ConsFinancial Statements-Pt 1

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

Companies

Sun Life Financial Inc. Services of Canada (SFC)
UK 100
FTSE quotes by TradingView

Latest directors dealings

All directors dealings today