|
ASO(2)
premium and deposit equivalents(1)
|
1,681
|
1,707
|
1,767
|
3,388
|
3,442
|
Total premiums and
deposits(1)
|
43,275
|
42,781
|
37,017
|
86,056
|
83,133
|
Assets under management
|
|
|
|
|
|
General fund
assets
|
174,325
|
172,348
|
164,709
|
174,325
|
164,709
|
|
Segregated
funds
|
111,684
|
110,011
|
108,692
|
111,684
|
108,692
|
|
Mutual funds, managed
funds and other AUM(1)
|
738,767
|
729,026
|
712,719
|
738,767
|
712,719
|
Total
AUM(1)
|
1,024,776
|
1,011,385
|
986,120
|
1,024,776
|
986,120
|
Financial Strength
|
Q2'19
|
Q1'19
|
Q4'18
|
2019
|
2018
|
|
LICAT ratios(3)
|
|
|
|
|
|
|
Sun Life Financial
Inc.
|
144%
|
145%
|
144%
|
144%
|
149%
|
|
Sun Life
Assurance(4)
|
133%
|
132%
|
131%
|
133%
|
134%
|
Financial leverage
ratio(1)
|
20.4%
|
21.1%
|
21.2%
|
20.4%
|
21.8%
|
Dividend
|
|
|
|
|
|
Dividend payout
ratio(1)
|
42%
|
42%
|
42%
|
42%
|
38%
|
|
Dividends per common
share ($)
|
0.525
|
0.500
|
0.500
|
1.025
|
0.930
|
Capital
|
|
|
|
|
|
Subordinated debt and
innovative capital instruments(5)
|
3,491
|
3,739
|
3,738
|
3,491
|
3,737
|
|
Participating
policyholders' equity and non-controlling interests
|
974
|
930
|
864
|
974
|
517
|
|
Total shareholders'
equity
|
23,684
|
23,782
|
23,706
|
23,684
|
23,216
|
Total
capital
|
28,149
|
28,451
|
28,308
|
28,149
|
27,470
|
Average common shares
outstanding (millions)
|
593
|
597
|
602
|
595
|
609
|
|
Closing common shares
outstanding (millions)
|
591.0
|
594.6
|
598.5
|
591.0
|
607.0
|
|
|
(1)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial Measures in
this document.
|
(2)
|
Administrative
Services Only ("ASO").
|
(3)
|
Life Insurance
Capital Adequacy Test ("LICAT") ratio.
|
(4)
|
Sun Life Assurance
Company of Canada ("Sun Life Assurance") is SLF Inc.'s principal
operating life insurance subsidiary.
|
(5)
|
Innovative capital
instruments consist of Sun Life ExchangEable Capital Securities,
and qualify as regulatory capital. However, under IFRS they are
reported as Senior debentures in the Consolidated Financial
Statements. For additional information, see section I - Capital and
Liquidity Management - 1 - Capital in our 2018 annual
MD&A.
|
C. Profitability
The following table reconciles our reported net income and
underlying net income. The table also sets out the impact that
other notable items had on our reported net income and underlying
net income. All factors discussed in this document that impact our
underlying net income are also applicable to reported net
income.
|
Quarterly
results
|
Year-to-date
|
($ millions,
after-tax)
|
Q2'19
|
Q1'19
|
Q2'18
|
2019
|
2018
|
Reported net income
|
595
|
623
|
706
|
1,218
|
1,375
|
Market related
impacts(1)
|
(97)
|
(69)
|
8
|
(166)
|
(60)
|
Assumption changes and
management actions(1)
|
(20)
|
(11)
|
1
|
(31)
|
(2)
|
Other
adjustments(1)
|
(27)
|
(14)
|
(32)
|
(41)
|
(62)
|
Underlying net
income(2)
|
739
|
717
|
729
|
1,456
|
1,499
|
Reported ROE(2)
|
11.0%
|
11.5%
|
13.5%
|
11.3%
|
13.3%
|
Underlying ROE(2)
|
13.7%
|
13.3%
|
14.0%
|
13.5%
|
14.5%
|
Impact of other notable items on reported and
underlying net income
|
|
|
|
|
|
Experience related
items(3)
|
|
|
|
|
|
Impact of investment
activity on insurance contract liabilities ("investing
activity")
|
28
|
61
|
30
|
89
|
78
|
Credit
|
12
|
(29)
|
6
|
(17)
|
27
|
Mortality
|
(3)
|
15
|
6
|
12
|
(10)
|
Morbidity
|
(3)
|
25
|
43
|
22
|
55
|
Lapse and other
policyholder behaviour
|
(4)
|
(8)
|
(9)
|
(12)
|
(38)
|
Expenses
|
13
|
11
|
(26)
|
24
|
(30)
|
Other
experience
|
(9)
|
(18)
|
(5)
|
(27)
|
57
|
|
|
(1)
|
Represents an
adjustment made to arrive at a non-IFRS financial measure. See
section M - Non-IFRS Financial Measures in this document for a
breakdown of components within this adjustment.
|
(2)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial
Measures.
|
(3)
|
Experience related
items reflect the difference between actual experience during the
reporting period and best estimate assumptions used in the
determination of our insurance contract liabilities.
|
Quarterly Comparison - Q2 2019 vs. Q2
2018
Our reported net income of $595
million in the second quarter of 2019 decreased $111 million compared to the second quarter of
2018, primarily reflecting unfavourable market related and
assumption changes and management actions ("ACMA") impacts.
Underlying net income in the second quarter of 2019 increased
$10 million to $739 million compared to the same period in 2018,
primarily driven by business growth, favourable expense experience,
and benefits from tax related items primarily in the U.S.,
partially offset by unfavourable morbidity experience in
Canada and the U.S., lower new
business gains in International in Asia, and lower available-for-sale ("AFS")
gains in the U.S. Underlying net income increased by $16 million as a result of the impact of foreign
exchange translation.
1. Market related
impacts
Market related impacts in the second quarter of 2019
compared to the same period last year reflected unfavourable
interest rate impacts and unfavourable changes in the fair value of
investment properties, partially offset by favourable equity market
impacts. See section M - Non-IFRS Financial Measures in this
document for a breakdown of the components of market related
impacts.
2. Assumption changes and management
actions
The effects of assumption changes and management actions
in the second quarter of 2019 decreased reported net income by
$20 million compared to an increase
of $1 million in the second quarter
of 2018.
Due to the long-term nature of our business, we make
certain judgments involving assumptions and estimates to value our
obligations to policyholders. The valuation of these obligations is
recorded in our financial statements as insurance contract
liabilities and investment contract liabilities and requires us to
make assumptions about equity market performance, interest rates,
asset default, mortality and morbidity experience rates, lapse and
other policyholder behaviour experience, expenses and inflation and
other factors over the life of our products. We will complete our
annual review of actuarial methods and assumptions in the second
half of 2019, with the majority of changes being implemented in the
third quarter. As this is a work in progress, it is not yet
possible to determine the impact on net income at this time. See
section H - Risk Management for sensitivities associated with
Ultimate Reinvestment Rate ("URR").
3. Other adjustments
Other adjustments decreased reported net income by
$27 million in the second quarter of
2019, compared to a decrease of $32
million in the second quarter of 2018, largely reflecting
lower acquisition, integration, and restructuring costs primarily
in the U.S., partially offset by higher fair value adjustments on
MFS's share-based payment awards and the unfavourable impact of
certain hedges in Canada that do
not qualify for hedge accounting.
4. Experience related items
Compared to the second quarter of 2018, the significant
changes in experience related items are as follows:
- Unfavourable morbidity experience; and
- Favourable expense experience resulting from expense
discipline while growing the businesses, as well as lower incentive
compensation costs reflecting reported net income.
5. Income taxes
Our statutory tax rate is normally reduced by various tax
benefits, such as lower taxes on income subject to tax in foreign
jurisdictions, a range of tax-exempt investment income, and other
sustainable tax benefits that are expected to decrease our
effective tax rate.
In the second quarter of 2019, our effective income tax
rates on reported net income and underlying net
income(1) were 11.9% and 15.6% compared to 19.1% and
17.1% in the second quarter of 2018, respectively. Our effective
tax rate on underlying net income is within our expected range of
15% to 20%.
6. Impact of foreign exchange rates
During the second quarter of 2019, our reported net income
and underlying net income increased by $15
million and $16 million,
respectively, due to the impact of foreign exchange translation in
the second quarter of 2019 relative to the second quarter of
2018.
Year-to-Date Comparison
- Q2 2019 vs. Q2 2018
Our reported net income was $1,218
million for the first six months of 2019, compared to
$1,375 million in the first six
months of 2018, predominantly reflecting unfavourable market
related and ACMA impacts, partially offset by lower acquisition,
integration, and restructuring costs. Underlying net income was
$1,456 million, compared to
$1,499 million in the first six
months of 2018, reflecting interest on par seed
capital(2) of $110 million
in the first quarter of 2018, unfavourable credit experience, less
favourable morbidity experience in Canada, and lower new business gains in
International in Asia, partially
offset by favourable expense experience, business growth, benefits
from tax related items primarily in the U.S., improved lapse and
other policyholder behaviour experience, and favourable mortality
experience.
1. Market related impacts
Market related impacts in the first six months of 2019,
compared to the first six months of 2018, reflected unfavourable
interest rate impacts and less favourable changes in the fair value
of investment properties, partially offset by favourable equity
market impacts.
2. Assumption changes and management
actions
Assumption changes and management actions decreased net
income by $31 million in the first
six months of 2019, compared to $2
million in the first six months of 2018.
3. Other adjustments
Other adjustments in the first six months of 2019
decreased reported net income by $41
million, compared to a decrease of $62 million in the same period last year,
primarily driven by lower acquisition, integration, and
restructuring costs and lower fair value adjustments on MFS's
share-based payment awards, partially offset by the impact of
certain hedges in Canada that do
not qualify for hedge accounting.
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Our effective income
tax rate on underlying net income is calculated using underlying
net income and income tax expense associated with underlying net
income, which excludes amounts attributable to participating
policyholders.
|
(2)
|
In the first quarter
of 2018, the seed capital that was transferred into the
participating account at demutualization was transferred into the
shareholder account, along with accrued investment income. The
results include income of $110 million, of which $75 million was in
Canada and $35 million was in the U.S.
|
4. Experience related items
Compared to the first six months of 2018, the significant
changes in experience related items are as follows:
- Unfavourable credit experience, including the net impact
resulting from downgrades of indirect exposures to a single name in
the utilities sector;
- Less favourable morbidity experience;
- Improved lapse and other policyholder behaviour
experience; and
- Favourable expense experience resulting from expense
discipline, as well as lower incentive compensation
costs.
Other experience for the first quarter of 2018,
predominantly included the impact of accrued investment income on
seed capital of $110 million -
$75 million in Canada and $35
million in the U.S. ("interest on par seed capital"). For
further information, please see Note 10.C in the second quarter of
2019 Interim Consolidated Financial Statements.
5. Income taxes
Our statutory tax rate is normally reduced by various tax
benefits, such as lower taxes on income subject to tax in foreign
jurisdictions, a range of tax-exempt investment income, and other
sustainable tax benefits that are expected to decrease our
effective tax rate.
For the first six months of 2019, our effective tax rates
on reported and underlying net income(1) were 11.4% and
16.7%, respectively, compared to 18.0% and 16.4%, respectively, for
the first six months of 2018. Our effective tax rate on underlying
net income is within our expected range of 15% to 20%.
6. Impact of foreign exchange
rates
During the first six months of 2019, our reported net
income and underlying net income increased by $34 million and $37
million, respectively, due to the impact of foreign exchange
translation in the first six months of 2019 relative to the first
six months of 2018.
D. Growth
1. Sales and Value of New Business
|
Quarterly
results
|
Year-to-date
|
($
millions)
|
Q2'19
|
Q1'19
|
Q2'18
|
2019
|
2018
|
Insurance sales by
business group(1)
|
|
|
|
|
|
Canada
|
194
|
362
|
266
|
556
|
562
|
U.S.
|
225
|
160
|
155
|
385
|
291
|
Asia
|
238
|
258
|
212
|
496
|
445
|
Total insurance
sales(1)
|
657
|
780
|
633
|
1,437
|
1,298
|
Wealth sales by
business group(1)
|
|
|
|
|
|
Canada
|
3,248
|
2,825
|
3,039
|
6,073
|
6,864
|
Asia
|
1,799
|
1,881
|
2,502
|
3,680
|
6,238
|
Total wealth sales
excluding Asset Management(1)
|
5,047
|
4,706
|
5,541
|
9,753
|
13,102
|
Asset Management
sales(1)
|
31,929
|
31,287
|
25,263
|
63,216
|
57,527
|
Total wealth
sales(1)
|
36,976
|
35,993
|
30,804
|
72,969
|
70,629
|
Value of New
Business(1)("VNB")
|
235
|
382
|
266
|
617
|
600
|
|
|
(1)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial Measures in
this
document.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Our effective income
tax rate on underlying net income is calculated using underlying
net income and income tax expense associated with underlying net
income, which excludes amounts attributable to participating
policyholders.
|
Total Company insurance sales were $657 million in the second quarter of 2019, up 4%
(2% on a constant currency basis) compared to the same period in
2018.
- Canada insurance sales
decreased in the second quarter of 2019, reflecting lower sales in
Group Benefits ("GB") and individual insurance.
- U.S. insurance sales increased 40% in local currency,
predominantly driven by medical stop-loss.
- Asia insurance sales
were up 10% on a constant currency basis, with double-digit growth
in most local insurance markets offset by lower sales in
International.
Total Company wealth sales were $37.0
billion in the second quarter of 2019, up 20% (16% on a
constant currency basis) compared to the second quarter of
2018.
- Canada wealth sales
increased 7%, driven by higher sales in Group Retirement Services
("GRS").
- Asia wealth sales were
down, primarily from lower sales in India, partially offset by the impact of
foreign exchange translation.
- Asset Management gross sales increased 26%, driven by
higher mutual and managed fund sales in MFS Investment Management
("MFS"), the impact of foreign exchange translation and higher
sales in SLC Management.
The Company's VNB was $235 million
in the second quarter of 2019, down 12% compared to the second
quarter of 2018, largely due to lower sales in International in
Asia and in GB in Canada, partially offset by favourable volume
of Group Benefits in the U.S.
2. Premiums and Deposits
($
millions)
|
Quarterly
results
|
Year-to-date
|
Q2'19
|
Q1'19
|
Q2'18
|
2019
|
2018
|
Net premium
revenue
|
4,480
|
4,370
|
4,315
|
8,850
|
8,960
|
Segregated fund
deposits
|
2,872
|
3,064
|
2,703
|
5,936
|
6,098
|
Mutual fund
sales(1)
|
23,703
|
23,664
|
19,265
|
47,367
|
43,321
|
Managed fund
sales(1)
|
10,539
|
9,976
|
8,967
|
20,515
|
21,312
|
ASO premium and
deposit equivalents(1)
|
1,681
|
1,707
|
1,767
|
3,388
|
3,442
|
Total premiums and
deposits(1)
|
43,275
|
42,781
|
37,017
|
86,056
|
83,133
|
Total adjusted
premiums and deposits(1)(2)
|
42,210
|
41,968
|
37,170
|
83,525
|
83,452
|
|
|
(1)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial Measures in
this document.
|
(2)
|
Adjusted premiums and
deposits is a non-IFRS financial measure that excludes from
premiums and deposits the impact of Constant Currency Adjustment
and Reinsurance in Canada's GB Operations Adjustment as described
in section M - Non-IFRS Financial Measures in this
document.
|
Net premium revenue was $4.5
billion, up $0.2 billion from
the second quarter of 2018, primarily driven by increased premium
revenue in Canada and the U.S.,
and the currency impact from the change in the Canadian dollar,
partially offset by a decrease in Asia. Net premium revenue was $8.9 billion in the first six months of 2019,
compared to $9.0 billion in the same
period of 2018. The decrease was primarily driven by lower premiums
in Asia and Canada, partially offset by higher premium
revenue in the U.S. and the impact of foreign exchange
translation.
Segregated fund deposits were $2.9
billion in the second quarter of 2019, up $0.2 billion from the second quarter of 2018,
largely attributable to increases in Canada partially offset by lower deposits in
Hong Kong in Asia. Segregated fund deposits were
$5.9 billion in the first six months
of 2019, compared to $6.1 billion in
the same period last year, due to lower deposits in Canada and Hong
Kong in Asia.
Sales of mutual funds were $23.7
billion in the second quarter of 2019, up from $19.3 billion in the second quarter of 2018.
Sales of mutual funds were $47.4
billion for the first six months of 2019, compared to
$43.3 billion in the same period in
2018. The higher mutual fund sales in both the second quarter and
first six months of 2019 were driven by increased sales in MFS and
the impact of foreign exchange translation, partially offset by
lower sales in Asia.
Managed fund sales of $10.5
billion in the second quarter of 2019 increased by
$1.6 billion from the second quarter
of 2018, primarily due to higher sales in MFS and SLC Management,
and the currency impact from the change in the Canadian dollar.
Sales of managed funds were $20.5
billion for the first six months of 2019, down compared to
the same period in 2018, reflecting decreased sales in MFS,
partially offset the impact of foreign exchange
translation.
ASO premium and deposit equivalents in the second quarter
of 2019 of $1.7 billion were slightly
lower compared to the second quarter of 2018 due to lower ASO
premium and deposit equivalents in Hong
Kong in Asia. ASO premium
and deposit equivalents for the first six months of
2019 of $3.4 billion were slightly
lower compared to the first six months of 2018, due to lower ASO
premiums and deposit equivalents in Hong
Kong in Asia, partially
offset by Canada.
The impact of foreign exchange translation increased total
premiums and deposits by approximately $1.2
billion and $2.8 billion,
respectively, for the second quarter and the first six months of
2019, in comparison to the respective periods in 2018.
3. Assets Under Management
AUM consist of general funds, segregated funds, and other
AUM. Other AUM includes mutual funds and managed funds, which
include institutional and other third-party assets managed by the
Company.
|
Quarterly
results
|
($
millions)
|
Q2'19
|
Q1'19
|
Q4'18
|
Q3'18
|
Q2'18
|
Assets under management(1)
|
|
|
|
|
|
General fund
assets
|
174,325
|
172,348
|
168,765
|
162,439
|
164,709
|
Segregated
funds
|
111,684
|
110,011
|
103,062
|
108,298
|
108,692
|
Mutual funds, managed
funds and other AUM(1)
|
738,767
|
729,026
|
679,316
|
712,782
|
712,719
|
Total
AUM(1)
|
1,024,776
|
1,011,385
|
951,143
|
983,519
|
986,120
|
|
|
(1)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial Measures in
this document.
|
AUM were $1,024.8 billion as
at June 30, 2019, compared to AUM of
$951.1 billion as at December 31, 2018. The increase in AUM of
$73.6 billion between December 31, 2018 and June
30, 2019 resulted primarily from:
(i)
|
an increase of $116.2
billion from favourable market movements; and
|
(ii)
|
an increase of $3.2
billion of other business activities; partially offset
by
|
(iii)
|
an decrease of $31.5
billion from the impact of foreign exchange translation;
and
|
(iv)
|
net outflows of
mutual, managed, and segregated funds of $14.3 billion.
|
For the second quarter of 2019, net outflows of mutual,
managed and segregated funds were $7.2
billion, predominantly driven by net outflows from MFS of
$8.1 billion, partially offset by net
inflows of $0.5 billion from
Canada, $0.4 billion from Asia, and $0.2
billion from SLC Management.
E. Financial Strength
|
Quarterly
results
|
|
Q2'19
|
Q1'19
|
Q4'18
|
Q3'18
|
Q2'18
|
LICAT ratio
|
|
|
|
|
|
Sun Life Financial
Inc.
|
144%
|
145%
|
144%
|
145%
|
149%
|
Sun Life
Assurance
|
133%
|
132%
|
131%
|
130%
|
134%
|
Financial leverage
ratio(1)
|
20.4%
|
21.1%
|
21.2%
|
21.9%
|
21.8%
|
Dividend
|
|
|
|
|
|
Dividend payout
ratio(1)
|
42%
|
42%
|
42%
|
40%
|
40%
|
Dividends per common
share ($)
|
0.525
|
0.500
|
0.500
|
0.475
|
0.475
|
Capital
|
|
|
|
|
|
Subordinated debt and
innovative capital instruments(2)
|
3,491
|
3,739
|
3,738
|
3,738
|
3,737
|
Participating
policyholders' equity and non-controlling interests
|
974
|
930
|
864
|
802
|
517
|
Preferred
shareholders' equity
|
2,257
|
2,257
|
2,257
|
2,257
|
2,257
|
Common shareholders'
equity
|
21,427
|
21,525
|
21,449
|
20,577
|
20,959
|
Total
capital
|
28,149
|
28,451
|
28,308
|
27,374
|
27,470
|
|
|
(1)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial Measures in
this document.
|
(2)
|
Innovative capital
instruments consist of Sun Life ExchangEable Capital Securities,
and qualify as regulatory capital. However, under IFRS they are
reported as Senior debentures in our Consolidated Financial
Statements. For additional information, see section I - Capital and
Liquidity Management - 1 - Capital in our 2018 annual
MD&A.
|
The Office of the Superintendent of Financial Institutions
("OSFI") has developed the regulatory capital framework referred to
as the Life Insurance Capital Adequacy Test for Canada. LICAT measures the capital adequacy of
an insurer using a risk-based approach and includes elements that
contribute to financial strength through periods when an insurer is
under stress as well as elements that contribute to policyholder
and creditor protection wind-up.
SLF Inc. is a non-operating insurance company and is
subject to the LICAT guideline. As at June
30, 2019, SLF Inc.'s LICAT ratio was 144%, in line with
December 31, 2018. The favourable
impact of reported net income and market movements were offset by
the impact of the payment of dividends, the repurchases of common
shares, the redemption of subordinated debentures, the impact from
OSFI's 2019 LICAT guideline revisions and the impact from the
de-registration of a U.S. reinsurer.
Sun Life Assurance, SLF Inc.'s principal operating life
insurance subsidiary, is also subject to the LICAT guideline. As at
June 30, 2019, Sun Life Assurance's
LICAT ratio was 133%, compared to 131% as at December 31, 2018. The increase was primarily due
to the favourable contribution of reported net income and market
movements, partially offset by dividends to SLF Inc. and the
unfavourable impact from OSFI's 2019 LICAT guideline revisions. The
Sun Life Assurance LICAT ratios in both periods are well above
OSFI's supervisory ratio of 100% and regulatory minimum ratio of
90%.
Our total capital consists of subordinated debt and other
capital instruments, participating policyholders' equity, and total
shareholders' equity, which includes common shareholders' equity
and preferred shareholders' equity. As at June 30, 2019, our total capital was $28.1 billion, compared to $28.3 billion as at December 31, 2018. The decrease in total capital
was primarily due to the payment of $611
million of dividends on common shares of SLF Inc. ("common
shares"), foreign currency translation loss of $539 million included in other comprehensive
income (loss) ("OCI"), $400 million
from the repurchase and cancellation of common shares and the
redemption of $250 million principal
amount of Series 2014-1 Subordinated Unsecured 2.77% Fixed/
Floating Debentures ("Series 2014-1 Debentures") detailed below,
partially offset by total net income of $1,218 million and unrealized gains on AFS assets
of $400 million.
SLF Inc. and its wholly-owned holding companies had
$2,214 million in cash and other
liquid assets(1) as at June 30,
2019 ($2,523 million as at
December 31, 2018). The decrease in
cash and other liquid assets in the first six months of 2019
includes the impact of the redemption of $250 million principal amount of Series 2014-1
Debentures.
On May 13, 2019, SLF Inc.
redeemed all of the outstanding $250
million principal amount of Series 2014-1 Debentures, in
accordance with the redemption terms attached to such debentures.
The redemption was funded from existing cash and other liquid
assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Other liquid assets
include cash equivalents, short-term investments, and publicly
traded securities.
|
On July 2, 2019, SLF Inc.'s
Series D Senior Unsecured 5.70% Debentures ("Series D Debentures")
matured and SLF Inc. repaid all of the outstanding $300 million principal amount of such debentures
together with all accrued and unpaid interest. Under LICAT, senior
debentures do not qualify as available capital, as a result, the
repayment of the Series D Debentures will have no impact on the
LICAT ratio of Sun Life Assurance or SLF Inc. In addition, a
separate pool of assets had been set aside to support the
redemption of these debentures. As such, the redemption did not
affect the cash and other liquid assets held by SLF Inc. and its
wholly-owned holding companies noted above.
Normal Course Issuer Bids
SLF Inc. launched a normal course issuer bid on
August 14, 2018 and amended it
effective May 14, 2019 (the "2018
NCIB"). The 2018 NCIB remains in effect until the earlier of
August 13, 2019 and the date on which
SLF Inc. has purchased an aggregate of 18.0 million common shares
under the bid. During the three months and six months ended
June 30, 2019, SLF Inc. purchased
approximately 3.7 million common shares at a total cost of
$200 million, and 7.8 million common
shares at a total cost of $400
million, respectively. All of the common shares purchased
under the 2018 NCIB were subsequently cancelled. As at June 30, 2019, the total aggregate shares
purchased and cancelled and associated cost under the 2018 NCIB are
16.4 million and $825 million,
respectively.
On July 31, 2019, SLF Inc.
announced that, subject to the approval of OSFI and the Toronto
Stock Exchange ("TSX"), it intends to launch a new normal course
issuer bid to purchase for cancellation up to 15 million of its
common shares (the "2019 NCIB"). The 2019 NCIB is expected to
commence on August 14, 2019 and
continue until August 13, 2020, or
such earlier date as SLF Inc. may determine or as SLF Inc.
completes its purchases pursuant to the 2019 NCIB. Purchases under
the 2019 NCIB may be made through the facilities of the TSX, other
Canadian stock exchanges and/or alternative Canadian trading
platforms, at prevailing market rates. Purchases under the 2019
NCIB may also be made by way of private agreements or share
repurchase programs under issuer bid exemption orders issued by
securities regulatory authorities. Any purchases made under an
exemption order issued by a securities regulatory authority will
generally be at a discount to the prevailing market price. The
actual number of common shares purchased under the 2019 NCIB, and
the timing of such purchases (if any), will be determined by SLF
Inc. Any common shares purchased by SLF Inc. pursuant to the 2019
NCIB will be cancelled. The 2019 NCIB will provide the Company with
the flexibility to acquire common shares in order to return capital
to shareholders as part of its overall capital management
strategy.
F. Performances by Business Group
($
millions)
|
Quarterly
results
|
Year-to-date
|
Q2'19
|
Q1'19
|
Q2'18
|
2019
|
2018
|
Reported net income
(loss)
|
|
|
|
|
|
Canada
|
148
|
237
|
262
|
385
|
511
|
U.S.
|
94
|
124
|
105
|
218
|
201
|
Asset
Management
|
229
|
219
|
214
|
448
|
424
|
Asia
|
134
|
80
|
133
|
214
|
266
|
Corporate
|
(10)
|
(37)
|
(8)
|
(47)
|
(27)
|
Total reported net
income (loss)
|
595
|
623
|
706
|
1,218
|
1,375
|
Underlying net income
(loss)(1)
|
|
|
|
|
|
Canada
|
243
|
237
|
245
|
480
|
540
|
U.S.
|
110
|
150
|
125
|
260
|
254
|
Asset
Management
|
245
|
227
|
216
|
472
|
447
|
Asia
|
147
|
122
|
145
|
269
|
273
|
Corporate
|
(6)
|
(19)
|
(2)
|
(25)
|
(15)
|
Total underlying net
income (loss)(1)
|
739
|
717
|
729
|
1,456
|
1,499
|
|
|
(1)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial Measures in
this document.
|
Information describing the business groups and their
respective business units is included in our 2018 annual MD&A.
All factors discussed in this document that impact our underlying
net income are also applicable to reported net
income.
1. Canada
|
Quarterly
results
|
Year-to-date
|
($ millions)
|
Q2'19
|
Q1'19
|
Q2'18
|
2019
|
2018
|
Individual Insurance
& Wealth
|
(3)
|
106
|
105
|
103
|
212
|
Group
Benefits
|
80
|
74
|
103
|
154
|
172
|
Group Retirement
Services
|
71
|
57
|
54
|
128
|
127
|
Reported net income
(loss)
|
148
|
237
|
262
|
385
|
511
|
Market related
impacts(1)
|
(72)
|
(1)
|
15
|
(73)
|
(29)
|
Assumption changes and
management actions(1)
|
(20)
|
—
|
5
|
(20)
|
(2)
|
Other
adjustments(2)
|
(3)
|
1
|
(3)
|
(2)
|
2
|
Underlying net income
(loss)(3)
|
243
|
237
|
245
|
480
|
540
|
Reported ROE
(%)(3)
|
8.5%
|
13.5%
|
15.5%
|
11.0%
|
15.3%
|
Underlying ROE
(%)(3)
|
13.8%
|
13.5%
|
14.5%
|
13.7%
|
16.2%
|
Insurance
sales(3)
|
194
|
362
|
266
|
556
|
562
|
Wealth
sales(3)
|
3,248
|
2,825
|
3,039
|
6,073
|
6,864
|
|
|
(1)
|
Represents an
adjustment made to arrive at a non-IFRS financial measure. See
section M - Non-IFRS Financial Measures in this document for a
breakdown of components within this adjustment.
|
(2)
|
Mainly comprised of
certain hedges in Canada that do not qualify for hedge accounting
and acquisition, integration and restructuring costs. For further
information, see section M - Non-IFRS Financial Measures in this
document.
|
(3)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial Measures in
this document.
|
Profitability
Quarterly Comparison - Q2 2019 vs. Q2
2018
Canada's
reported net income was $148 million
in the second quarter of 2019, compared to $262 million in the second quarter of
2018. Underlying net income was $243
million in the second quarter of 2019, compared to
$245 million in the second quarter of
2018.
Reported net income in the second quarter of 2019 compared
to the second quarter of 2018 predominantly reflected unfavourable
market related impacts, which included the impacts from interest
rates and changes in the fair value of investment properties, and
unfavourable ACMA. Underlying net income in the second quarter of
2019 was in line with the same period in 2018, reflecting
favourable expense experience and continued business growth, offset
by unfavourable morbidity and credit experience.
Year-to-Date Comparison - Q2 2019 vs. Q2
2018
Canada's
reported net income was $385 million
in the first six months of 2019, compared to $511 million in the same period in 2018.
Underlying net income was $480
million in the first six months of 2019, compared to
$540 million in the same period in
2018.
Reported net income in the first six months of 2019
compared to the first six months of 2018 reflected unfavourable
market related impacts, which included the impacts from interest
rates and changes in the fair value of investment properties,
partially offset by equity markets, and unfavourable ACMA impact.
Underlying net income in the first six months of 2019 compared to
the same period in 2018 reflected interest on par seed capital of
$75 million in the first quarter of
2018 and unfavourable credit and morbidity experience, partially
offset by continued business growth, favourable expense experience
and higher investing activity gains.
Growth
Quarterly Comparison - Q2 2019 vs. Q2
2018
Canada
individual insurance sales decreased in the second quarter of 2019
to $94 million, compared to
$110 million in the same period last
year. Sales in GB of $100 million
decreased by 36% compared to the second quarter of 2018 due to the
timing of large case sales during the first half of the
year.
Canada wealth sales of
$3.2 billion in the second quarter of
2019 were up compared to $3.0 billion
in the second quarter of 2018, driven by increased sales in
GRS.
Year-to-Date Comparison - Q2 2019 vs. Q2
2018
Canada
individual insurance sales were $187
million in the first six months of 2019, compared to
$198 million in the same period last
year. Sales in GB of $369 million
were consistent with the first six months of 2018.
Canada wealth sales were
$6.1 billion in the first six months
of 2019, compared to $6.9 billion in
the same period last year. Individual wealth sales of $3.1 billion were down 8% in the first six months
of 2019 compared to the same period last year, reflecting a weaker
RRSP season across the industry. GRS sales of $3.0 billion were down 15% over the first six
months in 2018, mainly due to a large case defined benefit sale in
the first quarter of 2018.
2. U.S.
|
Quarterly
results
|
Year-to-date
|
(US$
millions)
|
Q2'19
|
Q1'19
|
Q2'18
|
2019
|
2018
|
Group
Benefits
|
41
|
86
|
57
|
127
|
90
|
In-force
Management
|
29
|
7
|
24
|
36
|
67
|
Reported net income
(loss)
|
70
|
93
|
81
|
163
|
157
|
Market related
impacts(1)
|
(8)
|
(11)
|
(1)
|
(19)
|
(21)
|
Assumption changes and
management actions(1)
|
1
|
(2)
|
(3)
|
(1)
|
(1)
|
Acquisition,
integration and restructuring(1)
|
(4)
|
(6)
|
(12)
|
(10)
|
(20)
|
Underlying net income
(loss)(2)
|
81
|
112
|
97
|
193
|
199
|
Reported ROE
(%)(2)
|
9.9%
|
13.6%
|
11.7%
|
11.8%
|
11.5%
|
Underlying ROE
(%)(2)
|
11.6%
|
16.3%
|
14.0%
|
13.9%
|
14.5%
|
After-tax profit
margin for Group Benefits (%)(2)
|
7.3%
|
7.9%
|
6.5%
|
7.3%
|
6.5%
|
Insurance
sales(2)
|
168
|
120
|
120
|
288
|
228
|
(C$
millions)
|
|
|
|
|
|
Reported
net income (loss)
|
94
|
124
|
105
|
218
|
201
|
Underlying net income
(loss)(2)
|
110
|
150
|
125
|
260
|
254
|
|
|
(1)
|
Represents an
adjustment made to arrive at a non-IFRS financial measure. See
section M - Non-IFRS Financial Measures in this document for a
breakdown of components within this adjustment.
|
(2)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial Measures in
this document.
|
Profitability
Quarterly Comparison - Q2 2019 vs. Q2
2018
U.S.'s reported net income was
US$70 million ($94 million) in the second quarter of 2019,
compared to US$81 million
($105 million) in the second quarter
of 2018. Underlying net income was US$81
million ($110 million) in the
second quarter of 2019, compared to US$97
million ($125 million) in the
second quarter of 2018. The impact of foreign exchange translation
increased reported net income and underlying net income by
$3 million and $4 million, respectively.
Reported net income in the second quarter of 2019 compared
to the second quarter of 2018 reflected unfavourable market related
impacts, predominantly from changes in the fair value of investment
properties, partially offset by lower integration costs, as the
integration of the U.S. employee benefits business acquired in 2016
nears completion. Underlying net income in the second quarter of
2019 compared to the second quarter of 2018 reflected less
favourable morbidity experience driven by unfavourable experience
in medical stop-loss partially offset by favourable experience in
employee group benefits, and lower AFS gains, partially offset by
improved lapse and other policyholder behaviour experience and
benefits from tax related items. The after-tax profit margin for
Group Benefits(1) was 7.3% as of the second quarter of
2019, compared to 6.5% as of the second quarter of 2018.
Year-to-Date Comparison - Q2 2019 vs. Q2
2018
U.S.'s reported net income was
US$163 million ($218 million) in the first six months of 2019,
compared to US$157 million
($201 million) in the same period in
2018. Underlying net income was US$193
million ($260 million) in the
first six months of 2019, compared to US$199
million ($254 million) in the
same period in 2018. The impact of foreign exchange translation
increased reported net income and underlying net income by
$9 million and $11 million, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial Measures in
this document.
|
Reported net income in the first six months of 2019
compared to the first six months of 2018 was driven by lower
integration costs, as the integration of the U.S. employee benefits
business acquired in 2016 nears completion. Underlying net income
in the first six months of 2019 compared to the same period in 2018
was driven by favourable mortality experience, improved lapse and
other policyholder behaviour experience, benefits from tax related
items, and continued business growth, partially offset by interest
on par seed capital of US$28 million
($35 million) in the first quarter of
2018, lower AFS gains, and lower investing activity
gains.
Growth
Quarterly Comparison - Q2 2019 vs. Q2
2018
U.S. Group Benefits sales of US$168 million in the second quarter of 2019
increased 40% compared to US$120
million in the second quarter of 2018, driven by strong
momentum and our leadership position in medical stop-loss, where
business in-force increased to US$1.8
billion, up 22% from the same period in the prior
year.
Year-to-Date Comparison - Q2 2019 vs. Q2 2018
(year-to-date)
U.S. Group Benefits sales of
US$288 million in the first six
months of 2019 increased 26% compared to US$228 million in the same period of 2018,
primarily driven by increased medical stop-loss
sales.
3. Asset Management
|
Quarterly
results
|
Year-to-date
|
Asset Management (C$ millions)
|
Q2'19
|
Q1'19
|
Q2'18
|
2019
|
2018
|
Reported net
income
|
229
|
219
|
214
|
448
|
424
|
Fair value adjustments
on MFS's share-based payment awards(1)
|
(11)
|
(8)
|
(2)
|
(19)
|
(23)
|
Acquisition,
integration and restructuring(1)
|
(5)
|
—
|
—
|
(5)
|
—
|
Underlying net
income(2)
|
245
|
227
|
216
|
472
|
447
|
Assets under
management (C$ billions)(2)
|
708.1
|
698.4
|
684.0
|
708.1
|
684.0
|
Gross sales (C$
billions)(2)
|
31.9
|
31.3
|
25.3
|
63.2
|
57.6
|
Net sales (C$
billions)(2)
|
(7.9)
|
(6.5)
|
(14.7)
|
(14.4)
|
(19.8)
|
MFS(C$ millions)
|
|
|
|
|
|
Reported net
income
|
225
|
215
|
211
|
440
|
412
|
Fair value adjustments
on MFS's share-based payment awards(1)
|
(11)
|
(8)
|
(2)
|
(19)
|
(23)
|
Underlying net
income(2)
|
236
|
223
|
213
|
459
|
435
|
Assets under
management (C$ billions)(2)
|
639.9
|
631.1
|
622.5
|
639.9
|
622.5
|
Gross sales (C$
billions)(2)
|
30.3
|
29.0
|
24.1
|
59.3
|
53.7
|
Net sales (C$
billions)(2)
|
(8.1)
|
(7.8)
|
(14.9)
|
(15.9)
|
(20.3)
|
MFS (US$ millions)
|
|
|
|
|
|
Reported net
income
|
168
|
162
|
163
|
330
|
322
|
Fair value adjustments
on MFS's share-based payment awards(1)
|
(8)
|
(6)
|
(1)
|
(14)
|
(18)
|
Underlying net
income(2)
|
176
|
168
|
164
|
344
|
340
|
Pre-tax net operating
profit margin ratio for MFS(2)
|
37%
|
38%
|
36%
|
37%
|
37%
|
Average net assets
(US$ billions)(2)
|
480.2
|
456.7
|
480.9
|
468.5
|
487.9
|
Assets under
management (US$ billions)(2)(3)
|
488.8
|
472.9
|
474.1
|
488.8
|
474.1
|
Gross sales (US$
billions)(2)
|
22.6
|
21.8
|
18.6
|
44.4
|
42.0
|
Net sales (US$
billions)(2)
|
(6.1)
|
(5.9)
|
(11.5)
|
(12.0)
|
(15.8)
|
Asset appreciation
(depreciation) (US$ billions)
|
22.0
|
50.4
|
3.4
|
72.4
|
(1.7)
|
S&P 500 Index
(daily average)
|
2,884
|
2,720
|
2,704
|
2,803
|
2,718
|
MSCI EAFE Index
(daily average)
|
1,888
|
1,833
|
2,018
|
1,861
|
2,045
|
SLC Management (C$ millions)
|
|
|
|
|
|
Reported net
income
|
4
|
4
|
3
|
8
|
12
|
Acquisition,
integration and restructuring(1)
|
(5)
|
—
|
—
|
(5)
|
—
|
Underlying net
income(2)
|
9
|
4
|
3
|
13
|
12
|
Assets under
management (C$ billions)(2)
|
68.2
|
67.3
|
61.5
|
68.2
|
61.5
|
Gross sales (C$
billions)(2)
|
1.6
|
2.3
|
1.2
|
3.9
|
3.9
|
Net sales (C$
billions)(2)
|
0.2
|
1.3
|
0.2
|
1.5
|
0.5
|
|
|
(1)
|
Represents an
adjustment made to arrive at a non-IFRS financial measure. See
section M - Non-IFRS Financial Measures in this document for a
breakdown of components within this adjustment.
|
(2)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial Measures in
this document.
|
(3)
|
Monthly information
on AUM is provided by MFS in its Corporate Fact Sheet, which can be
found at www.mfs.com/CorpFact. The Corporate Fact Sheet also
provides MFS's U.S. GAAP assets and liabilities as at June 30,
2019.
|
Profitability
Quarterly Comparison - Q2 2019 vs. Q2
2018
Asset Management's reported net income
was $229 million in the second
quarter of 2019, compared to $214
million in the second quarter of 2018. Underlying net income
was $245 million in the second
quarter of 2019, compared to $216
million in the second quarter of 2018. The impact of foreign
exchange increased reported net income and underlying net income by
$8 million.
Asset Management's reported net income in the second
quarter of 2019 compared with the second quarter of 2018 was driven
by the change in underlying net income, partially offset by higher
fair value adjustments on MFS's share based payment awards and
higher acquisition costs in SLC Management related to the
acquisition of BentallGreenOak ("BGO"). Underlying net income
compared to the second quarter of 2018 was driven by expense
management, investment income including returns on seed capital,
and favourable impact of foreign exchange translation.
In U.S. dollars, MFS's reported net income was
US$168 million in the second quarter
of 2019 compared to US$163 million in
the second quarter of 2018, driven by the change in underlying net
income, partially offset by higher fair value adjustments on MFS's
share based payment awards. MFS's underlying net income was
US$176 million in the second quarter
of 2019, compared to US$164 million
in the same period in 2018. Both quarters had similar average net
assets ("ANA"), and improvements were driven by expense management
and investment income including returns on seed capital. The
pre-tax net operating profit margin ratio for MFS was 37% in the
second quarter of 2019, compared to 36% in the same period last
year.
Year-to-Date Comparison - Q2 2019 vs. Q2
2018
Asset Management's reported net income in
the first six months of 2019 was $448
million, compared to $424
million in the same period in 2018. Underlying net income
was $472 million in the first six
months of 2019, compared to $447
million in the same period in 2018. The impact of foreign
exchange translation increased reported net income and underlying
net income by $19 million and
$20 million, respectively.
Asset Management's reported net income in the first six
months of 2019 compared to the first six months of 2018 was driven
by lower fair value adjustments on MFS's share based payment awards
offset by acquisition costs related to BGO. Underlying net income
compared to the second quarter of 2018 was driven by expense
management, favourable results in investment income including
returns on seed capital and the favourable impact of foreign
exchange translation, partially offset by the impacts from lower
ANA.
In U.S. dollars, MFS's reported net income was
US$330 million in the first six
months of 2019, compared to US$322
million in the first six months of 2018, reflecting lower
fair value adjustments on MFS's share based payment awards. MFS's
underlying net income was US$344
million in the first six months of 2019, compared to
US$340 million for the same period in
2018, driven by expense management and favourable results in
investment income including returns on seed capital, partially
offset by the impacts from lower ANA.
SLC Management's reported net income in the first six
months of 2019 compared to the first six months of 2018 included
acquisition costs related to BGO. Underlying net income in the
first six months of 2019 was in line with the same period in
2018.
Growth
Asset Management's AUM was
$708.1 billion as at June 30, 2019, compared to $649.7 billion as at December 31, 2018. The increase in AUM was
primarily due to asset appreciation and the impact of foreign
exchange translation, partially offset by net outflows. MFS's AUM
was US$488.8 billion ($639.9 billion) as at June
30, 2019, compared to US$428.4
billion ($584.2 billion) as at
December 31, 2018. The increase of
US$60.4 billion was primarily driven
by asset appreciation of US$72.4
billion and gross sales of US$44.4
billion, partially offset by redemptions of US$56.4 billion. MFS continued to report strong
retail sales, resulting in positive net retail fund flows of
$2.6 billion (US$2.0 billion) for the second quarter of 2019
and $3.6 billion (US$2.7 billion) in the first half of the
year.
In the second quarter of 2019, 93%, 92% and 84% of MFS's
U.S. retail fund assets ranked in the top half of their Lipper
categories based on ten-, five- and three-year performance,
respectively.
SLC Management's AUM was $68.2
billion as at June 30, 2019,
compared to $65.5 billion as at
December 31, 2018.
Acquisition of BentallGreenOak
On
July 1, 2019, we completed the
acquisition of our majority stake in BGO, which was the product of
the merger of the Bentall Kennedy group of companies and GreenOak
Real Estate, a global real estate investment firm. This acquisition
increases our global real estate investment footprint, while adding
organizational depth and a full spectrum of solutions including
equity and debt real estate strategies. The expected reduction to
Total shareholders' equity as a result of the acquisition is
approximately $850 million,
primarily driven by the establishment of financial
liabilities associated with the anticipated increase of our future
ownership in BentallGreenOak. Please refer to the
second quarter of 2019 Interim Consolidated Financial Statements
for additional details.
4. Asia
|
Quarterly results
|
Year-to-date
|
($
millions)
|
Q2'19
|
Q1'19
|
Q2'18
|
2019
|
2018
|
Insurance and
Wealth
|
117
|
101
|
86
|
218
|
191
|
International
|
17
|
(21)
|
47
|
(4)
|
75
|
Reported net income
(loss)
|
134
|
80
|
133
|
214
|
266
|
Market related
impacts(1)
|
(14)
|
(42)
|
—
|
(56)
|
4
|
Assumption changes and
management actions(1)
|
1
|
—
|
—
|
1
|
1
|
Acquisition,
integration and restructuring(1)(2)
|
—
|
—
|
(12)
|
—
|
(12)
|
Underlying net income
(loss)(3)
|
147
|
122
|
145
|
269
|
273
|
Reported ROE
(%)(3)
|
9.9%
|
6.0%
|
10.9%
|
7.9%
|
11.0%
|
Underlying ROE
(%)(3)
|
10.9%
|
9.1%
|
11.8%
|
10.0%
|
11.3%
|
Insurance
sales(3)
|
238
|
258
|
212
|
496
|
445
|
Wealth
sales(3)
|
1,799
|
1,881
|
2,502
|
3,680
|
6,238
|
|
|
(1)
|
Represents an
adjustment made to arrive at a non-IFRS financial measure. See
section M - Non-IFRS Financial Measures in this document for a
breakdown of components within this adjustment.
|
(2)
|
The amount in the
second quarter of 2018 pertains to a distribution arrangement in
India for asset management.
|
(3)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial Measures in
this document.
|
Profitability
Quarterly Comparison - Q2 2019 vs. Q2
2018
Asia's
reported net income was $134 million
in the second quarter of 2019, compared to reported net income of
$133 million in the second quarter of
2018. Underlying net income was $147
million in the second quarter of 2019, compared to
$145 million in the second quarter of
2018. The impact of foreign exchange translation increased reported
net income and underlying net income by $4
million and $5 million,
respectively.
Reported net income in the second quarter of 2019 was in
line with the second quarter of 2018, as unfavourable market
related impacts, predominantly from interest rates partially offset
by equity market impacts, were offset by the impact of acquisition,
integration and restructuring costs in the second quarter of 2018.
Underlying net income in the second quarter of 2019 was in line
with the same period in 2018, reflecting favourable expense
experience, favourable credit experience and continued business
growth, largely offset by lower new business gains in
International.
Year-to-Date Comparison - Q2 2019 vs. Q2
2018
Asia's
reported net income was $214 million
in the first six months of 2019, compared to $266 million in the same period in 2018.
Underlying net income was $269
million in the first six months of 2019, compared to
$273 million in the same period in
2018. The impact of foreign exchange translation increased reported
net income and underlying net income by $6
million and $8 million,
respectively.
Reported net income in the first six months of 2019
compared to the first six months of 2018 reflected unfavourable
market related impacts, predominantly from interest rates,
partially offset by the impacts of acquisition, integration and
restructuring costs in the second quarter of 2018. Underlying net
income in the first six months of 2019 compared to the same period
in 2018 reflected lower new business gains in International, and
less favourable credit experience, partially offset by higher
investing activity gains, continued business growth and improved
expense experience.
Growth
Quarterly Comparison - Q2 2019 vs. Q2
2018
Asia
insurance sales were $238 million in
the second quarter of 2019, compared to $212
million in the second quarter of 2018. Total individual
insurance sales increased by 12%, driven by double-digit growth in
most markets. International experienced lower sales but saw
improvements from the prior quarter as a result of a new product
launch.
Asia wealth sales were
$1.8 billion in the second quarter of
2019, compared to $2.5 billion in the
second quarter of 2018. The decrease mainly reflected lower mutual
fund sales in India due to weak
market sentiments.
Year-to-Date Comparison - Q2 2019 vs. Q2
2018
Asia
insurance sales were $496 million in
the first six months of 2019, compared to $445 million in the first six months of 2018.
Total individual insurance sales in the first six months of 2019
increased 12% from the first six months of 2018. On a constant
currency basis, individual insurance sales increased
11%, with most markets achieving double-digit growth. International
experienced lower sales but saw improvements from the prior quarter
as a result of a new product launch.
Asia wealth sales were
$3.7 billion in the first six months
of 2019, compared to $6.2 billion in
the first six months of 2018. This decrease mainly reflected lower
mutual fund sales in India due to
weak market sentiments and in the
Philippines due to elevated money market sales in the first
six months of 2018.
5. Corporate
|
Quarterly
results
|
Year-to-date
|
($
millions)
|
Q2'19
|
Q1'19
|
Q2'18
|
2019
|
2018
|
UK
|
39
|
29
|
37
|
68
|
85
|
Corporate
Support
|
(49)
|
(66)
|
(45)
|
(115)
|
(112)
|
Reported net income
(loss)
|
(10)
|
(37)
|
(8)
|
(47)
|
(27)
|
Market related
impacts(1)
|
—
|
(9)
|
(6)
|
(9)
|
(9)
|
Assumption changes and
management actions(1)
|
(2)
|
(9)
|
—
|
(11)
|
—
|
Acquisition,
integration and restructuring(1)
|
(2)
|
—
|
—
|
(2)
|
(3)
|
Underlying net income
(loss)(2)
|
(6)
|
(19)
|
(2)
|
(25)
|
(15)
|
|
|
(1)
|
Represents an
adjustment made to arrive at a non-IFRS financial measure. See
section M - Non-IFRS Financial Measures in this document for a
breakdown of components within this adjustment.
|
(2)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial Measures in
this document.
|
Profitability
Quarterly Comparison - Q2 2019 vs. Q2
2018
Corporate's reported net loss was
$10 million in the second quarter of
2019, compared to reported net loss of $8
million in the second quarter of 2018. Underlying net loss
was $6 million in the second quarter
of 2019, compared to underlying net loss of $2 million in the second quarter of
2018.
Reported net loss in the second quarter of 2019 compared
to the second quarter of 2018 reflected improved market related
impacts, more than offset by the change in underlying net loss.
Underlying net loss in the second quarter of 2019 compared to the
same period in 2018 reflected lower earnings from the run-off
businesses, partially offset by favourable expense
experience.
Year-to-Date Comparison - Q2 2019 vs. Q2
2018
Corporate's reported net loss was
$47 million in the first six months
of 2019, compared to $27 million in
the same period in 2018. Underlying net loss was $25 million in the first six months of 2019,
compared to $15 million in the same
period in 2018.
Reported net loss in the first six months of 2019 compared
to the first six months of 2018 reflected unfavourable ACMA.
Underlying net loss in the first six months of 2019 compared to the
same period in 2018 reflected lower earnings from the run-off
businesses, and higher regulatory expenses including the adoption
of IFRS 17 Insurance Contracts ("IFRS 17"), partially offset
by favourable expense experience.
G. Investments
We had total general fund invested assets of $156.6 billion as at June
30, 2019, compared to $151.7
billion as at December 31,
2018. The increase in general fund invested assets was
primarily due to the impacts of declining interest rates and
operational activity, partially offset by the unfavourable impact
from foreign exchange translation. Our general fund invested assets
are well diversified across investment types, geographies and
sectors with the majority of our portfolio invested in fixed income
high-quality assets.
The following table sets out the composition of our
general fund invested assets.(1)
|
June 30,
2019
|
December 31,
2018
|
($ millions)
|
Carrying value
|
% of
total carrying
value
|
Carrying
value
|
% of
total carrying value
|
Cash, cash equivalents
and short-term securities
|
8,188
|
5%
|
9,506
|
6%
|
Debt
securities
|
78,677
|
51%
|
74,443
|
49%
|
Equity
securities
|
4,850
|
3%
|
4,634
|
3%
|
Mortgages and
loans
|
47,485
|
30%
|
46,822
|
31%
|
Derivative
assets
|
1,914
|
1%
|
1,112
|
1%
|
Other invested
assets
|
5,095
|
3%
|
4,830
|
3%
|
Policy loans
|
3,196
|
2%
|
3,222
|
2%
|
Investment
properties
|
7,229
|
5%
|
7,157
|
5%
|
Total invested
assets
|
156,634
|
100%
|
151,726
|
100%
|
|
|
(1)
|
The values and ratios
presented are based on the carrying value of the respective asset
categories. Generally, the carrying values for fair value through
profit or loss ("FVTPL") and AFS invested assets are equal to their
fair values; however our mortgages and loans are generally carried
at amortized cost. For invested assets supporting insurance
contracts, in the event of default, if the amounts recovered are
insufficient to satisfy the related insurance contract liability
cash flows that the assets are intended to support, credit exposure
may be greater than the carrying value of the assets.
|
1. Debt Securities
Our debt securities portfolio is actively managed through
a regular program of purchases and sales aimed at optimizing yield,
quality and liquidity, while ensuring that it remains well
diversified and duration-matched to insurance contract liabilities.
With the exception of certain countries where we have business
operations, including Canada,
the United States, the
United Kingdom and the Philippines, our exposure to debt
securities from any single country did not exceed 1% of total
invested assets on our Interim Consolidated Financial Statements as
at June 30, 2019.
The carrying value of FVTPL and AFS debt securities by
geographic location is presented in the following table.
|
June 30,
2019
|
December 31, 2018
|
($
millions)
|
FVTPL debt
securities
|
AFS debt
securities
|
Total
|
% of Total
|
FVTPL
debt
securities
|
AFS debt
securities
|
Total
|
% of Total
|
Debt
securities
|
|
|
|
|
|
|
|
|
Canada
|
27,513
|
4,330
|
31,843
|
40%
|
25,091
|
4,217
|
29,308
|
38%
|
United
States
|
22,578
|
6,033
|
28,611
|
36%
|
21,329
|
5,917
|
27,246
|
37%
|
Europe
|
8,720
|
1,399
|
10,119
|
13%
|
8,840
|
1,278
|
10,118
|
14%
|
Asia
|
3,907
|
555
|
4,462
|
6%
|
3,673
|
445
|
4,118
|
6%
|
Other
|
2,392
|
1,250
|
3,642
|
5%
|
2,469
|
1,184
|
3,653
|
5%
|
Total debt
securities
|
65,110
|
13,567
|
78,677
|
100%
|
61,402
|
13,041
|
74,443
|
100%
|
Our debt securities with a credit rating of "A" or higher
represented 73% of the total debt securities as at June 30, 2019, compared to 72% as at December 31, 2018. Debt securities with a credit
rating of "BBB" or higher represented 99% of total debt securities
as at June 30, 2019, consistent with
December 31, 2018.
Our gross unrealized losses as at June 30, 2019 for FVTPL and AFS debt securities
were $0.1 billion and $0.03 billion, respectively, compared with
$1.4 billion and $0.2 billion, respectively, as at December 31, 2018. The decrease in gross
unrealized losses was largely due to the impact from declining
interest rates and the narrowing of credit spreads.
2. Mortgages and Loans
Mortgages
and loans in this section are presented at their carrying value on
our Interim Consolidated Financial Statements. Our mortgage
portfolio consisted almost entirely of first mortgages and our loan
portfolio consisted of private placement loans.
The carrying value of mortgages and loans by geographic
location is presented in the following
table.(1)
Mortgages and Loans by Geography
|
June 30,
2019
|
December 31,
2018
|
($
millions)
|
Mortgages
|
Loans
|
Total
|
Mortgages
|
Loans
|
Total
|
Canada
|
8,955
|
13,216
|
22,171
|
8,557
|
13,238
|
21,795
|
United
States
|
7,344
|
11,691
|
19,035
|
7,876
|
11,458
|
19,334
|
Europe
|
—
|
4,186
|
4,186
|
—
|
3,628
|
3,628
|
Asia
|
—
|
314
|
314
|
—
|
332
|
332
|
Other
|
—
|
1,779
|
1,779
|
—
|
1,733
|
1,733
|
Total
|
16,299
|
31,186
|
47,485
|
16,433
|
30,389
|
46,822
|
% of Total Invested
Assets
|
10%
|
20%
|
30%
|
11%
|
20%
|
31%
|
|
|
(1)
|
The geographic
location for mortgages is based on the location of the property and
for loans it is based on the country of the creditor's
parent.
|
As at June 30, 2019, we held
$16.3 billion of mortgages, compared
to $16.4 billion as at December 31, 2018. Our mortgage portfolio
consists entirely of commercial mortgages, including retail,
office, multi-family, industrial and land properties. As at
June 30, 2019, 34% of our commercial
mortgage portfolio consisted of multi-family residential mortgages;
there are no single family residential mortgages. Our uninsured
commercial portfolio had a weighted average loan-to-value ratio of
approximately 55% as at June 30,
2019, consistent with December 31,
2018. While we generally limit the maximum loan-to-value
ratio to 75% at issuance, we may invest in mortgages with a higher
loan-to-value ratio in Canada if
the mortgage is insured by the Canada Mortgage and Housing
Corporation ("CMHC"). The estimated weighted average debt service
coverage for our uninsured commercial portfolio is 1.76
times. Of the $3.6
billion of multi-family residential mortgages in the
Canadian commercial mortgage portfolio, 93% were insured by the
CMHC.
As at June 30, 2019, we held
$31.2 billion of loans, compared to
$30.4 billion as at December 31, 2018. Private placement loans
provide diversification by type of loan, industry segment and
borrower credit quality. The private placement loan portfolio
consists of senior secured and unsecured loans to large- and
mid-market sized corporate borrowers, securitized lease/loan
obligations secured by a variety of assets, and project finance
loans in sectors such as power and infrastructure.
Mortgages and Loans Past Due or Impaired
The gross carrying value and allowance for mortgages and
loans past due or impaired are presented in the following
table.
|
June 30,
2019
|
($
millions)
|
Gross carrying value
|
Allowance for losses
|
Mortgages
|
Loans
|
Total
|
Mortgages
|
Loans
|
Total
|
Not past
due
|
16,248
|
31,140
|
47,388
|
—
|
—
|
—
|
Past due:
|
|
|
|
|
|
|
Past due less than 90
days
|
—
|
12
|
12
|
—
|
—
|
—
|
Past due 90 days or
more
|
—
|
—
|
—
|
—
|
—
|
—
|
Impaired
|
106
|
88
|
194
|
55
(1)
|
54
|
109
|
Total
|
16,354
|
31,240
|
47,594
|
55
|
54
|
109
|
|
December 31,
2018
|
($
millions)
|
Gross carrying
value
|
Allowance for
losses
|
Mortgages
|
Loans
|
Total
|
Mortgages
|
Loans
|
Total
|
Not past
due
|
16,427
|
30,332
|
46,759
|
—
|
—
|
—
|
Past due:
|
|
|
|
|
|
|
Past due less than 90
days
|
—
|
14
|
14
|
—
|
—
|
—
|
Past due 90 days or
more
|
—
|
—
|
—
|
—
|
—
|
—
|
Impaired
|
31
|
93
|
124
|
25
(1)
|
50
|
75
|
Total
|
16,458
|
30,439
|
46,897
|
25
|
50
|
75
|
|
|
(1)
|
Includes $20 million
of sectoral provisions as at June 30, 2019, and $21 million of
sectoral provisions as at December 31, 2018.
|
Our impaired mortgages and loans net of allowances for
losses, were $85 million as at
June 30, 2019, compared to
$49 million as at December 31, 2018.
3. Derivative Financial Instruments
The values associated with our derivative instruments are
presented in the following table. Notional amounts serve as the
basis for payments calculated under derivatives contracts and are
generally not exchanged.
($ millions)
|
|
June 30, 2019
|
|
December 31,
2018
|
Net fair value asset
(liability)
|
|
110
|
|
(1,183)
|
Total notional
amount
|
|
62,359
|
|
59,198
|
Credit equivalent
amount(1)
|
|
794
|
|
542
|
Risk-weighted credit
equivalent amount(1)
|
|
18
|
|
15
|
|
|
(1)
|
Amounts presented are net of
collateral received.
|
The net fair value of derivatives was an asset of
$110 million as at June 30, 2019, compared to a liability of
$1,183 million as at December 31, 2018. The increase in net fair value
was primarily due to the impact of the strengthening of the
Canadian dollar against the U.S. dollar on foreign exchange
contracts, as well as the impact of downward shifts in yield
curves.
The total notional amount of our derivatives increased to
$62.4 billion as at June 30, 2019 from $59.2
billion as at December 31,
2018. The change in notional is mainly attributable to an
increase of $5.0 billion in foreign
exchange contracts used for hedging foreign currency assets,
partially offset by a $1.7 billion
decrease in interest rate contracts primarily due to a reduction in
interest rate exposure assets.
4. Asset Default Provision
We make provisions for possible future credit events in
the determination of our insurance contract liabilities. The amount
of the provision for asset default included in insurance contract
liabilities is based on possible reductions in future investment
yields that vary by factors such as type of asset, asset credit
quality (rating), duration and country of origin. To the extent
that an asset is written off, or disposed of, any amounts that were
set aside in our insurance contract liabilities for possible future
asset defaults in respect of that asset are released.
Our asset default provision reflects the provision
relating to future credit events for fixed income assets currently
held by the Company that support our insurance contract
liabilities. Our asset default provision as at June 30, 2019 was $2,643
million compared to $2,389
million as at December 31,
2018. The increase of $254
million was primarily due to yield curve movement, changes
in credit ratings, increases in the provision for assets purchased,
net of dispositions, offset by the release of provisions on fixed
income assets supporting our insurance contract
liabilities.
H. Risk Management
The Company has established a Risk Management Framework to
assist in identifying, measuring, managing, monitoring and
reporting risks. The Risk Management Framework covers all risks and
these have been grouped into six major categories: credit, market,
insurance, business and strategic, operational and liquidity
risks.
Through our enterprise risk management processes, we
oversee the various risk factors identified in the Risk Management
Framework and provide reports to senior management and to the Board
Committees at least quarterly. Our enterprise risk management
processes and risk factors are described in our annual MD&A and
AIF.
When referring to segregated funds in this section, it is
inclusive of segregated fund guarantees, variable annuities and
investment products and includes Run-off reinsurance in
Corporate.
1. Market Risk Sensitivities
Our
net income(1) is affected by the determination of
policyholder obligations under our annuity and insurance contracts.
These amounts are determined using internal valuation models and
are recorded in our Consolidated Financial Statements, primarily as
Insurance contract liabilities. The determination of these
obligations requires management to make assumptions about the
future level of equity market performance, interest rates, credit
and swap spreads and other factors over the life of our products.
Differences between our actual experience and our best estimate
assumptions are reflected in our Consolidated Financial Statements.
Refer to Additional Cautionary Language and Key Assumptions Related
to Sensitivities in this section for important additional
information regarding these estimates.
The market value of our investments in fixed income and
equity securities fluctuates based on movements in interest rates
and equity markets. The market value of fixed income assets
designated as AFS that are held primarily in our surplus segment
increases with declining interest rates and decreases with rising
interest rates. The market value of equities designated as AFS and
held primarily in our surplus segment increases (decreases) with
rising (declining) equity markets. Changes in the market value of
AFS assets flow through other comprehensive income and are only
recognized in net income when realized upon sale, or when
considered impaired. The amount of realized gains (losses) recorded
in net income in any period is equal to the unrealized gains
(losses) or OCI position at the start of the period plus the change
in market value during the current period up to the point of sale
for those securities that were sold during the period. The sale or
impairment of AFS assets held in surplus can therefore have the
effect of modifying our net income sensitivity.
We realized $33 million
(pre-tax) in net gains on the sale of AFS assets during the second
quarter of 2019 ($41 million pre-tax
in the second quarter of 2018). The net unrealized gains (losses)
or OCI position on AFS fixed income and equity assets were
$267 million and $77 million, respectively, after-tax as at
June 30, 2019 ($(98) million and $43
million, respectively, after-tax as at December 31, 2018).
Equity Market Sensitivities
The
following table sets out the estimated immediate impact on, or
sensitivity of, our net income and OCI, and Sun Life Assurance's
LICAT ratio to certain instantaneous changes in equity market
prices as at June 30, 2019 and
December 31, 2018.
As at June 30,
2019 ($ millions, unless otherwise noted)
|
|
|
|
|
Change in Equity
Markets(1)
|
25% decrease
|
10% decrease
|
10% increase
|
25% increase
|
Potential impact on
net income(2)(3)
|
$
|
(350)
|
$
|
(150)
|
$
|
100
|
$
|
250
|
Potential impact on
OCI(3)
|
$
|
(100)
|
$
|
(50)
|
$
|
50
|
$
|
100
|
Potential impact on
LICAT(2)(4)
|
2.0 point decrease
|
0.5 point decrease
|
0.5 point increase
|
1.0 point increase
|
|
|
|
|
|
As at December 31,
2018
|
|
|
|
|
($ millions, unless
otherwise noted)
|
|
|
|
|
Change in Equity
Markets(1)
|
25%
decrease
|
10%
decrease
|
10%
increase
|
25%
increase
|
Potential impact on
net income(2)(3)
|
$
|
(300)
|
$
|
(100)
|
$
|
100
|
$
|
250
|
Potential impact on
OCI(3)
|
$
|
(100)
|
$
|
(50)
|
$
|
50
|
$
|
100
|
Potential impact on
LICAT(2)(4)
|
2.0 point
decrease
|
1.0 point
decrease
|
0.5 point
increase
|
1.0 point
increase
|
|
|
(1)
|
Represents the
respective change across all equity markets as at June 30, 2019 and
December 31, 2018. Assumes that actual equity exposures
consistently and precisely track the broader equity markets. Since
in actual practice equity-related exposures generally differ from
broad market indices (due to the impact of active management, basis
risk, and other factors), realized sensitivities may differ
significantly from those illustrated above.
Sensitivities include the impact of re-balancing equity hedges for
dynamic hedging programs at 2% intervals (for 10% changes in equity
markets) and at 5% intervals (for 25% changes in equity
markets).
|
(2)
|
The market risk
sensitivities include the estimated mitigation impact of our
hedging programs in effect as at June 30, 2019 and December 31,
2018, and
include new business added and product changes implemented prior to
such dates.
|
(3)
|
Net income and OCI
sensitivities have been rounded to the nearest $50 million. The
sensitivities exclude the market impacts on the income from our
joint ventures and associates, which we account for on an equity
basis.
|
(4)
|
The LICAT
sensitivities illustrate the impact on Sun Life Assurance as at
June 30, 2019 and December 31, 2018. LICAT ratios are rounded to
the nearest 0.5%.
|
________________
|
(1)
|
Net income refers to
common shareholders' net income in section H - Risk Management in
this document.
|
Interest Rate Sensitivities
The following table sets out the estimated immediate
impact on, or sensitivity of, our net income and OCI, and Sun Life
Assurance's LICAT ratio to certain instantaneous changes in
interest rates as at June 30, 2019
and December 31, 2018.
Sun Life Assurance's LICAT ratio generally decreases with
rising interest rates and increases with declining interest rates,
which is opposite to our net income sensitivity. Increases to
interest rates will reduce the value of our assets and margins in
our actuarial liabilities, resulting in a lower LICAT ratio. The
sensitivity of Sun Life Assurance's LICAT ratio to changes in
interest rates fluctuates with changes in lapse behaviour for
certain products as assumed in our insurance contract liabilities,
which vary with the level of short- and long-term interest rates.
Sun Life Assurance's LICAT ratio sensitivity to changes in interest
rates may be non-linear due to the inter-relationships between
market rates, actuarial assumptions and LICAT
calculations.
|
|
|
($ millions, unless
otherwise noted)
|
As at June 30, 2019
|
As at December 31,
2018
|
Change in Interest
Rates(1)
|
50 basis point
decrease
|
50 basis point
increase
|
50 basis point
decrease
|
50 basis point
increase
|
Potential impact on
net income(2)(3)(4)
|
$
|
(150)
|
$
|
100
|
$
|
(100)
|
$
|
50
|
Potential impact on
OCI(3)
|
$
|
250
|
$
|
(250)
|
$
|
250
|
$
|
(250)
|
Potential impact on
LICAT(2)(5)
|
3.5 point increase
|
3.5 point decrease
|
2.5 point
increase
|
1.5 point
decrease
|
|
|
(1)
|
Interest rate
sensitivities assume a parallel shift in assumed interest rates
across the entire yield curve as at June 30, 2019 and December 31,
2018 with no change to the Actuarial Standards Board ("ASB")
promulgated URR. Variations in realized yields based on factors
such as different terms to maturity and geographies may result in
realized sensitivities being significantly different from those
illustrated above. Sensitivities include the impact of rebalancing
interest rate hedges for dynamic hedging programs at 10 basis point
intervals (for 50 basis point changes in interest
rates).
|
(2)
|
The market risk
sensitivities include the estimated mitigation impact of our
hedging programs in effect as at June 30, 2019 and December 31,
2018, and include new business added and product changes
implemented prior to such dates.
|
(3)
|
Net income and OCI
sensitivities have been rounded to the nearest $50 million. The
sensitivities exclude the market impacts on the income from our
joint ventures and associates, which we account for on an equity
basis.
|
(4)
|
The majority of
interest rate sensitivity, after hedging, is attributed to
individual insurance products. We also have interest rate
sensitivity, after hedging, from our fixed annuity and segregated
funds products.
|
(5)
|
The LICAT
sensitivities illustrate the impact on Sun Life Assurance as at
June 30, 2019 and December 31, 2018. LICAT ratios are rounded to
the nearest 0.5%.
|
On July 3, 2019, the ASB
announced a decrease of 15 basis points to the promulgated URR with
an effective date of October 15, 2019
with early implementation allowed. As at June 30, 2019, our estimated sensitivity to a 15
basis point decrease in the URR is a decrease in reported net
income of approximately $100 million.
The actual impact of this change, when implemented in the third
quarter of 2019, could differ from the Company's
estimate.
2. Credit Spread and Swap Spread
Sensitivities
We have estimated the immediate impact or sensitivity of
our net income attributable to certain instantaneous changes in
credit and swap spreads. The credit spread sensitivities reflect
the impact of changes in credit spreads on our asset and liability
valuations (including non-sovereign fixed income assets, provincial
governments, corporate bonds, and other fixed income assets). The
swap spread sensitivities reflect the impact of changes in swap
spreads on swap-based derivative positions and liability
valuations.
($ millions, unless
otherwise noted)
|
|
Credit Spread
Sensitivities(1)
|
|
|
Swap Spread
Sensitivities
|
Net income
senstivity(2)
|
|
50 basis point
decrease
|
50 basis
point
increase
|
|
20 basis point
decrease
|
20 basis
point
increase
|
June 30, 2019
|
$
|
(100)
|
$
|
75
|
|
$
|
50
|
$
|
(50)
|
December 31,
2018
|
$
|
(75)
|
$
|
75
|
|
$
|
25
|
$
|
(25)
|
|
|
(1)
|
In most instances,
credit spreads are assumed to revert to long-term insurance
contract liability assumptions generally over a five-year
period.
|
(2)
|
Sensitivities have
been rounded to the nearest $25 million.
|
The credit and swap spread sensitivities assume a parallel
shift in the indicated spreads across the entire term structure.
Variations in realized spread changes based on different terms to
maturity, geographies, asset classes and derivative types,
underlying interest rate movements, and ratings may result in
realized sensitivities being significantly different from those
provided above. The credit spread sensitivity estimates exclude any
credit spread impact that may arise in connection with asset
positions held in segregated funds. Spread sensitivities are
provided for the consolidated entity and may not be proportional
across all reporting segments. Refer to Additional Cautionary
Language and Key Assumptions Related to Sensitivities in this
section for important additional information regarding these
estimates.
3. General Account Insurance and Annuity
Products
Most of our expected sensitivity to
changes in interest rates and about two-thirds of our expected
sensitivity to changes in equity markets are derived from our
general account insurance and annuity products. We have implemented
market risk management strategies to mitigate a portion of the
market risk related to our general account insurance and annuity
products.
Individual insurance products include universal life and
other long-term life and health insurance products. Major sources
of market risk exposure for individual insurance products include
the reinvestment risk related to future premiums on regular premium
policies, asset reinvestment risk on both regular premium and
single premium policies and the guaranteed cost of insurance.
Interest rate risk for individual insurance products is typically
managed on a duration basis, within tolerance ranges set out in the
applicable investment policy or guidelines. Targets and limits are
established so that the level of residual exposure is commensurate
with our risk appetite. Exposures are monitored frequently, and
assets are re-balanced as necessary to maintain compliance within
policy limits using a combination of assets and derivative
instruments. A portion of the longer-term cash flows are backed
with equities and real estate.
For participating insurance products and other insurance
products with adjustability features, the investment strategy
objective is to provide a total rate of return given a constant
risk profile over the long term.
Fixed annuity products generally provide the policyholder
with a guaranteed investment return or crediting rate. Interest
rate risk for these products is typically managed on a duration
basis, within tolerance ranges set out in the applicable investment
guidelines. Targets and limits are established such that the level
of residual exposure is commensurate with our risk appetite.
Exposures are monitored frequently, and are re-balanced as
necessary to maintain compliance within prescribed tolerances using
a combination of fixed income assets and derivative
instruments.
Certain insurance and annuity products contain minimum
interest rate guarantees. Market risk management strategies are
implemented to limit potential financial loss due to reductions in
asset earned rates relative to contract guarantees. These typically
involve the use of hedging strategies utilizing interest rate
derivatives such as interest rate floors, swaps and
swaptions.
Certain insurance and annuity products contain features
which allow the policyholders to surrender their policy at book
value. Market risk management strategies are implemented to limit
the potential financial loss due to changes in interest rate levels
and policyholder behaviour. These typically involve the use of
hedging strategies such as dynamic option replication and the
purchase of interest rate swaptions.
Certain products have guaranteed minimum annuitization
rates. Market risk management strategies are implemented to limit
the potential financial loss and typically involve the use of fixed
income assets, interest rate swaps, and swaptions.
4. Segregated Fund
Guarantees
Approximately one-third of our
equity market sensitivity and a small amount of interest rate risk
sensitivity as at June 30, 2019 are
derived from segregated fund products. These products provide
benefit guarantees, which are linked to underlying fund performance
and may be triggered upon death, maturity, withdrawal or
annuitization. The cost of providing these guarantees is uncertain
and depends upon a number of factors including general capital
market conditions, our hedging strategies, policyholder behaviour
and mortality experience, each of which may result in negative
impacts on net income and capital.
The following table provides information with respect to
the guarantees provided for our segregated fund products by
business group.
As at June 30,
2019
|
|
|
|
|
($
millions)
|
Fund value
|
Amount at Risk(1)
|
Value of
guarantees(2)
|
Insurance contract
liabilities(3)
|
Canada
|
11,889
|
393
|
10,647
|
639
|
Asia
|
2,613
|
253
|
2,709
|
105
|
Corporate(4)
|
2,276
|
226
|
1,124
|
246
|
Total
|
16,778
|
872
|
14,480
|
990
|
|
|
|
|
|
As at December 31,
2018
|
|
|
|
|
($
millions)
|
Fund value
|
Amount at
Risk(1)
|
Value of
guarantees(2)
|
Insurance
contract
liabilities(3)
|
Canada
|
11,202
|
792
|
10,742
|
552
|
Asia
|
2,798
|
444
|
3,165
|
147
|
Corporate(4)
|
2,215
|
277
|
1,219
|
255
|
Total
|
16,215
|
1,513
|
15,126
|
954
|
|
|
(1)
|
The Amount at Risk
represents the excess of the value of the guarantees over fund
values on all policies where the value of the guarantees exceeds
the fund value. The Amount at Risk is not currently payable as the
guarantees are only payable upon death, maturity, withdrawal, or
annuitization if fund values remain below guaranteed
values.
|
(2)
|
For guaranteed
lifetime withdrawal benefits, the value of guarantees is calculated
as the present value of the maximum future withdrawals assuming
market conditions remain unchanged from current levels. For all
other benefits, the value of guarantees is determined assuming 100%
of the claims are made at the valuation date.
|
(3)
|
The insurance
contract liabilities represent management's provision for future
costs associated with these guarantees and include a provision for
adverse deviation in accordance with Canadian actuarial standards
of practice.
|
(4)
|
Corporate includes
Run-off reinsurance, a closed block of reinsurance. The Run-off
reinsurance business includes risks assumed through reinsurance of
variable annuity products issued by various North American
insurance companies between 1997 and 2001.
|
|
|
The movement of the
items in the table above from December 31, 2018 to June 30, 2019
primarily resulted from the following factors:
|
|
|
(i)
|
the total fund values
increased due to an increase in equity markets, which was partially
offset by net redemptions from products closed to new
business;
|
|
(ii)
|
the Amount at Risk
decreased due to an increase in equity markets and net redemptions
from products closed to new business;
|
|
(iii)
|
the total value of
guarantees decreased due to net redemptions from products closed to
new business, and the weakening of the U.S. dollar against the
Canadian dollar; and
|
|
(iv)
|
the total insurance
contract liabilities increased due to a decrease in interest rates,
which was partially offset by an increase in equity markets and net
redemptions from products closed to new business.
|
5. Segregated Fund Hedging
Our hedging programs use derivative instruments to
mitigate the interest and equity related exposure of our segregated
fund contracts. As at June 30, 2019,
over 90% of our segregated fund contracts, as measured by
associated fund values, were included in a hedging program. While a
large percentage of contracts are included in the hedging program,
not all of our market risk exposure related to these contracts is
hedged. For those segregated fund contracts included in the hedging
program, we generally hedge the value of expected future net claims
costs and associated margins.
The following table illustrates the impact of our hedging
program related to our sensitivity to a 50 basis point decrease in
interest rates and a 10% and 25% decrease in equity markets for
segregated fund contracts as at June 30,
2019 and December 31,
2018.
Impact of Segregated Fund Hedging
June 30,
2019
|
|
|
($
millions)
|
Changes in interest
rates(1)
|
Changes in equity
markets(2)
|
Net income
sensitivity(3)(4)
|
50 basis point decrease
|
10% decrease
|
25% decrease
|
Before
hedging
|
(200)
|
(150)
|
(450)
|
Hedging
impact
|
200
|
100
|
350
|
Net of
hedging
|
—
|
(50)
|
(100)
|
|
|
|
|
December 31,
2018
|
|
|
|
|
|
|
($
millions)
|
Changes in interest
rates(1)
|
Changes in equity
markets(2)
|
Net income
sensitivity(3)(4)
|
50 basis point
decrease
|
10%
decrease
|
25%
decrease
|
Before
hedging
|
(150)
|
(150)
|
(450)
|
Hedging
impact
|
150
|
100
|
350
|
Net of
hedging
|
—
|
(50)
|
(100)
|
|
|
(1)
|
Represents a parallel
shift in assumed interest rates across the entire yield curve as at
June 30, 2019 and December 31, 2018, with no change to the ASB
promulgated URR. Variations in realized yields based on factors
such as different terms to maturity and geographies may result in
realized sensitivities being significantly different from those
illustrated above. Sensitivities include the impact of re-balancing
interest rate hedges for dynamic hedging programs at 10 basis point
intervals (for 50 basis point changes in interest
rates).
|
(2)
|
Represents the change
across all equity markets as at June 30, 2019 and December 31,
2018. Assumes that actual equity exposures consistently and
precisely track the broader equity markets. Since in actual
practice equity-related exposures generally differ from broad
market indices (due to the impact of active management, basis risk,
and other factors), realized sensitivities may differ significantly
from those illustrated above. Sensitivities include the impact of
re-balancing equity hedges for dynamic hedging programs at 2%
intervals (for 10% changes in equity markets) and at 5% intervals
(for 25% changes in equity markets).
|
(3)
|
Net income
sensitivities have been rounded to the nearest $50
million.
|
(4)
|
Since the fair value
of benefits being hedged will generally differ from the financial
statement value (due to different valuation methods and the
inclusion of valuation margins in respect of financial statement
values), this will result in residual volatility to interest rate
and equity market shocks in net income and capital. The general
availability and cost of these hedging instruments may be adversely
impacted by a number of factors, including volatile and declining
equity and interest rate market conditions.
|
6. Real Estate Risk
Real estate
risk is the potential for financial loss arising from fluctuations
in the value of, or future cash flows from our investments in real
estate. We are exposed to real estate risk and may experience
financial losses resulting from the direct ownership of real estate
investments or indirectly through fixed income investments secured
by real estate property, leasehold interests, ground rents, and
purchase and leaseback transactions. Real estate price risk may
arise from external market conditions, inadequate property
analysis, inadequate insurance coverage, inappropriate real estate
appraisals, or from environmental risk exposures. We hold direct
real estate investments that support general account liabilities
and surplus, and fluctuations in value will impact our
profitability and financial position. A material and sustained
increase in interest rates may lead to deterioration in real estate
values. An instantaneous 10% decrease in the value of our direct
real estate investments as at June 30,
2019 would decrease net income(1) by
approximately $275 million
($275 million decrease as at
December 31, 2018). Conversely, an
instantaneous 10% increase in the value of our direct real estate
investments as at June 30, 2019 would
increase net income by approximately $275
million ($275 million increase
as at December 31, 2018).
____________________
|
|
(1)
Net income sensitivities have been rounded to the nearest $25
million.
|
|
7. Additional Cautionary Language and Key Assumptions
Related to Sensitivities
Our market risk
sensitivities are measures of our estimated change in net income
and OCI for changes in interest rates and equity market price
levels described above, based on interest rates, equity market
prices and business mix in place as at the respective calculation
dates. These sensitivities are calculated independently for each
risk factor, generally assuming that all other risk variables stay
constant. The sensitivities do not take into account indirect
effects such as potential impacts on goodwill impairment or
valuation allowances on deferred tax assets. The sensitivities are
provided for the consolidated entity and may not be proportional
across all reporting segments. Actual results can differ materially
from these estimates for a variety of reasons, including
differences in the pattern or distribution of the market shocks,
the interaction between these risk factors, model error, or changes
in other assumptions such as business mix, effective tax rates,
policyholder behaviour, currency exchange rates and other market
variables relative to those underlying the calculation of these
sensitivities. The extent to which actual results may differ from
the indicative ranges will generally increase with larger capital
market movements. Our sensitivities as at December 31, 2018 have been included for
comparative purposes only.
We have also provided measures of our net income
sensitivity to instantaneous changes in credit spreads, swap
spreads, real estate price levels, and capital sensitivities to
changes in interest rates and equity price levels. The real estate
sensitivities are non-IFRS financial measures. For additional
information, see section M - Non-IFRS Financial Measures in this
document. The cautionary language which appears in this section is
also applicable to the credit spread, swap spread, real estate, and
LICAT ratio sensitivities. In particular, these sensitivities are
based on interest rates, credit and swap spreads, equity market,
and real estate price levels as at the respective calculation dates
and assume that all other risk variables remain constant. Changes
in interest rates, credit and swap spreads, equity market, and real
estate prices in excess of the ranges illustrated may result in
other-than-proportionate impacts.
As these market risk sensitivities reflect an
instantaneous impact on net income and OCI, they do not include
impacts over time such as the effect on fee income in our asset
management businesses.
The sensitivities reflect the composition of our assets
and liabilities as at June 30, 2019
and December 31, 2018, respectively.
Changes in these positions due to new sales or maturities, asset
purchases/sales, or other management actions could result in
material changes to these reported sensitivities. In particular,
these sensitivities reflect the expected impact of hedging
activities based on the hedge programs in place as at the
June 30 and December 31 calculation dates. The actual impact
of hedging activity can differ materially from that assumed in the
determination of these indicative sensitivities due to ongoing
hedge re-balancing activities, changes in the scale or scope of
hedging activities, changes in the cost or general availability of
hedging instruments, basis risk (i.e., the risk that hedges do not
exactly replicate the underlying portfolio experience), model risk,
and other operational risks in the ongoing management of the hedge
programs or the potential failure of hedge counterparties to
perform in accordance with expectations.
The sensitivities are based on methods and assumptions in
effect as at June 30, 2019 and
December 31, 2018, as applicable.
Changes in the regulatory environment, accounting or actuarial
valuation methods, models, or assumptions (including changes to the
ASB promulgated URR) after those dates could result in material
changes to these reported sensitivities. Changes in interest rates
and equity market prices in excess of the ranges illustrated may
result in other than proportionate impacts.
Our hedging programs may themselves expose us to other
risks, including basis risk (i.e., the risk that hedges do not
exactly replicate the underlying portfolio experience), volatility
risk, derivative counterparty credit risk, and increased levels of
liquidity risk, model risk and other operational risks. These
factors may adversely impact the net effectiveness, costs, and
financial viability of maintaining these hedging programs and
therefore adversely impact our profitability and financial
position. While our hedging programs are intended to mitigate these
effects (e.g., hedge counterparty credit risk is managed by
maintaining broad diversification, dealing primarily with highly
rated counterparties, and transacting through over-the-counter
contracts, cleared through central clearing houses, exchange-traded
contracts or bilateral over-the-counter contracts negotiated
directly between counterparties that include credit support
annexes), residual risk, potential reported earnings and capital
volatility remain.
For the reasons outlined above, our sensitivities should
only be viewed as directional estimates of the underlying
sensitivities of each factor under these specialized assumptions,
and should not be viewed as predictors of our future net income,
OCI, and capital. Given the nature of these calculations, we cannot
provide assurance that actual impact will be consistent with the
estimates provided.
Information related to market risk sensitivities and
guarantees related to segregated fund products should be read in
conjunction with the information contained in section M -
Accounting and Control Matters - 1 - Critical Accounting Policies
and Estimates in our 2018 annual MD&A. Additional information
on market risk can be found in Note 6 of our 2018 Annual
Consolidated Financial Statements and the Risk Factors section in
the AIF.
I. Additional Financial Disclosure
1. Revenue
|
Quarterly
results
|
|
Year-to-date
|
($
millions)
|
Q2'19
|
Q1'19
|
Q2'18
|
|
2019
|
2018
|
Premiums
|
|
|
|
|
|
|
Gross
|
5,088
|
4,942
|
4,901
|
|
10,030
|
10,118
|
Ceded
|
(608)
|
(572)
|
(586)
|
|
(1,180)
|
(1,158)
|
Net
premiums
|
4,480
|
4,370
|
4,315
|
|
8,850
|
8,960
|
Net investment income
|
|
|
|
|
|
|
Interest and other
investment income
|
1,465
|
1,398
|
1,398
|
|
2,863
|
2,752
|
Fair
value(1) and foreign currency changes on assets and
liabilities
|
2,626
|
4,154
|
(405)
|
|
6,780
|
(1,953)
|
Net gains (losses) on
available-for-sale assets
|
33
|
23
|
41
|
|
56
|
77
|
Fee income
|
1,542
|
1,447
|
1,477
|
|
2,989
|
2,983
|
Total
revenue
|
10,146
|
11,392
|
6,826
|
|
21,538
|
12,819
|
Adjusted
revenue(2)
|
7,546
|
7,288
|
7,384
|
|
14,769
|
15,091
|
|
|
(1)
|
Represents the change
in FVTPL assets and liabilities.
|
(2)
|
Adjusted revenue is a
non-IFRS financial measure that excludes from revenue the impact of
Constant Currency Adjustment, FV Adjustment and Reinsurance in
Canada's GB Operations Adjustment as described in section M -
Non-IFRS Financial Measures in this document.
|
Revenue in the second quarter of 2019 was $10.1 billion, up $3.3
billion compared to the second quarter of 2018. Revenue was
$21.5 billion for the six months
ended June 30, 2019, up $8.7 billion from the comparable period last
year. In both cases, the increase was mainly driven by increases in
the fair value of FVTPL assets, largely due to lower interest rate
yields in 2019. The currency impact from the change in the Canadian
dollar relative to average exchange rates in the second quarter of
2019 and the first six months of 2019 increased revenue by
$164 million and $377 million, respectively.
Adjusted revenue was $7.5
billion in the second quarter of 2019, slightly higher than
the second quarter of 2018, primarily driven by increased net
premium revenue. Adjusted revenue of $14.8
billion for the six months ended June
30, 2019 was $0.3 billion
lower compared to the same period last year. The decrease was
primarily driven by lower net premium revenue in Asia and Canada, partially offset by higher net premium
revenue in the U.S.
2. Changes in the Statements of Financial Position and
in Shareholders' Equity
Total general fund
assets were $174.3 billion as at
June 30, 2019, compared to
$168.8 billion as at December 31, 2018, primarily driven by an
increase of $6.8 billion from the
change in value of FVTPL assets and an increase of $1.9 billion from business activities, partially
offset by of a decrease of $3.1
billion from the impact of foreign exchange
translation.
Insurance contract liabilities (excluding other policy
liabilities and assets) of $120.7
billion as at June 30, 2019
increased by $5.8 billion compared to
December 31, 2018, mainly due to
changes in balances on in-force policies (which include fair value
changes on FVTPL assets supporting insurance contract liabilities)
and balances arising from new policies, partially offset by the
impact of foreign exchange translation.
Shareholders' equity, including preferred share capital,
was $23.7 billion as at June 30, 2019, compared to $23.7 billion as at December 31, 2018. The slight change in
shareholders' equity included:
(i)
|
common share dividend
payments of $611 million;
|
(ii)
|
a decrease of $539
million from the impacts of foreign exchange
translation;
|
(iii)
|
a decrease of $400
million from the repurchase and cancellation of common
shares;
|
(iv)
|
changes in the
remeasurement of defined benefit plans of $100 million;
and
|
(v)
|
$22 million as a
result of the adoption of IFRS 16 Leases; offset
by
|
(vi)
|
shareholders' net
income of $1,266 million in 2019, before preferred share dividends
of $48 million;
|
(vii)
|
net unrealized gains
on AFS assets in OCI of $400 million; and
|
(viii)
|
$13 million from
stock options exercised and $4 million from stock-based
compensation.
|
As at July 24, 2019, SLF
Inc. had 591,039,889 common shares, 3,399,484 options to acquire
SLF Inc. common shares, and 92,200,000 Class A Shares
outstanding.
3. Cash Flows
|
Quarterly
results
|
|
Year-to-date
|
($
millions)
|
Q2'19
|
Q2'18
|
|
2019
|
2018
|
Net cash and cash equivalents, beginning of
period
|
5,252
|
5,484
|
|
7,194
|
5,956
|
Cash flows provided
by (used in):
|
|
|
|
|
|
Operating
activities
|
1,901
|
403
|
|
674
|
833
|
Investing
activities
|
(55)
|
(68)
|
|
(92)
|
(90)
|
Financing
activities
|
(696)
|
(398)
|
|
(1,297)
|
(1,354)
|
Changes due to
fluctuations in exchange rates
|
(81)
|
38
|
|
(158)
|
114
|
Increase (decrease) in cash and cash
equivalents
|
1,069
|
(25)
|
|
(873)
|
(497)
|
Net cash and cash
equivalents, end of period
|
6,321
|
5,459
|
|
6,321
|
5,459
|
Short-term
securities, end of period
|
1,859
|
2,502
|
|
1,859
|
2,502
|
Net cash, cash equivalents and short-term securities,
end of period
|
8,180
|
7,961
|
|
8,180
|
7,961
|
The operating activities of the Company generate cash
flows which include net premium revenue, net investment income, fee
income, and the sale and maturity of investments. They are the
principal source of funds to pay for policyholder claims and
benefits, commissions, operating expenses, and the purchase of
investments. Cash flows used in investing activities primarily
include transactions related to associates, joint ventures and
acquisitions. Cash flows provided by and used in financing
activities largely reflect capital transactions including payments
of dividends, the issuance and repurchase of shares, as well as the
issuance and retirement of debt instruments and preferred
shares.
The cash flows used in financing activities in the second
quarter of 2019 compared to the same period last year increased due
to the repurchase of debt and repurchase of common shares for
cancellation and in the second quarter of 2019.
4. Quarterly Financial Results
The following table provides a summary of our results for
the eight most recently completed quarters. A more complete
discussion of our historical quarterly results can be found in our
interim and annual MD&A for the relevant periods.
|
Quarterly
results
|
($ millions, unless
otherwise noted)
|
Q2'19
|
Q1'19
|
Q4'18
|
Q3'18
|
Q2'18
|
Q1'18
|
Q4'17
|
Q3'17
|
Total
revenue
|
10,146
|
11,392
|
8,180
|
5,998
|
6,826
|
5,993
|
8,648
|
5,555
|
Common shareholders'
net income (loss)
|
|
|
|
|
|
|
|
|
Reported
|
595
|
623
|
580
|
567
|
706
|
669
|
207
|
817
|
Underlying(1)
|
739
|
717
|
718
|
730
|
729
|
770
|
641
|
643
|
Diluted EPS
($)
|
|
|
|
|
|
|
|
|
Reported
|
1.00
|
1.04
|
0.96
|
0.93
|
1.16
|
1.09
|
0.34
|
1.32
|
Underlying(1)
|
1.24
|
1.20
|
1.19
|
1.20
|
1.20
|
1.26
|
1.05
|
1.05
|
Basic reported EPS
($)
|
|
|
|
|
|
|
|
|
Reported
|
1.00
|
1.04
|
0.96
|
0.94
|
1.16
|
1.10
|
0.34
|
1.33
|
Reported net income
(loss) by segment
|
|
|
|
|
|
|
|
|
Canada
|
148
|
237
|
96
|
335
|
262
|
249
|
172
|
340
|
U.S.(2)
|
94
|
124
|
118
|
(267)
|
105
|
96
|
(63)
|
72
|
Asset
Management
|
229
|
219
|
244
|
241
|
214
|
210
|
114
|
185
|
Asia(2)
|
134
|
80
|
125
|
164
|
133
|
133
|
121
|
216
|
Corporate
|
(10)
|
(37)
|
(3)
|
94
|
(8)
|
(19)
|
(137)
|
4
|
Total reported net
income (loss)
|
595
|
623
|
580
|
567
|
706
|
669
|
207
|
817
|
Underlying net income
(loss) by segment(1)
|
|
|
|
|
|
|
|
|
Canada
|
243
|
237
|
245
|
251
|
245
|
295
|
232
|
222
|
U.S.(2)
|
110
|
150
|
121
|
139
|
125
|
129
|
95
|
121
|
Asset
Management
|
245
|
227
|
227
|
251
|
216
|
231
|
226
|
204
|
Asia(2)
|
147
|
122
|
140
|
110
|
145
|
128
|
111
|
130
|
Corporate
|
(6)
|
(19)
|
(15)
|
(21)
|
(2)
|
(13)
|
(23)
|
(34)
|
Total underlying net
income (loss)(1)
|
739
|
717
|
718
|
730
|
729
|
770
|
641
|
643
|
|
|
(1)
|
Represents a non-IFRS
financial measure. See section M - Non-IFRS Financial Measures in
this document.
|
(2)
|
Effective January 1,
2018, we transferred our International business unit from the U.S.
to Asia, and comparative figures in 2017 have been changed to
conform with the current year presentation.
|
First Quarter 2019
Reported net
income of $623 million in the first
quarter of 2019 decreased $46 million
from the first quarter of 2018, while underlying net income
decreased $53 million to $717 million. This variance was primarily due to
interest on par seed capital of $110
million in the first quarter of 2018 and unfavourable credit
experience, partially offset by favourable mortality, lapse and
other policyholder behaviour, investing activity gains, morbidity
experience, and other experience.
Fourth Quarter 2018
Reported net
income was $580 million in the fourth
quarter of 2018, an increase compared to the same quarter in 2017,
reflecting the $251 million charge in
2017 related to the enactment of the U.S. Tax Cuts and Jobs Act,
positive impacts from other adjustments and ACMA, partially offset
by market related impacts. Underlying net income in the fourth
quarter of 2018 increased to $718
million compared to 2017, driven by the effect of the lower
income tax rate in the U.S., favourable expense experience that
resulted from ongoing expense management and lower incentive
compensation costs, and other experience, partially offset by
mortality and morbidity experience.
Third Quarter 2018
Reported net
income was $567 million in the third
quarter of 2018, reflecting a $269
million unfavourable change in ACMA compared to the same
quarter in 2017. Underlying net income was $730 million, primarily driven by strong business
growth, the lower income tax rate in the U.S. and higher investment
income on surplus assets, partially offset by new business
strain.
Second Quarter 2018
Reported net
income was $706 million in the second
quarter of 2018, reflecting an $82
million favourable change in market related impacts compared
to the same quarter in 2017. Underlying net income was $729 million, primarily driven by strong business
growth and favourable morbidity experience, partially offset by
expenses, credit experience, and the impact of investment activity
on insurance contract liabilities.
First Quarter 2018
Reported net
income was $669 million in the first
quarter of 2018, reflecting a $79
million unfavourable change in market related impacts
compared to the same quarter in 2017. Underlying net income was
$770 million, primarily driven by
interest on par seed capital of $110
million, strong business growth, the lower income tax rate
in the U.S., as well as the impact of investment activity on
insurance contract liabilities, partially offset by weaker
mortality and lapse experience.
Fourth Quarter 2017
Reported net
income was $207 million in the fourth
quarter of 2017, reflecting unfavourable impact of the U.S. tax
reform, a restructuring charge, and the impact from interest rates
compared to the fourth quarter of 2016. Underlying net income was
$641 million, reflecting the growth
in our wealth businesses and favourable morbidity and mortality
experience.
Third Quarter 2017
Reported net
income was $817 million in the third
quarter of 2017, reflecting favourable market related activity
primarily driven by interest rates and changes in the fair values
of real estate, and favourable impact of ACMA, partially offset by
the unfavourable impact of the movement of the Canadian dollar and
other adjustments compared to the third quarter of 2016. Underlying
net income was $643 million,
reflecting favourable mortality experience, growth in fee income on
our wealth businesses and new business gains, partially offset by a
lower level of gains from investing activity.
J. Legal and Regulatory Matters
Information concerning legal and regulatory matters is
provided in our Annual Consolidated Financial Statements, our
annual MD&A, and the AIF, in each case for the year ended
December 31, 2018, and in our Interim
Consolidated Financial Statements for the period ended June 30, 2019.
K. Changes in Accounting Policies
We have adopted several amended IFRS standards in the
current year. In addition, new IFRS standards were issued in the
current year. We adopted IFRS 16 Leases, which replaces IAS
17 Leases and related interpretations, on a modified
retrospective basis as at January 1,
2019. The adoption of IFRS 16 reduced opening retained
earnings by $22 million on an
after-tax basis as at January 1,
2019. For additional information, refer to Note 2 in our
Interim Consolidated Financial Statements for the period ended
June 30, 2019.
In 2017, a new accounting standard on insurance contacts,
IFRS 17, was issued, replacing the current accounting standard on
insurance contracts (IFRS 4 Insurance Contracts). The
original effective date was January 1,
2021. In June 2019, the IASB
issued an exposure draft ("ED") that proposes targeted amendments
to IFRS 17 for public consultation. As part of the ED, the IASB has
proposed to defer the effective date by one year to January 1, 2022 as well as extend the deferral
option of IFRS 9 Financial Instruments for insurers to that
same date. Comments on the proposed amendments are due by
September 25, 2019, which will be
followed by a discussion period before the IASB finalizes the
amendments in 2020. We will consider the implications of these
amendments as we assess the financial statement and business
implications of the standard as a whole.
L. Internal Control Over Financial
Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting to provide
reasonable assurance regarding the reliability of the Company's
financial reporting and the preparation of its financial statements
in accordance with IFRS.
There were no changes in the Company's internal control
over financial reporting during the period, which began on
April 1, 2019 and ended on
June 30, 2019 that have materially
affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
M. Non-IFRS Financial Measures
1. Underlying Net Income and Underlying
EPS
Underlying net income (loss) and financial measures based
on underlying net income (loss), including underlying EPS or
underlying loss per share, and underlying ROE, are non-IFRS
financial measures. Underlying net income (loss) removes from
reported net income (loss) the impact of the following items that
create volatility in our results under IFRS and when removed assist
in explaining our results from period to period:
(a)
|
market related
impacts that differ from our best estimate assumptions, which
include: (i) impact of returns in equity markets, netof hedging,
for which our best estimate assumptions are approximately 2% per
quarter. This also includes the impact of the basis risk inherent
in our hedging program, which is the difference between the return
on underlying funds of products that provide benefit guarantees and
the return on the derivative assets used to hedge those benefit
guarantees; (ii) the impact of changes in interest rates in the
reporting period and on the value of derivative instruments used in
our hedging programs including changes in credit and swap spreads,
and any changes to the assumed fixed income reinvestment rates in
determining the actuarial liabilities; and (iii) the impact of
changes in the fair value of investment properties in the reporting
period;
|
(b)
|
assumption changes
and management actions, which include: (i) the impact of revisions
to the methods and assumptions used indetermining our liabilities
for insurance contracts and investment contracts; and (ii) the
impact on insurance contracts and investment contracts of actions
taken by management in the current reporting period, referred to as
management actions which include, for example, changes in the
prices of in-force products, new or revised reinsurance on in-force
business, and material changes to investment policies for assets
supporting our liabilities; and
|
(c)
|
Other
adjustments:
|
|
(i)
|
certain hedges in
Canada that do not qualify for hedge accounting - this adjustment
enhances the comparability of our net income from period to period,
as it reduces volatility to the extent it will be offset over the
duration of the hedges;
|
|
(ii)
|
fair value
adjustments on MFS's share-based payment awards that are settled
with MFS's own shares and accounted for as liabilities and measured
at fair value each reporting period until they are vested,
exercised and repurchased - this adjustment enhances the
comparability of MFS's results with publicly traded asset managers
in the United States;
|
|
(iii)
|
acquisition,
integration and restructuring costs (including impacts related to
acquiring and integrating acquisitions); and
|
|
(iv)
|
other items
that are unusual or exceptional in nature.
|
All factors discussed in this document that impact our
underlying net income are also applicable to reported net
income.
All EPS measures in this document refer to fully diluted
EPS, unless otherwise stated. As noted below, underlying EPS
excludes the dilutive impact of convertible
instruments.
The following table sets out the amounts that were
excluded from our underlying net income (loss) and underlying EPS,
and provides a reconciliation to our reported net income (loss) and
EPS based on IFRS.
Reconciliations of Select Net Income
Measures
|
Quarterly
results
|
|
Year-to-date
|
($ millions, unless
otherwise noted)
|
Q2'19
|
Q1'19
|
Q2'18
|
|
2019
|
2018
|
Reported net
income
|
595
|
623
|
706
|
|
1,218
|
1,375
|
Equity market
impact
|
|
|
|
|
|
|
Impact from equity
market changes
|
14
|
68
|
15
|
|
82
|
(20)
|
Basis risk
impact
|
6
|
(10)
|
(6)
|
|
(4)
|
(16)
|
Equity market
impact
|
20
|
58
|
9
|
|
78
|
(36)
|
Interest rate
impact(1)
|
|
|
|
|
|
|
Impact of interest
rate changes
|
(99)
|
(122)
|
(38)
|
|
(221)
|
(65)
|
Impact of credit
spread movements
|
(22)
|
(27)
|
6
|
|
(49)
|
23
|
Impact of swap spread
movements
|
7
|
16
|
(5)
|
|
23
|
(22)
|
Interest rate
impact
|
(114)
|
(133)
|
(37)
|
|
(247)
|
(64)
|
Impact of changes in
the fair value of investment properties
|
(3)
|
6
|
36
|
|
3
|
40
|
Market related
impacts
|
(97)
|
(69)
|
8
|
|
(166)
|
(60)
|
Assumption changes and
management actions
|
(20)
|
(11)
|
1
|
|
(31)
|
(2)
|
Other
adjustments:
|
|
|
|
|
|
|
Certain hedges in
Canada that do not qualify for hedge accounting
|
(5)
|
1
|
1
|
|
(4)
|
7
|
Fair value adjustments
on MFS's share-based payment awards
|
(11)
|
(8)
|
(2)
|
|
(19)
|
(23)
|
Acquisition,
integration and restructuring
|
(11)
|
(7)
|
(31)
|
|
(18)
|
(46)
|
Total of other
adjustments
|
(27)
|
(14)
|
(32)
|
|
(41)
|
(62)
|
Underlying net income
(loss)
|
739
|
717
|
729
|
|
1,456
|
1,499
|
Reported EPS
(diluted) ($)
|
1.00
|
1.04
|
1.16
|
|
2.04
|
2.25
|
Market related impacts
($)
|
(0.16)
|
(0.12)
|
0.01
|
|
(0.27)
|
(0.10)
|
Assumption changes and
management actions ($)
|
(0.03)
|
(0.02)
|
—
|
|
(0.05)
|
—
|
Certain hedges in
Canada that do not qualify for hedge accounting ($)
|
(0.01)
|
—
|
—
|
|
(0.01)
|
0.01
|
Fair value adjustments
on MFS's share-based payment awards ($)
|
(0.02)
|
(0.01)
|
—
|
|
(0.03)
|
(0.03)
|
Acquisition,
integration and restructuring ($)
|
(0.02)
|
(0.01)
|
(0.05)
|
|
(0.03)
|
(0.08)
|
Impact of convertible
securities on diluted EPS ($)
|
—
|
—
|
—
|
|
(0.01)
|
(0.01)
|
Underlying EPS
(diluted) ($)
|
1.24
|
1.20
|
1.20
|
|
2.44
|
2.46
|
|
|
(1)
|
Our exposure to
interest rates varies by product type, line of business, and
geography. Given the long-term nature of our business, we have a
higher degree of sensitivity in respect of interest rates at long
durations.
|
2. Additional Non-IFRS Measures
Management also uses the following non-IFRS financial
measures:
Return on equity. IFRS does not
prescribe the calculation of ROE and therefore a comparable measure
under IFRS is not available. To determine reported ROE and
underlying ROE, respectively, reported net income (loss) and
underlying net income (loss) is divided by the total weighted
average common shareholders' equity for the period. The quarterly
ROE is annualized.
Financial leverage ratio. This total
debt to total capital ratio is ratio of debt plus preferred shares
to total capital, where debt consists of all capital qualifying
debt securities. Capital qualifying debt securities consist of
subordinated debt and innovative capital
instruments.
Dividend payout ratio. This is the
ratio of dividends paid per share to diluted underlying EPS for the
period.
Sales. In Canada, insurance sales consist of sales of
individual insurance and group benefits products; wealth sales
consist of sales of individual wealth products and sales in GRS. In
the U.S., insurance sales consist of sales by Group Benefits. In
Asia, insurance sales consist of
the individual and group insurance sales by our subsidiaries and
joint ventures and associates, based on our proportionate equity
interest, in the Philippines,
Hong Kong, Indonesia, India, China,
Malaysia, Vietnam and sales from our International
business unit; wealth sales consist of Hong Kong wealth sales, Philippines mutual fund sales, wealth sales by
our India and China insurance joint ventures and associates,
and Aditya Birla Sun Life AMC Limited's equity and fixed income
mutual fund sales based on our proportionate equity interest,
including sales as reported by our bank distribution partners.
Asset Management sales consist of gross sales (inflows) for
retail and institutional Clients; unfunded commitments are not
included in sales. Sales are also expressed on a
constant currency basis, which is a measure of sales that
provides greater comparability across reporting periods by
excluding the impact of exchange rate fluctuations from the
translation of functional currencies to the Canadian
dollar.
Value of New Business. VNB represents
the present value of our best estimate of future distributable
earnings, net of the cost of capital, from new business contracts
written in a particular time period, except new business in our
Asset Management pillar. The assumptions used in the calculations
are generally consistent with those used in the valuation of our
insurance contract liabilities except that discount rates used
approximate theoretical return expectations of an equity investor.
Capital required is based on the higher of Sun Life Assurance's
LICAT operating target and local (country specific) operating
target capital. VNB is a useful metric to evaluate the present
value created from new business contracts. There is no directly
comparable IFRS measure.
Adjusted revenue. This measure is an
alternative measure of revenue that provides greater comparability
across reporting periods, by excluding the impact of: (i) exchange
rate fluctuations, from the translation of functional currencies to
the Canadian dollar, for comparisons ("Constant Currency
Adjustment"); (ii) Fair value and foreign currency changes on
assets and liabilities ("FV Adjustment"); and (iii) reinsurance for
the insured business in Canada's
GB operations ("Reinsurance in Canada's GB Operations Adjustment").
|
Quarterly
results
|
|
Year-to-date
|
($
millions)
|
Q2'19
|
Q1'19
|
Q2'18
|
|
2019
|
2018
|
Revenue
|
10,146
|
11,392
|
6,826
|
|
21,538
|
12,819
|
Constant Currency
Adjustment
|
122
|
93
|
—
|
|
280
|
—
|
FV
Adjustment
|
2,626
|
4,154
|
(405)
|
|
6,780
|
(1,953)
|
Reinsurance in
Canada's GB Operations Adjustment
|
(148)
|
(143)
|
(153)
|
|
(291)
|
(319)
|
Adjusted
revenue
|
7,546
|
7,288
|
7,384
|
|
14,769
|
15,091
|
Adjusted premiums and deposits. This
measure is an alternative measure of premiums and deposits that
provides greater comparability across reporting periods by
excluding the impact of: (i) the Constant Currency Adjustment; and
(ii) the Reinsurance in Canada's
GB Operations Adjustment.
|
Quarterly
results
|
|
Year-to-date
|
($
millions)
|
Q2'19
|
Q1'19
|
Q2'18
|
|
2019
|
2018
|
Premiums and
deposits
|
43,275
|
42,781
|
37,017
|
|
86,056
|
83,133
|
Constant Currency
Adjustment
|
1,213
|
956
|
—
|
|
2,822
|
—
|
Reinsurance in
Canada's GB Operations Adjustment
|
(148)
|
(143)
|
(153)
|
|
(291)
|
(319)
|
Adjusted premiums and
deposits
|
42,210
|
41,968
|
37,170
|
|
83,525
|
83,452
|
Pre-tax net operating profit margin ratio for
MFS. This ratio is a measure of the profitability
of MFS, which excludes the impact of fair value adjustments on
MFS's share-based payment awards, investment income, and certain
commission expenses that are offsetting. These commission expenses
are excluded in order to neutralize the impact these items have on
the pre-tax operating profit margin ratio and have no impact on the
profitability of MFS. There is no directly comparable IFRS
measure.
After-tax profit margin for U.S. Group
Benefits. This ratio assists in explaining our
results from period to period and is a measure of profitability
that expresses U.S. Employee Benefits and Medical Stop-Loss
underlying net income as a percentage of net premiums. This ratio
is calculated by dividing underlying net income (loss) by net
premiums for the trailing four quarters. There is no directly
comparable IFRS measure.
Impact of foreign exchange translation.
Items impacting our Consolidated Statements of Operations,
such as Revenue, Benefits and expenses, and Total net income
(loss), are translated into Canadian dollars using average exchange
rates for the respective period. For items impacting our
Consolidated Statements of Financial Position, such as Assets and
Liabilities, period end rates are used for currency translation
purposes.
Several IFRS financial measures are presented on a
constant currency adjusted basis to exclude the impact of foreign
exchange rate fluctuations. These measures are calculated using the
average or period end foreign exchange rates, as appropriate, in
effect at the date of the comparative period.
Assumption changes and management actions.
In this document the impact of ACMA on shareholders' net
income (after-tax) is included in reported net income and is
excluded in calculating underlying net income, as described in
section C - Profitability in this document.
Real estate market sensitivities. Real
estate market sensitivities are non-IFRS financial measures for
which there are no directly comparable measures under IFRS so it is
not possible to provide a reconciliation of these amounts to the
most directly comparable IFRS measures.
Other. Management also uses the
following non-IFRS financial measures for which there are no
comparable financial measures in IFRS: (i) ASO premium and deposit
equivalents, mutual fund sales, managed fund sales, insurance
sales, and total premiums and deposits; (ii) AUM, mutual fund
assets, managed fund assets, other AUM, and assets under
administration; (iii) the value of new business, which is used to
measure the estimated lifetime profitability of new sales and is
based on actuarial calculations; and (iv) assumption changes and
management actions, which is a component of our sources of earnings
disclosure. Sources of earnings is an alternative presentation of
our Consolidated Statements of Operations that identifies and
quantifies various sources of income. The Company is required to
disclose its sources of earnings by its principal regulator,
OSFI.
N. Forward-looking Statements
From time to time, the Company makes written or oral
forward-looking statements within the meaning of certain securities
laws, including the "safe harbour" provisions of the United States
Private Securities Litigation Reform Act of 1995 and applicable
Canadian securities legislation. Forward-looking statements
contained in this document include statements (i) relating to our
strategies, (ii) relating to our growth initiatives and other
business objectives, (iii) relating to our potential new normal
course issuer bid, (iv) relating to the expected impact of the
acquisition of BGO on Total shareholders' equity, (v) relating to
our annual review of actuarial methods and assumptions, (vi)
relating to our expected tax range for future years, (vii) set out
in this document under the heading H - Risk Management - 1. Market
Risk Sensitivities - Interest Rate Sensitivities, (viii) that are
predictive in nature or that depend upon or refer to future events
or conditions, and (ix) that include words such as "achieve",
"aim", "ambition", "anticipate", "aspiration", "assumption",
"believe", "could", "estimate", "expect", "goal", "initiatives",
"intend", "may", "objective", "outlook", "plan", "project", "seek",
"should", "strategy", "strive", "target", "will", and similar
expressions. Forward-looking statements include the information
concerning our possible or assumed future results of operations.
These statements represent our current expectations, estimates, and
projections regarding future events and are not historical facts.
Forward-looking statements are not a guarantee of future
performance and involve risks and uncertainties that are difficult
to predict. Future results and shareholder value may differ
materially from those expressed in these forward-looking statements
due to, among other factors, the matters set out in this document
under the headings, C - Profitability - 5 - Income taxes, E -
Financial Strength and H - Risk Management and in SLF Inc.'s 2018
AIF under the heading Risk Factors and the factors detailed in SLF
Inc.'s other filings with Canadian and U.S. securities regulators,
which are available for review at www.sedar.com and www.sec.gov,
respectively.
Important risk factors that could cause our assumptions
and estimates, and expectations and projections to be inaccurate
and our actual results or events to differ materially from those
expressed in or implied by the forward-looking statements contained
in this document, are set out below. The realization of our
forward-looking statements, essentially depends on our business
performance which, in turn, is subject to many risks. Factors that
could cause actual results to differ materially from expectations
include, but are not limited to: credit risks - related to
issuers of securities held in our investment portfolio, debtors,
structured securities, reinsurers, counterparties, other financial
institutions and other entities; market risks - related to
the performance of equity markets; changes or volatility in
interest rates or credit spreads or swap spreads; real estate
investments; and fluctuations in foreign currency exchange rates;
insurance risks - related to policyholder behaviour;
mortality experience, morbidity experience and longevity; product
design and pricing; the impact of higher-than-expected future
expenses; and the availability, cost and effectiveness of
reinsurance; business and strategic risks - related to
global economic and political conditions; the design and
implementation of business strategies; changes in distribution
channels or Client behaviour including risks relating to market
conduct by intermediaries and agents; the impact of competition;
the performance of our investments and investment portfolios
managed for Clients such as segregated and mutual funds; changes in
the legal or regulatory environment, including capital requirements
and tax laws; the environment, environmental laws and regulations;
tax matters, including estimates and judgments used in calculating
taxes; our international operations, including our joint ventures;
market conditions that affect our capital position or ability to
raise capital; downgrades in financial strength or credit ratings;
and the impact of mergers, acquisitions and divestitures;
operational risks - related to breaches or failure of
information system security and privacy, including cyber-attacks;
our ability to attract and retain employees; legal, regulatory
compliance and market conduct, including the impact of regulatory
inquiries and investigations; the execution and integration of
mergers, acquisitions, strategic investments and divestitures; our
information technology infrastructure; a failure of information
systems and Internet-enabled technology; dependence on third-party
relationships, including outsourcing arrangements; business
continuity; model errors; information management; and liquidity
risks - the possibility that we will not be able to fund all
cash outflow commitments as they fall due.
The Company does not undertake any obligation to update or
revise its forward-looking statements to reflect events or
circumstances after the date of this document or to reflect the
occurrence of unanticipated events, except as required by
law.
Earnings Conference Call
The Company's second quarter 2019 financial results will
be reviewed at a conference call on Thursday, August 1, 2019, at 10:00 a.m. ET. To listen to the call via live
audio webcast and to view the presentation slides, as well as
related information, please visit
www.sunlife.com and click on the link to
Quarterly reports under Investors – Financial results and reports
10 minutes prior to the start of the call. Individuals
participating in the call in a listen-only mode are encouraged to
connect via our webcast. Following the call, the webcast and
presentation will be archived and made available on the Company's
website, www.sunlife.com, until the Q2
2021 period end. The conference call can also be accessed by phone
by dialing 647-427-2311 (International) or 1-866-521-4909 (tollfree
within North America). A replay of
the conference call will be available from Thursday, August 1, 2019 at 2:00 p.m. ET until 11:59 p.m. ET on Thursday,
August 15, 2019 by calling 416-621-4642 or 1-800-585-8367
(toll-free within North America)
using Conference ID: 6379369.
Consolidated Statements of Operations
|
For the three months
ended
|
For the six months
ended
|
(unaudited, in
millions of Canadian dollars except for per share
amounts)
|
June 30, 2019
|
June 30,
2018
|
June 30, 2019
|
June 30,
2018
|
Revenue
|
|
|
|
|
|
|
|
|
Premiums
|
|
|
|
|
|
|
|
|
Gross
|
$
|
5,088
|
$
|
4,901
|
$
|
10,030
|
$
|
10,118
|
Less: Ceded
|
|
608
|
|
586
|
|
1,180
|
|
1,158
|
Net
premiums
|
|
4,480
|
|
4,315
|
|
8,850
|
|
8,960
|
Net investment income
(loss):
|
|
|
|
|
|
|
|
|
Interest and other
investment income
|
|
1,465
|
|
1,398
|
|
2,863
|
|
2,752
|
Fair value and foreign
currency changes on assets and liabilities
|
|
2,626
|
|
(405)
|
|
6,780
|
|
(1,953)
|
Net gains (losses) on
available-for-sale assets
|
|
33
|
|
41
|
|
56
|
|
77
|
Net investment income
(loss)
|
|
4,124
|
|
1,034
|
|
9,699
|
|
876
|
Fee income
|
|
1,542
|
|
1,477
|
|
2,989
|
|
2,983
|
Total revenue
|
|
10,146
|
|
6,826
|
|
21,538
|
|
12,819
|
Benefits and expenses
|
|
|
|
|
|
|
|
|
Gross claims and
benefits paid
|
|
4,353
|
|
3,974
|
|
8,473
|
|
7,976
|
Increase (decrease) in
insurance contract liabilities
|
|
3,268
|
|
167
|
|
7,908
|
|
(387)
|
Decrease (increase) in
reinsurance assets
|
|
(119)
|
|
(60)
|
|
(140)
|
|
(45)
|
Increase (decrease) in
investment contract liabilities
|
|
18
|
|
(2)
|
|
42
|
|
(9)
|
Reinsurance expenses
(recoveries)
|
|
(503)
|
|
(519)
|
|
(1,011)
|
|
(1,047)
|
Commissions
|
|
586
|
|
589
|
|
1,150
|
|
1,162
|
Net transfer to (from)
segregated funds
|
|
(96)
|
|
(74)
|
|
(181)
|
|
(91)
|
Operating
expenses
|
|
1,697
|
|
1,626
|
|
3,365
|
|
3,244
|
Premium
taxes
|
|
104
|
|
95
|
|
204
|
|
187
|
Interest
expense
|
|
84
|
|
78
|
|
172
|
|
153
|
Total benefits and expenses
|
|
9,392
|
|
5,874
|
|
19,982
|
|
11,143
|
Income (loss) before income
taxes
|
|
754
|
|
952
|
|
1,556
|
|
1,676
|
Less: Income tax
expense (benefit)
|
|
90
|
|
182
|
|
178
|
|
301
|
Total net income (loss)
|
|
664
|
|
770
|
|
1,378
|
|
1,375
|
Less: Net income
(loss) attributable to participating policyholders
|
|
45
|
|
41
|
|
112
|
|
(47)
|
Shareholders' net income (loss)
|
|
619
|
|
729
|
|
1,266
|
|
1,422
|
Less: Preferred
shareholders' dividends
|
|
24
|
|
23
|
|
48
|
|
47
|
Common shareholders' net income
(loss)
|
$
|
595
|
$
|
706
|
$
|
1,218
|
$
|
1,375
|
|
|
|
|
|
|
|
|
|
|
Average exchange rates during the reporting
periods:
|
|
|
|
|
|
|
|
|
|
|
U.S.
dollars
|
|
1.34
|
|
1.29
|
|
1.33
|
|
1.28
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.00
|
$
|
1.16
|
$
|
2.05
|
$
|
2.26
|
Diluted
|
|
$
|
1.00
|
$
|
1.16
|
$
|
2.04
|
$
|
2.25
|
Dividends per common share
|
|
$
|
0.525
|
$
|
0.475
|
$
|
1.025
|
$
|
0.930
|
Consolidated Statements of Financial
Position
|
As at
|
(unaudited, in
millions of Canadian dollars)
|
June 30,
2019
|
December 31,
2018
|
Assets
|
|
|
Cash, cash equivalents
and short-term securities
|
$
|
8,188
|
$
|
9,506
|
Debt
securities
|
78,677
|
74,443
|
Equity
securities
|
4,850
|
4,634
|
Mortgages and
loans
|
47,485
|
46,822
|
Derivative
assets
|
1,914
|
1,112
|
Other invested
assets
|
5,095
|
4,830
|
Policy
loans
|
3,196
|
3,222
|
Investment
properties
|
7,229
|
7,157
|
Invested
assets
|
156,634
|
151,726
|
Other
assets
|
5,114
|
4,498
|
Reinsurance
assets
|
4,210
|
4,141
|
Deferred tax
assets
|
1,305
|
1,209
|
Intangible
assets
|
1,753
|
1,779
|
Goodwill
|
5,309
|
5,412
|
Total general fund
assets
|
174,325
|
168,765
|
Investments for
account of segregated fund holders
|
111,684
|
103,062
|
Total assets
|
$
|
286,009
|
$
|
271,827
|
Liabilities and equity
|
|
|
|
|
Liabilities
|
|
|
|
|
Insurance contract
liabilities
|
$
|
127,728
|
$
|
121,923
|
Investment contract
liabilities
|
3,145
|
3,164
|
Derivative
liabilities
|
1,804
|
2,295
|
Deferred tax
liabilities
|
393
|
322
|
Other
liabilities
|
12,506
|
12,153
|
Senior
debentures
|
1,300
|
1,299
|
Subordinated
debt
|
2,791
|
3,039
|
Total general fund
liabilities
|
149,667
|
144,195
|
Insurance contracts
for account of segregated fund holders
|
105,168
|
96,663
|
Investment contracts
for account of segregated fund holders
|
6,516
|
6,399
|
Total liabilities
|
$
|
261,351
|
$
|
247,257
|
Equity
|
|
|
|
|
Issued share capital
and contributed surplus
|
$
|
10,659
|
$
|
10,749
|
Shareholders' retained
earnings and accumulated other comprehensive income
|
13,025
|
12,957
|
Total shareholders'
equity
|
23,684
|
23,706
|
Participating
policyholders' equity
|
974
|
864
|
Total equity
|
$
|
24,658
|
$
|
24,570
|
Total liabilities and equity
|
$
|
286,009
|
$
|
271,827
|
|
|
|
|
|
Exchange rates at the end of the reporting
periods:
|
U.S.
dollars
|
|
|
1.31
|
|
1.36
|
Media Relations Contact:
Noah
Zatzman
Corporate
Communications
Tel:
647-256-1866
noah.zatzman@sunlife.com
Investor Relations
Contact:
Leigh
Chalmers
Senior Vice-President, Head of
Investor Relations & Capital Management
Tel:
647-256-8201
investor.relations@sunlife.com
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SOURCE Sun Life Financial Inc.