Exhibit 3
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ANNUAL INFORMATION FORM 2006
Presentation of information
In this Annual Information Form (AIF), Sun Life Financial Inc. (SLF Inc.) and its consolidated subsidiaries, significant equity investments and joint ventures are collectively referred to as “Sun Life Financial” or the “Company”.
Unless otherwise indicated, all information in this AIF is presented as at and for the year ended December 31, 2006, and amounts are expressed in Canadian dollars. Financial information is presented in accordance with Canadian generally accepted accounting principles (GAAP) and the accounting requirements of the Office of the Superintendent of Financial Institutions, Canada (OSFI).
Documents incorporated by reference
The following documents are incorporated by reference in and form part of this AIF:
(i) | SLF Inc.’s Management’s Discussion and Analysis (MD&A) for the year ended December 31, 2006, and | ||
(ii) | SLF Inc.’s Consolidated Financial Statements and accompanying notes (Consolidated Financial Statements) for the year ended December 31, 2006. |
These documents have been filed with securities regulators in Canada and with the United States Securities and Exchange Commission (SEC) and may be accessed at www.sedar.com and www.sec.gov, respectively.
Forward-looking statements
Certain statements in this AIF, including those relating to the Company’s strategies and other statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates” or similar expressions, are forward-looking statements within the meaning of securities laws. Forward-looking statements include the information concerning possible or assumed future results of operations of the Company. These statements represent the Company’s expectations, estimates and projections regarding future events and are not historical facts. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. The future results and stockholder value of SLF Inc. may differ materially from those expressed in these forward-looking statements due to, among other factors, the matters set out under “Risk factors” in SLF Inc.’s AIF and the factors detailed in its other filings with Canadian and U.S. securities regulators, including its annual MD&A, and annual and interim financial statements, which are available for review at www.sedar.com and www.sec.gov.
Factors that could cause actual results to differ materially from expectations include, but are not limited to, the performance of equity markets; interest rate fluctuations; changes in legislation and regulations including tax laws; regulatory investigations and proceedings or private legal proceedings and class actions relating to the practices in the mutual fund, insurance, annuity and financial product distribution industries; risks relating to product design and pricing; investment losses and defaults; the occurrence of natural or man-made disasters, pandemic diseases and acts of terrorism; risks relating to operations in Asia, including risks relating to joint ventures; failure of computer systems and internet enabled technology; breaches of computer security and privacy; the cost, availability and effectiveness of reinsurance; the inability to maintain strong distribution channels and risks relating to market conduct by intermediaries and agents; dependence on third party relationships including outsourcing arrangements; currency exchange rate fluctuations; the impact of competition; downgrades in financial strength or credit ratings; the ability to successfully complete and integrate acquisitions; the ability to attract and retain employees; and the performance of the Company’s investments and investment portfolios managed for clients such as segregated and mutual funds. The Company does not undertake any obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law.
ANNUAL INFORMATION FORM 2006
Table of contents
Management’s | ||||||||||||
Discussion & | Consolidated | |||||||||||
Analysis | Financial | |||||||||||
Annual | Incorporated by | Statements | ||||||||||
Information Form | Reference | and Notes | ||||||||||
Corporate structure | 1 | |||||||||||
General development of the business | 2 | 32 | 15 | |||||||||
Business of Sun Life Financial | ||||||||||||
General summary | 4 | 8–10 | ||||||||||
Business performance | 11–31 | 2–6 | ||||||||||
Risk management | 38–43 | |||||||||||
Investments | 43–45 | |||||||||||
Capital structure | ||||||||||||
General description | 6 | 35–40, 49–50 | ||||||||||
Constraints | 7 | |||||||||||
Market for securities | 7 | |||||||||||
Sales of unlisted securities | 8 | |||||||||||
Dividends | 9 | 46–47 | 4 | |||||||||
Transfer agent and registers | 11 | |||||||||||
Directors and executive officers | 12 | |||||||||||
Interests of experts | 16 | |||||||||||
Regulatory matters | 17 | |||||||||||
Risk factors | 26 | |||||||||||
Legal and regulatory proceedings | 31 | 50 | 43 | |||||||||
Additional information | 31 | |||||||||||
Appendices | ||||||||||||
A – Charter of Audit and Conduct Review Committee | 32 | |||||||||||
B – Policy Restricting the use of External Auditors | 34 | |||||||||||
ANNUAL INFORMATION FORM 2006
Corporate structure
Incorporation
Sun Life Financial Inc. (SLF Inc.) was incorporated under the Insurance Companies Act, Canada (the Insurance Act) on August 5, 1999, for the purpose of becoming the holding company of Sun Life Assurance Company of Canada (Sun Life Assurance) following its demutualization.
Sun Life Assurance was incorporated in 1865 as a stock insurance company and was converted into a mutual insurance company in 1962. On March 22, 2000, Sun Life Assurance implemented a plan of demutualization under which it converted back to a stock company pursuant to Letters Patent of Conversion issued under the Insurance Act. Under its plan of demutualization, Sun Life Assurance became the wholly-owned subsidiary of SLF Inc.
Sun Life Financial’s head and registered office is located at 150 King Street West, Toronto, Ontario, M5H 1J9.
Principal subsidiaries and significant equity investments
Sun Life Financial’s corporate structure as at December 31, 2006, including SLF Inc.’s principal direct and indirect subsidiaries and significant equity investments, is shown below. Unless otherwise indicated, all companies shown below are 100% owned.
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Sun Life Financial Inc. | sunlife.com | 1 |
ANNUAL INFORMATION FORM 2006
General development of the business
Overview
Sun Life Financial is a leading international financial services organization,offering a diverse range of life and health insurance products and services, savings, investment management, retirement, and pension products and services to both individual and corporate customers. Sun Life Financial manages its operations and reports its financial results in five business segments: Sun Life Financial Canada (SLF Canada), Sun Life Financial United States (SLF U.S.), MFS Investment Management (MFS), Sun Life Financial Asia (SLF Asia), and Corporate. The Corporate segment includes the operations of Sun Life Financial’s United Kingdom business unit (SLF U.K.), its active reinsurance business, and Corporate Support operations which include run-off reinsurance and revenue and expenses of a corporate nature not attributable to other segments.
The Company’s business model is one of balance. It strives to establish scale and scope in each of the diversified markets in which it chooses to compete. It weighs the higher growth prospects in emerging markets against the relative stability of more mature operations. In a similar way, the Company’s protection business serves as a counterbalance to its wealth management business, ensuring that its customers have access to complementary insurance, retirement and savings products that meet their specific needs. The following table shows the Company’s products by business segment
Products | SLF Canada | SLF U.S. | MFS | SLF Asia | Corporate | |||||||||||||||
Individual life insurance | n | n | n | n | ||||||||||||||||
Individual annuity and savings | n | n | n | n | n | |||||||||||||||
Group life and health | n | n | n | |||||||||||||||||
Group pension and retirement | n | n | n | |||||||||||||||||
Mutual funds | n | n | n | |||||||||||||||||
Asset management | n | n | n | n | ||||||||||||||||
Individual health insurance | n | n | ||||||||||||||||||
Reinsurance (life retrocession) | n | |||||||||||||||||||
A hallmark of the Company’s operations is its strong focus on multi-channel distribution. By offering more than one touch point, customers have the option of choosing how – and when – they can purchase products and access services.
Distribution Channels | SLF Canada | SLF U.S. | MFS | SLF Asia | ||||||||||||||||
Direct sales agents | n | n | ||||||||||||||||||
Independent and managing general agents | n | n | n | |||||||||||||||||
Financial intermediaries (e.g., brokers) | n | n | n | n | ||||||||||||||||
Banks | n | n | ||||||||||||||||||
Pension and benefit consultants | n | n | n | |||||||||||||||||
Direct sales (including Internet) | n | n | n | |||||||||||||||||
Acquisitions, disposals, business combinations and other developments
Sun Life Financial assesses its businesses and corporate strategies on an ongoing basis to ensure that it makes optimal use of its capital and provides maximum shareholder value. The following summary outlines the acquisitions, disposals and business combination activities in the past three years. Additional information is provided in Note 3 to SLF Inc.’s 2006 Consolidated Financial Statements.
2 | Sun Life Financial Inc. | sunlife.com |
ANNUAL INFORMATION FORM 2006
Corporate reorganization
On January 4, 2005, the Company completed a reorganization under which most of Sun Life Assurance’s asset management businesses in Canada and the United States, including the majority of its U.S. annuities business, were transferred to Sun Life Financial Corp. (SLF Corp.), a subsidiary of SLF Inc. Under this reorganization, Sun Life Assurance transferred its shares of CI Financial Inc., McLean Budden Limited, Massachusetts Financial Services Company and Sun Life Assurance’s other U.S. subsidiaries to SLF Corp. After the reorganization, the operations remaining in Sun Life Assurance consisted primarily of the life, health and annuities businesses of the Company’s Canadian operations, the majority of the life and health businesses of its United States operations, and all of its operations in the United Kingdom and Asia.
CMG Asia Limited
On October 18, 2005, the Company completed its acquisition of CMG Asia Limited, CMG Asia Trustee Company Limited, CommServe Financial Limited and Financial Solutions Limited, which together formed the Hong Kong individual life insurance, group insurance and group pension and brokerage operations of Commonwealth Bank of Australia. This acquisition enhanced Sun Life Financial’s position in the Hong Kong life insurance market and gave it a strong presence in the pension and group insurance markets. As a result of this transaction, the Company now has a more solid platform for use as a base for further expansion in Asia.
Other operations
On August 26, 2005, the Company sold its 31.72% investment in Administradora de Fondos de Pensiones Cuprum S.A., a Chilean pension fund manager, to Empresas Penta S.A.
U.S. group benefits business acquisition
On January 10, 2007, SLF Inc. entered into an agreement to purchase the U.S. group benefits business of Genworth Financial, Inc. (Genworth) for US$650 million. The acquisition will add significant scale and scope to Sun Life Financial’s U.S. group business. Genworth’s group operations, which primarily offer group life, disability, stop-loss and dental insurance, will strengthen and complement Sun Life Financial’s existing product offerings in the U.S. The acquisition will significantly enhance Sun Life Financial’s market share across its U.S. group lines of business and positions the Company as the second largest U.S. medical stop-loss provider. In addition, Genworth’s extensive distribution network and focus on the small-case employer market will help accelerate Sun Life Financial’s group insurance growth strategy in the U.S.
The transaction will be financed with existing capital. It is expected to close in the second quarter of 2007 and is subject to regulatory approval in Canada and the United States.
Sun Life Financial Inc. | sunlife.com | 3 |
ANNUAL INFORMATION FORM 2006
Business of Sun Life Financial
Wealth and protection industries
The global financial services industry continues to evolve rapidly in response to demographic trends. The graying of the population in developed markets is placing a greater demand on wealth accumulation products for working age employees, income distribution products for employees closer to retirement and wealth transfer vehicles for retirees. The aging of the population is also beginning to strain existing health care systems, as a larger portion of the population is expected to require treatment over a longer timeframe. Demand for products such as long-term care and critical illness insurance is anticipated to grow as consumers turn to products that help ensure direct access to high-quality health care. Lastly, concern about inadequate public pension plans is leading to a dramatic rise in both mutual funds and other financial vehicles that address baby boomers’ concerns about the need for adequate resources in retirement.
In the emerging markets of Asia, the rising affluence of consumers is stimulating the demand for a wide variety of financial products, including protection, savings and investment vehicles.
Competition
The markets in which Sun Life Financial engages are highly competitive. Sun Life Financial’s competitors include not only insurance companies, but also investment managers, mutual fund companies, banks, financial planners and other financial service providers. Frequently competition is based on pricing, the ability to provide value-added services, and deliver excellence to both distributors and customers.
Increased competition has been a contributing factor to the global trend of consolidation within the financial services industry. Mergers and acquisitions in the Canadian insurance industry have significantly changed the competitive landscape, as the three largest companies serve more than two-thirds of the Canadian insurance market. In the United States, the market is more fragmented, raising the likelihood of consolidation as insurers look to achieve scale to compete effectively.
Changes in the regulation of the financial services industry in North America have reduced the traditional barriers between the banking, insurance and investment industries, heightening competition in these markets. Several major Canadian banks have significant securities, wealth management and insurance operations. Canadian financial services legislation provides a regulatory framework for further convergence of the banking, insurance and investment industries. At present, there is no clear timetable for the government to announce policy changes relating to bank/bank and bank/insurer mergers and acquisitions.
In the emerging markets of Asia, the regulatory environments are moving towards market liberalization, expanding the opportunities for foreign participants and aligning their regulatory environments more closely with standards prevalent in more mature markets. The insurance market is expected to be particularly dynamic in China and India, where Sun Life Financial has joint venture operations.
Seasonality
Seasonality factors impact certain components of Sun Life Financial’s business. Individual insurance sales typically increase during sales contests. In Canada, Individual Wealth and Group sales are typically higher in the first quarter due to the RRSP season. Insurance sales in India are also strong in the first quarter.
4 | Sun Life Financial Inc. | sunlife.com |
ANNUAL INFORMATION FORM 2006
Number of employees
The table below outlines the number of full-time equivalent employees (FTEs) across the Company’s operations. It does not include employees in joint venture operations.
Country/Business | Number of FTEs | |||
Canada | 7,323 | |||
United States | 4,969 | |||
Philippines | 625 | |||
Hong Kong | 560 | |||
Ireland | 378 | |||
Indonesia | 268 | |||
India | 66 | |||
United Kingdom | 32 | |||
Bermuda | 28 | |||
China | 15 | |||
Total | 14,264 | |||
Additional information
Additional information about the Company’s business and its operating segments, including an overview of the financial services industry, its products and methods of distribution, competitive environment, risk management policies and investment activities, are described in SLF Inc.’s 2006 MD&A which is incorporated by reference in this AIF and should be read in conjunction with SLF Inc.’s 2006 Consolidated Financial Statements.
Sun Life Financial Inc. | sunlife.com | 5 |
ANNUAL INFORMATION FORM 2006
Capital structure
General
SLF Inc.’s authorized capital consists of unlimited numbers of common shares (the Common Shares), Class A Shares (the Class A Preferred Shares) and Class B Shares (the Class B Preferred Shares), each without nominal or par value.
The Class A Preferred Shares and Class B Preferred Shares may be issued in series as determined by SLF Inc.’s Board of Directors. The Board is authorized to fix the number, consideration per share, designation, and rights and restrictions attached to each series of shares. The holders of Class A Preferred Shares and Class B Preferred Shares are not entitled to any voting rights except as described below or as otherwise provided by law. Five series of Class A Preferred Shares have been created, designated the Class A Non-Cumulative Preferred Share Series 1, Series 2, Series 3, Series 4 and Series 5. The table outlines the issued share capital of SLF Inc., as at January 31, 2007, including stock exchange listings.
Number of | Exchanges1 | ||||||||||||||||
Security | Shares | TSX | NYSE | PSE | |||||||||||||
Common Shares | 571,897,513 | n | n | n | |||||||||||||
Class A Preferred Shares | |||||||||||||||||
Series 1 | 16,000,000 | n | |||||||||||||||
Series 2 | 13,000,000 | n | |||||||||||||||
Series 3 | 10,000,000 | n | |||||||||||||||
Series 4 | 12,000,000 | n | |||||||||||||||
Series 52 | 10,000,000 | n | |||||||||||||||
1 | Toronto Stock Exchange (TSX), New York Stock Exchange (NYSE) and Philippines Stock Exchange (PSE) | |
2 | The Class A Preferred Shares Series 5 were issued on February 2, 2007 |
Common shares
Each Common Share is entitled to one vote at meetings of the shareholders of SLF Inc., except for meetings at which only holders of another specified class or series of shares are entitled to vote separately as a class or series. Common Shares are entitled to receive dividends if and when declared by the Board of Directors. Dividends must be declared and paid in equal amounts per share on all Common Shares, subject to the rights of holders of the Class A Preferred Shares and Class B Preferred Shares. Holders of Common Shares will participate in any distribution of the net assets of SLF Inc. upon its liquidation, dissolution or winding-up on an equal basis per share, subject to the rights of the holders of the Class A Preferred Shares and Class B Preferred Shares. There are no pre-emptive, redemption, purchase or conversion rights attaching to the Common Shares.
Class A preferred shares
The Class A Preferred Shares of each series rank on parity with the Class A Preferred Shares of each other series with respect to the payment of dividends and the return of capital on the liquidation, dissolution or winding-up of SLF Inc. The Class A Preferred Shares are entitled to preference over the Class B Preferred Shares, the Common Shares and any other shares ranking junior to the Class A Preferred Shares with respect to the payment of dividends and the return of capital. The special rights and restrictions attaching to the Class A Preferred Shares as a class may not be amended without such approval as may then be required by law, subject to a minimum requirement of approval by the affirmative vote of at least two-thirds of the votes cast at a meeting of the holders of Class A Preferred Shares held for that purpose.
Class A Preferred Shares
Quarterly | ||||||||
Series | Dividend ($) | Early Redemption Date | Prospectus Date | |||||
Series 1 | 0.296875 | March 31, 2010 | February 17, 2005 | |||||
Series 2 | 0.300000 | September 30, 2010 | July 8, 2005 | |||||
Series 3 | 0.278125 | March 31, 2011 | January 6, 2006 | |||||
Series 4 | 0.278125 | December 31, 2011 | October 2, 2006 | |||||
Series 5 | 0.281250 | March 31, 2012 | January 25, 2007 | |||||
6 | Sun Life Financial Inc. | sunlife.com |
ANNUAL INFORMATION FORM 2006
The shares in each series of the Class A Preferred Shares Series were issued for $25 per share and holders are entitled to receive non-cumulative quarterly dividends outlined in the preceding table. Subject to regulatory approval, on or after the early redemption date noted, SLF Inc. may redeem these shares in whole or in part at a declining premium. Additional information concerning these preferred shares is contained in the prospectus issued for each issue, which may be accessed at www.sedar.com.
Class B preferred shares
The Class B Preferred Shares of each series rank on a parity with the Class B Preferred Shares of each other series with respect to the payment of dividends and the return of capital on the liquidation, dissolution or winding-up of SLF Inc. The Class B Preferred Shares are entitled to preference over the Common Shares and any other shares ranking junior to the Class B Preferred Shares with respect to the payment of dividends and the return of capital, but are subordinate to the Class A Preferred Shares and any other shares ranking senior to the Class B Preferred Shares with respect to the payment of dividends and return of capital. The special rights and restrictions attaching to the Class B Preferred Shares as a class may not be amended without such approval as may then be required by law, subject to a minimum requirement of approval by the affirmative vote of at least two-thirds of the votes cast at a meeting of the holders of Class B Preferred Shares held for that purpose.
Constraints on shares
The Insurance Act contains restrictions on the purchase or other acquisition, issue, transfer and voting of the shares of a demutualized insurance company or, when a holding company structure is used, its corporate holding body. Information on those restrictions can be found in this AIF under the heading“Regulatory matters – Canada – Restrictions on ownership”.
Market for securities
The following tables set out the price range and trading volumes of SLF Inc.’s Common Shares and Class A Preferred Shares on the TSX during 2006:
Common Shares
Price ($) | ||||||||||||||||
Trading | ||||||||||||||||
High | Low | Close | Volume | |||||||||||||
(thousands) | ||||||||||||||||
January | 48.70 | 46.13 | 47.74 | 20,857 | ||||||||||||
February | 50.49 | 47.28 | 49.75 | 28,252 | ||||||||||||
March | 50.65 | 48.76 | 49.65 | 23,709 | ||||||||||||
April | 50.12 | 46.51 | 47.15 | 21,226 | ||||||||||||
May | 47.35 | 43.78 | 45.18 | 32,839 | ||||||||||||
June | 46.60 | 43.10 | 44.35 | 24,996 | ||||||||||||
July | 46.19 | 42.81 | 43.19 | 20,637 | ||||||||||||
August | 46.00 | 41.79 | 45.52 | 27,429 | ||||||||||||
September | 47.19 | 44.34 | 45.85 | 26,021 | ||||||||||||
October | 47.25 | 44.11 | 47.22 | 29,818 | ||||||||||||
November | 49.90 | 46.52 | 48.75 | 24,821 | ||||||||||||
December | 51.75 | 48.63 | 49.32 | 21,784 |
Sun Life Financial Inc. | sunlife.com | 7 |
ANNUAL INFORMATION FORM 2006
Class A Preferred Shares
Series 1 | Series 2 | |||||||||||||||||||||||||||||||
Price ($) | Trading | Price ($) | Trading | |||||||||||||||||||||||||||||
High | Low | Close | Volume | High | Low | Close | Volume | |||||||||||||||||||||||||
(thousands) | (thousands) | |||||||||||||||||||||||||||||||
January | 26.15 | 25.11 | 25.37 | 384 | 26.20 | 25.21 | 25.38 | 270 | ||||||||||||||||||||||||
February | 25.70 | 25.26 | 25.49 | 318 | 25.80 | 25.35 | 25.75 | 289 | ||||||||||||||||||||||||
March | 25.94 | 25.03 | 25.58 | 383 | 25.92 | 25.26 | 25.68 | 381 | ||||||||||||||||||||||||
April | 25.80 | 24.36 | 24.70 | 235 | 25.90 | 24.75 | 24.75 | 214 | ||||||||||||||||||||||||
May | 25.00 | 23.90 | 24.72 | 489 | 25.10 | 24.25 | 24.60 | 251 | ||||||||||||||||||||||||
June | 25.10 | 24.50 | 24.71 | 299 | 25.05 | 24.55 | 24.70 | 346 | ||||||||||||||||||||||||
July | 24.98 | 24.66 | 24.90 | 164 | 25.15 | 24.47 | 25.00 | 311 | ||||||||||||||||||||||||
August | 25.49 | 24.56 | 25.15 | 540 | 25.46 | 24.98 | 25.30 | 460 | ||||||||||||||||||||||||
September | 25.60 | 25.05 | 25.51 | 146 | 25.67 | 25.27 | 25.60 | 502 | ||||||||||||||||||||||||
October | 25.84 | 25.40 | 25.62 | 360 | 25.73 | 25.35 | 25.64 | 573 | ||||||||||||||||||||||||
November | 25.99 | 25.25 | 25.98 | 499 | 26.19 | 25.28 | 25.75 | 372 | ||||||||||||||||||||||||
December | 25.99 | 25.43 | 25.99 | 254 | 26.10 | 25.57 | 26.00 | 207 |
Series 3 | Series 4 | |||||||||||||||||||||||||||||||
Price ($) | Trading | Price ($) | Trading | |||||||||||||||||||||||||||||
High | Low | Close | Volume | High | Low | Close | Volume | |||||||||||||||||||||||||
(thousands) | (thousands) | |||||||||||||||||||||||||||||||
January | 24.89 | 24.30 | 24.30 | 802 | — | — | — | — | ||||||||||||||||||||||||
February | 24.64 | 24.20 | 24.50 | 1,000 | — | — | — | — | ||||||||||||||||||||||||
March | 24.99 | 24.40 | 24.61 | 715 | — | — | — | — | ||||||||||||||||||||||||
April | 25.06 | 23.85 | 23.95 | 363 | — | — | — | — | ||||||||||||||||||||||||
May | 24.39 | 23.63 | 24.12 | 271 | — | — | — | — | ||||||||||||||||||||||||
June | 24.52 | 23.80 | 24.25 | 452 | — | — | — | — | ||||||||||||||||||||||||
July | 24.45 | 24.00 | 24.15 | 447 | — | — | — | — | ||||||||||||||||||||||||
August | 24.75 | 24.11 | 24.40 | 475 | — | — | — | — | ||||||||||||||||||||||||
September | 24.94 | 24.40 | 24.70 | 190 | — | — | — | — | ||||||||||||||||||||||||
October | 24.75 | 24.26 | 24.45 | 517 | 24.99 | 23.94 | 24.05 | 2,072 | ||||||||||||||||||||||||
November | 24.75 | 24.07 | 24.60 | 587 | 24.55 | 24.00 | 24.32 | 1,277 | ||||||||||||||||||||||||
December | 25.00 | 24.25 | 24.79 | 324 | 24.89 | 24.26 | 24.86 | 852 |
On February 2, 2007, SLF Inc. issued 10,000,000 Class A Preferred Shares Series 5.
Sales of unlisted securities
On March 13, 2006, SLF Inc. issued $700 million of Series B Senior Unsecured Senior 4.9 5% Fixed/Floating Debentures (Series B Debentures) due in 2036. On July 11, 2006, SLF Inc. issued $300 million of Series C Senior Unsecured Senior 5.0% Fixed/Floating Debentures (Series C Debentures) due in 2031. These debentures are not listed or quoted on a public market.
8 | Sun Life Financial Inc. | sunlife.com |
ANNUAL INFORMATION FORM 2006
Dividends
SLF Inc.’s policy is to pay dividends on its Common Shares in a range that is comparable to that of common share dividends paid by other publicly traded North American financial institutions. On February 9, 2006, the Board of Directors approved an increase in the target dividend payout ratio from a range of 25% to 35% of common shareholders’ net income to a range of 30% to 40%. The Board of Directors reviews this policy on a periodic basis.
Dividends Declared
2006 | 2005 | 2004 | |||||||||||
Common Shares | $ | 1.15 | $ | 0.99 | $ | 0.86 | |||||||
Class A Preferred Shares | |||||||||||||
Series 1 | $ | 1.187500 | $ | 1.000 | — | ||||||||
Series 2 | $ | 1.200000 | $ | 0.553 | — | ||||||||
Series 3 | $ | 1.069067 | — | — | |||||||||
Series 4 | $ | 0.249932 | — | — | |||||||||
Series 5 | — | — | — | ||||||||||
SLF Inc. is prohibited under the Insurance Act from declaring or paying a dividend on any of its issued shares if there are reasonable grounds for believing that it is, or the payment would cause it to be, in contravention of any regulation under the Insurance Act with respect to the maintenance of adequate capital and adequate and appropriate forms of liquidity, or any direction to SLF Inc. made by the Superintendent of Financial Institutions, Canada (the Superintendent) pursuant to subsection 515(3) of the Insurance Act regarding its capital or liquidity. In addition, the Insurance Act prohibits an insurance company from declaring or paying a dividend without the Superintendent’s approval if the total of all dividends declared by that company in that year would exceed the aggregate of the company’s net income up to the date of the dividend and its retained net income for the preceding two years. As of the date hereof, these limitations would not restrict a payment of dividends on SLF Inc.’s shares, and no such direction to SLF Inc. has been made. In addition, SLF Inc. must provide at least 10 days’ prior notice to the Superintendent before paying any dividends and, in certain limited circumstances, would be required to obtain the Superintendent’s approval before declaring or paying dividends.
As a holding company, SLF Inc. depends primarily on the receipt of funds from its subsidiaries to pay shareholder dividends and operating expenses. The source of these funds is primarily dividends and capital repayments that SLF Inc. receives from its subsidiaries. The inability of its subsidiaries to pay dividends or return capital in the future may materially impair SLF Inc.’s ability to pay dividends to shareholders or to meet its cash obligations. Additional information concerning legislation regulating the ability of SLF Inc.’s subsidiaries in Canada, the U.S. and the U.K. to pay dividends or return capital can be found in this AIF under the heading “Regulatory matters”.
SLF Inc. and Sun Life Assurance have covenanted that, if a distribution is not paid when due on any outstanding Sun Life ExchangEable Capital Securities (the SLEECS) issued by Sun Life Capital Trust, Sun Life Assurance will not pay dividends on its “Public Preferred Shares”, if any are outstanding. If Sun Life Assurance does not have any Public Preferred Shares then SLF Inc. will not pay dividends on its preferred shares or Common Shares, in each case, until the 12th month following the failure to pay the required distribution in full, unless the required distribution is paid to the holders of SLEECS. “Public Preferred Shares” means preferred shares issued by Sun Life Assurance which: (a) have been issued to the public (excluding any preferred shares held beneficially by affiliates of Sun Life Assurance); (b) are listed on a recognized stock exchange; and (c) have an aggregate liquidation entitlement of at least $200 million. None of Sun Life Assurance’s issued shares qualify as “Public Preferred Shares” as at the date of this AIF.
SLF Inc. may not declare or pay dividends on its Class A Preferred Shares Series 1, Series 2, Series 3, Series 4 and Series 5 if Sun Life Assurance’s Minimum Continuing Capital and Surplus Requirements ratio (established by the Superintendent) is less than 120%.
Sun Life Financial Inc. | sunlife.com | 9 |
ANNUAL INFORMATION FORM 2006
Security ratings
The ratings assigned to SLF Inc.’s Class A Preferred Shares, Series 1, 2, 3, 4 and 5 and to its Senior Unsecured Debentures, Series A, B and C by rating agencies are listed in the adjacent table. Security ratings assigned to securities by the rating agencies are not a recommendation to purchase, hold or sell these securities, in as much as such ratings do not comment as to market price or suitability for a particular investor. Security ratings are intended to provide investors with an independent measure of the credit quality of an issue of securities. The Company provides certain rating agencies with confidential, in-depth information in support of the rating process.
Security Ratings
DBRS1 | S & P2 | |||||||||||||||
Rating | Rank | Rating | Rank | |||||||||||||
Class A Preferred Shares | ||||||||||||||||
Series 1-5 | Pfd-1 (low) | 1 of 6 | P-1 (low)/A | 1 of 53 | ||||||||||||
Senior Unsecured Debentures | ||||||||||||||||
Series A-C | AA (low) | 2 of 10 | AA- | 2 of 10 | ||||||||||||
1 | Dominion Bond Rating Service (DBRS) | |
2 | Standard & Poors, a division of The McGraw-Hill Companies, Inc. (S&P) | |
3 | Reflects Canadian scale, corresponds to 4 of 20 on Global scale |
Dominion Bond Rating Service
The DBRS rating scale for long-term debt is meant to provide an indication of the risk that a borrower will not fulfill its obligations in a timely manner with respect to both principal and interest. Under the DBRS system, debt securities that are rated AA are of superior credit quality and the protection of interest and principal is considered high. An AA rated entity is considered to be a strong credit and typically exemplifies above average strength in key areas of consideration and is unlikely to be significantly affected by reasonably foreseeable events. A reference to “high” or “low” reflects the relative strength within the rating category, while the absence of either a “high” or “low” designation indicates the rating is placed in the middle of the category.
The DBRS preferred share rating scale is used in the Canadian securities market and is meant to provide an indication of the risk that a borrower will not fulfill its full obligations in a timely manner with respect to both principal and dividend commitments. The Pfd-1 rating indicates that the shares are of superior credit quality and have been issued by an entity with strong earnings and balance sheet characteristics. A reference to “high” or “low” again reflects the relative strength within the rating category, while the absence of either a “high” or “low” designation indicates the rating is placed in the middle of the category.
Standard & Poors
The S&P rating scale for long-term debt is based on the likelihood of payment-capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation; and the protection afforded by, and the relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditor’s rights. An AA rating indicates that the obligor’s capacity to meet its financial commitment is very strong. S&P uses “+” or “—” designations to indicate the relative standing of securities within a particular rating category.
S&P has Canadian and global rating scales for preferred shares. S&P’s Canadian scale is a current assessment of the creditworthiness of an obligor with respect to a specific share obligation issued in the Canadian market, relative to preferred shares issued by other issuers in the Canadian market. SLF Inc.’s Class A Preferred Shares, Series 1, 2, 3, 4 and 5 have been assigned A ratings using S&P’s global scale for preferred shares and have been assigned P-1 (low) ratings using S&P’s Canadian scale for preferred shares. The A rating category is the highest of the nine categories used by S&P on its global preferred share scale. The P-1 rating category is the highest of the eight categories used by S&P on its Canadian preferred share scale. A reference to “high”, “medium” or “low” reflects the relative strength within the rating category.
Asset-backed securities
Sun Life Financial issues asset-backed securities from time to time as part of its normal course of business. Details of Sun Life Financial’s asset securitization program are presented in SLF Inc.’s 2006 MD&A under the heading “Financial Position and liquidity – Off-Balance sheet arrangements – asset securitization” and in Note 6 to SLF Inc.’s 2006 Consolidated Financial Statements.
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ANNUAL INFORMATION FORM 2006
Transfer agents and registers
Common Share Transfer Agents and Registers
Country | Transfer Agent and Location of Registers | |
Canada and the | CIBC Mellon Trust Company | |
United States | P.O. Box 7010, Adelaide Street Postal Station, | |
Toronto, Ontario, Canada, M5C 2W9 | ||
United Kingdom | Capita IRG Plc | |
Bourne House, 34 Beckenham Road, | ||
Beckenham, Kent, | ||
United Kingdom BR3 4TU | ||
Philippines | The Hongkong and Shanghai Banking Corp. Ltd. | |
30/F The Discovery Suites, #25 ADB Avenue, | ||
Ortigas Centre, Pasig, | ||
Metro Manila, Philippines | ||
Hong Kong | Computershare Hong Kong Investor Services Limited | |
18th Floor, Rooms 1806 — 1807, Hopewell Centre, | ||
183 Queen’s Road East, | ||
Wanchai, Hong Kong | ||
CIBC Mellon Trust Company Limited is the transfer agent for SLF Inc.’s Class A Preferred Shares Series 1, 2, 3, 4 and 5 and the registrar for SLF Inc.’s Series A, B and C Debentures and the registers for those securities are maintained in Toronto, Ontario, Canada.
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ANNUAL INFORMATION FORM 2006
Directors and executive officers
Board of Directors
At December 31, 2006, the Board of Directors of SLF Inc. had four standing committees: (1) Audit and Conduct Review, (2) Governance, (3) Management Resources, and (4) Risk Review.
The following table sets out the directors of SLF. Inc. as of the date of this AIF and, for each director, the province or state and country of his or her residence, principal occupation years as a director, and membership on board committees. The term of each director expires at the close of business of the Annual Meeting in 2007. Each of the directors of SLF Inc. is an independent director except Mr. Stewart, the Chief Executive Officer of SLF Inc.
Name and | ||||||||
Province/State and | Principal | Director | ||||||
Country of Residence | Occupation | Since | Board Committee Membership | |||||
James C. Baillie | of Counsel, Torys LLP | 2000 | Audit and Conduct Review | |||||
Ontario, Canada | Risk Review | |||||||
George W. Carmany, III | President, G.W. Carmany and Company, | 2004 | Management Resources | |||||
Massachusetts, USA | Inc. | Risk Review | ||||||
John H. Clappison | Corporate Director | 2006 | Audit and Conduct Review | |||||
Ontario, Canada | Risk Review | |||||||
David A. Ganong | President, Ganong Bros. Limited | 2002 | Governance1 | |||||
New Brunswick, Canada | Management Resources | |||||||
Risk Review1 | ||||||||
Germaine Gibara | President, Avvio Management Inc. | 2002 | Audit and Conduct Review | |||||
Quebec, Canada | Governance | |||||||
Krystyna T. Hoeg | Corporate Director | 2002 | Audit and Conduct Review | |||||
Ontario, Canada | Risk Review | |||||||
David W. Kerr | Corporate Director | 2004 | Audit and Conduct Review | |||||
Ontario, Canada | Management Resources | |||||||
Idalene F. Kesner | Chairperson, Department of | 2002 | Governance | |||||
Indiana, USA | Management, | Risk Review | ||||||
Frank P. Popoff Chair of Strategic | ||||||||
Management, Kelley School of Business, | ||||||||
Indiana University | ||||||||
Bertin F. Nadeau | Chairman and Chief Executive Officer, | 1999 | Governance | |||||
Quebec, Canada | GescoLynx Inc. | Management Resources | ||||||
Ronald W. Osborne | Chairman SLF Inc. and Sun Life | 1999 | Audit and Conduct Review2 | |||||
Ontario, Canada | Assurance | Governance | ||||||
Management Resources2 | ||||||||
Risk Review2 | ||||||||
Donald A. Stewart | Chief Executive Officer, SLF Inc. and | 1999 | (none) | |||||
Ontario, Canada | Sun Life Assurance | |||||||
W. Vickery Stoughton | President and Chief Executive Officer, | 1999 | Governance | |||||
California, USA | Magnevu Inc. | Management Resources |
1 | Mr. Ganong resigned from the Governance Committee and joined the Risk Review Committee effective December 6, 2006 | |
2 | Mr. Osborne is an ex-officio member of these committees. |
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ANNUAL INFORMATION FORM 2006
Each director of SLF Inc. has been engaged for more than five years in his or her present principal occupation or in other capacities with the company or organization (or predecessor thereof) in which he or she currently holds his or her principal occupation, except: Ms. Hoeg, who prior to February 2007 was President and Chief Executive Officer of Corby Distilleries Limited; Mr. Clappison, who prior to December 2005 was the Managing Partner of the Greater Toronto Area Office of PriceWaterhouseCoopers; Mr. Kerr, who prior to July 2002 was President and Chief Executive Officer of Falconbridge Limited and prior to August 2006 was Chairman of Falconbridge Limited; Mr. Osborne who, prior to December 2003, was President and Chief Executive Officer of Ontario Power Generation Inc.; and Mr. Stoughton, who in addition to his current occupation which he commenced in September 2006, is a Principal, Anvil Entertainment Inc. and Partner, Wear It Now and who prior to September 2003, was Chairman and Chief Executive Officer of Careside Inc.
No director or executive officer of the Company is or has been, in the 10 years before the date of this AIF, a director or executive officer of a company that, while that person was acting in that capacity, (a) was the subject of a cease trade order or similar order or an order that denied the company access to any exemptions under Canadian securities legislation, for a period of more than 30 consecutive days, (b) was subject to an event that resulted, after that person ceased to be a director or executive officer, in the issuer being the subject of a cease trade or similar order or an order that denied the issuer access to any exemption under Canadian securities legislation, for a period of more than 30 consecutive days, or (c) within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets except for the following:
(i) | Professor Kesner, a director of SLF Inc., was a director of Harriet & Henderson Yarns, Inc. until May 2003. In July 2003 Harriet & Henderson Yarns, Inc. filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the United States. Ms. Kesner is no longer a director of Harriet & Henderson Yarns, Inc.; | |
(ii) | Messrs. Ganong and Osborne, directors of SLF Inc., were directors of Air Canada when it filed for protection under the Companies’ Creditors Arrangement Act in April 2003. Air Canada successfully emerged from those proceedings and was restructured pursuant to a plan of arrangement in September 2004. Messrs. Ganong and Osborne are no longer directors of Air Canada; | |
(iii) | Mr. Stoughton, a director of SLF Inc., was a director of Careside, Inc. when it filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the United States in October 2002. Mr. Stoughton is no longer a director of Careside, Inc.; and | |
(iv) | Mr. Osborne was a director of Nortel Networks Corporation and Nortel Networks Limited (collectively, Nortel) when on April 10, 2006 the Ontario Securities Commission (OSC) issued a management cease trade order prohibiting all directors, officers and certain other current and former employees of Nortel from trading in securities of Nortel until two business days following receipt by the OSC of all filings required to be made by Nortel pursuant to Ontario securities laws. This order resulted from Nortel’s need to restate certain previously reported financial results and related delays in filing certain of its 2005 financial results. This order was revoked effective June 8, 2006. Mr. Osborne is no longer a director of Nortel. |
Audit and Conduct Review Committee
The responsibilities and duties of the Audit and Conduct Review Committee are set out in its charter, a copy of which is attached as Appendix A.
The Board of Directors has determined that each member of its Audit and Conduct Review Committee is independent as defined in the Company’s Director Independence Policy and is financially literate. In the board’s judgment, a member of the Committee is financially literate if, after seeking and receiving any explanations or information from senior financial management of the Company or the auditors of the Company that the member requires, the member is able to read and understand the consolidated financial statements of the Company to the extent sufficient to be able to intelligently ask, and to evaluate the answers to, probing questions about the material aspects of those financial statements.
The members of the Audit and Conduct Review Committee as of the date of this AIF and their qualifications and education are set out below.
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ANNUAL INFORMATION FORM 2006
Krystyna T. Hoeg (Chair) received her designation as a Chartered Accountant in Canada in 1980 while working at the firm of Touche Ross. She joined the Allied Domecq group of companies in 1985 and has held a number of senior financial positions with Hiram Walker & Sons Ltd., Hiram Walker — G&W Ltd. and Allied Domecq. In 1996, she was appointed President and Chief Executive Officer of Corby Distilleries Limited, a position she held until February 1, 2007. Ms. Hoeg joined the board of directors and audit committee of Clarica Life Insurance Company (Clarica) in 1999 and was appointed Chair of the Clarica audit committee in 2000. She joined the Board of Directors and the Audit and Conduct Review Committee of SLF Inc. and Sun Life Assurance in 2002 and became a member of the Risk Review Committee in 2004. In 2005, she was appointed Chair of the Audit and Conduct Review Committee. Ms. Hoeg is also a director and a member of the audit committee of Ganong Bros. Limited and Shoppers Drug Mart Corporation and a trustee and member of the audit committee of Cineplex Galaxy Income Fund.
James C. Baillie is of Counsel at Torys LLP, a law firm. He was called to the Bar in 1963 and has been with the Torys firm since then, first as an associate, then a partner, then of Counsel. The only exception is his service as Chairman of the Ontario Securities Commission from 1979 to 1981. Mr. Baillie joined the Board of Directors of SLF Inc. and Sun Life Assurance in 2000. He joined the Audit and Conduct Review Committee of SLF Inc. and Sun Life Assurance in 2001 and became a member of the Risk Review Committee in 2003. He was appointed the Chairman of the Risk Review Committee in 2004. Mr. Baillie is a director of MFS and the chair of its audit committee. He is also the Chair of the Auditing and Assurance Standards Oversight Council, which oversees the Audit and Assurance Standards Board, a national body with the authority and responsibility for setting auditing and assurance standards for the public and private sectors in Canada. He is a director and chairman of the audit committee of Decision Dynamics Technology Ltd., a trustee and member of the audit committee of Royal Utilities Income Fund and a director of Bridgepoint Health Canada and several other not-for-profit corporations.
John H. Clappison is a Chartered Accountant who joined the firm of Price Waterhouse in 1968. He became a Partner of the firm in 1980 and in 1990 became Managing Partner of the Greater Toronto Area office, a position he continued to hold after the merger of Price Waterhouse with Coopers & Lybrand to form PricewaterhouseCoopers in 1998, until he retired in December 2005. He was appointed a Fellow of the Institute of Chartered Accountants of Ontario in 1988. He has lectured on accounting practices at Ryerson University, the University of Toronto and the Ontario Institute of Chartered Accountants School of Accountancy. Mr. Clappison joined the Board of Directors, the Audit and Conduct Review Committee and the Risk Review Committee of SLF Inc. and Sun Life Assurance in 2006. He is a director and member of the audit committee of Cameco Corporation and Rogers Communications Inc. He is also a director of Summit Energy Management Inc. He is a Trustee of the Shaw Festival Theatre Endowment Foundation and St. Michael’s Hospital Foundation and a member of the Board of Trustees of The Art Gallery of Ontario Endowment Foundation.
Germaine Gibara received her designation as a Certified Financial Analyst in 1984. She received a Masters of Economics and Political Science degree from Dalhousie University and completed the Program for Management Development at Harvard Business School. Ms. Gibara has held senior positions with a number of financial service and resource-based companies, including Alcan Automotive Structures, TAL Global Asset Management Inc. and Caisse de dépôt et placement du Québec. She is President of Avvio Management Inc. Ms. Gibara joined the Clarica Board of Directors in 1997. She joined the Board of Directors and Risk Review Committee of SLF Inc. and Sun Life Assurance in 2002 and joined the Audit and Conduct Review Committee in 2004. Ms. Gibara is a director of the CPP Investment Board, the Canadian Auditing and Assurance Standards Oversight Council and Agrium Inc. She is also a director and member of the audit committee of Cogeco Cable Inc. and St. Lawrence Cement Group Inc. She was a director of the Economic Council of Canada between 1991 and 1993.
David W. Kerr received his designation as a Chartered Accountant in Canada in 1969 while working at the firm of Touche Ross. He joined what has become Brookfield Asset Management Inc. group in 1972, serving in various senior financial positions. Most recently, he was President and Chief Executive Officer of Falconbridge Limited (formerly Noranda Inc.) from 1990 to 2002. From 2002 until 2006, he was Chairman of Falconbridge Limited. Mr. Kerr joined the Board of Directors and Audit and Conduct Review Committee of SLF Inc. and Sun Life Assurance in December 2004. He is a director of Brookfield Asset Management Inc. and a director and member of the audit committee of Shell Canada Limited and a director and Chair of the audit committee of Sustainable Development Technology Canada.
SLF Inc.’s Board of Directors has determined that Ms. Krystyna T. Hoeg is an audit committee financial expert as defined by the SEC. The SEC has indicated that the designation of a person as an audit committee financial expert does not make that person an “expert” for any purpose, or impose any duties, obligations or liabilities on that person that are greater than those imposed on members of the audit committee and board of directors who do not carry this designation or affect the duties, obligations or liabilities of any other member of the audit committee or board of directors.
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ANNUAL INFORMATION FORM 2006
Executive officers
Each executive officer of SLF Inc. has held his current position or other senior positions with the Company during the past five years with the following exceptions: Prior to September 2006, Mr. Connor was President, Americas, Mercer Human Resource Consulting. Prior to May 2005 he was President, US, Mercer and prior to November 2004 was Chairman and Chief Executive Officer, Canada, Mercer. Prior to April 2005, Mr. Mansbridge was Vice-President, Information Technology with ATI Technologies. Prior to January 2004, he was Senior Vice-President and Chief Information Officer with Celestica Incorporated and prior to January 2002, Vice-President, Information Technology, Americas with Celestica Incorporated. Prior to September, 2006 Mr. McKenney was Senior Vice-President and Chief Financial Officer, Genworth Financial, Inc. Prior to October, 2003 he was Senior Vice-President and Chief Financial Officer, GEI Inc. Prior to September 2006, Mr. Rajotte was Senior Vice-President and General Manager of Asia Pacific Region for the International Division of MetLife, Inc. and prior to July 2005, Vice-President, Sales and Marketing for the International Division of MetLife, Inc. Prior to February 2003, Mr. Salipante was a private consultant, and prior to April 2002, he was President and General Manager of ING U.S. Financial Services. Prior to December 2002, Mr. Stramaglia was Executive Vice-President, Reinsurance and Chief Investment Officer of Clarica. As previously disclosed, Mr. Derksen will resign as Executive Vice-President and Chief Financial Officer upon his retirement on February 28, 2007 and Mr. McKenney will become the Executive Vice-President and Chief Financial Officer at that time.
Executive Officers
Name and Province/State and | ||
Country of Residence | Position | |
Donald A. Stewart | Chief Executive Officer | |
Ontario, Canada | ||
James M.A. Anderson | Executive Vice-President and | |
Ontario, Canada | Chief Investment Officer | |
Thomas A. Bogart | Executive Vice-President and | |
Ontario, Canada | Chief Legal Officer | |
Dean A. Connor | Executive Vice-President | |
Ontario, Canada | ||
Paul W. Derksen | Executive Vice-President and | |
Ontario, Canada | Chief Financial Officer | |
Kevin P. Dougherty | President, SLF Canada | |
Ontario, Canada | ||
Robert W. Mansbridge | Executive Vice-President and | |
Ontario, Canada | Chief Information Officer | |
Richard P. McKenney | Executive Vice-President | |
Ontario, Canada | ||
Stephan Rajotte | President, SLF Asia | |
Hong Kong | ||
Robert C. Salipante | President, SLF U.S. | |
Massachusetts, USA | ||
Michael P. Stramaglia | Executive Vice-President and | |
Ontario, Canada | Chief Risk Officer |
Shareholdings of directors and executive officers
As at December 31, 2006, SLF Inc.’s Directors and executive officers, as a group, owned, directly or indirectly, or had voting control or direction over 276,597 Common Shares of SLF Inc., or less than 1% of the total Common Shares outstanding.
Code of ethics
Sun Life Financial’s approach to business conduct is based on ethical behaviour, adhering to high business standards, integrity and respect. The Board of Directors sets the “tone from the top” and satisfies itself that senior management sustains a culture of integrity throughout the organization. The Board has adopted the Sun Life Financial Code of Business Conduct that applies to directors, officers and employees, including its Chief Executive Officer, Executive Vice-President and Chief Financial Officer, and Senior Vice-President, Finance. The Sun Life Financial Code of Business Conduct has been filed with securities regulators in Canada and with the SEC and may be accessed at www.sedar.com and www.sec.gov respectively.
The Risk Review Committee reviews the effectiveness of, and compliance with, the Code of Business Conduct and reports on its review to the Board of Directors on an annual basis. The Governance Committee reviews and makes recommendations to
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ANNUAL INFORMATION FORM 2006
the Board of Directors on amendments to the Code of Business Conduct. No waivers of the Code for directors or executive officers have been granted.
Principal accountant fees and services
Audit fees were paid for professional services rendered by the auditors for the audit of Sun Life Financial’s annual consolidated financial statements and segregated funds as well as services provided in connection with statutory and regulatory filings.
Fees for audit-related services were paid for assurance and related services that are reasonably related to the performance of the audit or review of the annual consolidated financial statements and are not reported under the audit fees category above. These services consisted primarily of reviews of the Company’s internal control reporting preparedness, CFA Institute (formerly the Association of Investment Management and Research) verifications, and employee benefit plan audits.
Audit Fees
Year Ended December 31 | |||||||||||||
($ millions) | 2006 | 2005 | 2004 | ||||||||||
Audit Services | 21.1 | 13.6 | 10.2 | ||||||||||
Audit-Related Services | 2.5 | 3.6 | 3.5 | ||||||||||
Tax Services | 0.1 | 0.6 | 2.2 | ||||||||||
Other Services | 0.6 | 0.7 | 0.4 | ||||||||||
Fees for tax services were paid for tax compliance, tax advice and tax planning professional services. These services included the review of original and amended tax returns, assistance with questions regarding tax audits and refund claims, tax planning and advisory services relating to domestic and international taxation.
Other fees were paid for products and services other than the audit fees, audit-related fees and tax fees described above.
Policy for approval of auditor services
SLF Inc. has established a policy requiring pre-approval of services provided by its external auditors, a copy of which is attached as Appendix B. All fees paid to SLF Inc.’s external auditors since the policy was established have been approved by the Audit and Conduct Review Committee in accordance with the policy in effect at the relevant time.
Interests of experts
Deloitte & Touche LLP, the external auditors of SLF Inc., provided an audit opinion on SLF Inc.’s 2006 Consolidated Financial Statements.
Robert W. Wilson, SLF Inc.’s Appointed Actuary provided an opinion on the value of policy liabilities for SLF Inc.’s consolidated balance sheets at December 31, 2006 and 2005 and the change in the consolidated statements of operations for the years then ended. Mr. Wilson owned beneficially, directly or indirectly, less than 1% of all outstanding securities or other property of SLF Inc. or its affiliates when he prepared that opinion, or after that opinion was prepared, and he does not expect to receive any such securities or other property in excess of that amount in the future.
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ANNUAL INFORMATION FORM 2006
Regulatory matters
Sun Life Financial is subject to regulation and supervision by governmental authorities in the jurisdictions in which it does business.
Canada
General
SLF Inc. is governed by the Insurance Act. OSFI administers the Insurance Act and supervises the activities of Sun Life Financial. SLF Inc. has all the powers and restrictions applicable to life insurance companies governed by the Insurance Act, which permits insurance companies to offer, directly or through subsidiaries or through networking arrangements, a broad range of financial services, including:
• | banking services, | ||
• | investment counseling and portfolio management, | ||
• | mutual funds, | ||
• | trust services, | ||
• | real property brokerage and appraisal, and | ||
• | merchant banking services. |
The Insurance Act requires the filing of annual and other reports on the financial condition of insurance companies, provides for periodic examinations of insurance companies’ affairs, imposes restrictions on transactions with related parties, and sets forth requirements governing certain aspects of insurance companies’ businesses.
OSFI supervises SLF Inc. on a consolidated basis to ensure that it has an overview of activities of SLF Inc. and its consolidated subsidiaries. This consolidated regulation includes the ability to review both insurance and non-insurance activities, whether inside or outside of Canada, conducted by subsidiaries of SLF Inc. and adequate supervisory power to bring about corrective action.
Investment powers
Under the Insurance Act, a life insurance company must maintain a prudent portfolio of investments, subject to certain overall limitations on the amount it may invest in certain classes of investments, such as commercial loans, real estate and stocks. Additional restrictions (and, in some cases, the need for regulatory approvals) limit the type of investments which Sun Life Financial can make in excess of 10% of the voting rights or 25% of the equity of any entity.
Capital and surplus requirements
OSFI has established guidelines which set out the framework within which the Superintendent will assess whether regulated insurance holding companies and non-operating life companies (collectively, Insurance Holding Companies) are maintaining adequate capital. Under these guidelines, Insurance Holding Companies and certain of their qualified foreign life insurance company subsidiaries (significant foreign life subsidiaries), are not subject to the Minimum Continuing Capital Surplus Requirements (MCCSR) that apply to Canadian life insurance companies. OSFI’s capital requirements do not establish minimum or targeted capital requirements for Insurance Holding Companies. Rather, Insurance Holding Companies, such as SLF Inc., are expected to manage their capital in a manner commensurate with their risk profile and control environments. Significant foreign life subsidiaries are not subject to the MCCSR rules, but are expected to comply with the capital adequacy requirements imposed in the foreign jurisdictions in which they operate. For the purposes of determining available capital, an Insurance Holding Company will deduct the capital of its significant foreign life subsidiaries and then add back any excess capital or deduct any capital deficit of such subsidiaries, based upon the capital adequacy rules of the jurisdictions in which those subsidiaries operate (see Regulatory Matters — United States). The Company’s principal operating life insurance company in the United States, Sun Life Assurance Company of Canada (U.S.), is qualified as a significant foreign life subsidiary.
Sun Life Assurance continues to be subject to the MCCSR rules on a consolidated basis. The MCCSR calculation involves applying quantitative factors to specific assets and liabilities, as well as to certain off-balance sheet items, based on the following risk components: (i) asset default risk, (ii) mortality/morbidity and lapse risk, (iii) interest margin pricing risk, (iv) changes in interest rate environment risk, (v) segregated fund risk, and (vi) off-balance sheet exposure. The total capital required is the sum of the capital required calculated for each of the six risk components referred to above. OSFI uses this total, in conjunction with the amount calculated as available capital, together with other considerations, in assessing the capital adequacy of Canadian life insurance companies. OSFI generally expects Canadian life insurance companies to maintain a
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ANNUAL INFORMATION FORM 2006
minimum MCCSR of 150% or greater, based on the risk profile of the relevant insurance company. Sun Life Assurance’s MCCSR ratio as at December 31, 2006 exceeded the levels that would require any regulatory or corrective action.
The principal elements used to calculate available capital for Insurance Holding Companies and for Canadian life insurance companies include common shares, contributed surplus, retained earnings, reported surplus, unamortized deferred realized and unrealized gains and certain losses on investments not taken into account in the valuation of liabilities, a certain portion of actuarial liabilities related to future policyholder termination dividends, preferred shares, qualifying innovative capital instruments and subordinated debt. Funds raised by Insurance Holding Companies or Canadian life insurance companies through borrowing or issuing securities are treated as different categories of available capital, depending on the characteristics of the instrument issued.
Insurance Holding Companies and Canadian life insurance companies must then reduce the amount of their available capital by the aggregate of their goodwill and controlling interests in non-life financial corporations, non-controlling substantial investments in corporations, a portion of negative policy reserves and cash value deficiencies and reserves on reinsurance ceded to unregistered reinsurers. OSFI may require that a higher amount of capital be available, taking into account such factors as operating experience and diversification of asset or insurance portfolios. OSFI may intervene and assume control of an Insurance Holding Company or a Canadian life insurance company if it deems the amount of available capital insufficient. Capital requirements may be adjusted by OSFI in the future as experience develops, the risk profile of Canadian life insurers changes, or to reflect other risks.
Restrictions on dividends and capital transactions
The Insurance Act prohibits the declaration or payment of dividends on shares of an Insurance Holding Company or a Canadian life insurance company if there are reasonable grounds for believing the company does not have, or the payment of the dividend would cause the company not to have, adequate capital or liquidity and requires that companies notify the Superintendent of the declaration of a dividend at least 10 days prior to the date fixed for its payment and, in certain circumstances, requires the prior approval of the Superintendent.
The Insurance Act also prohibits the purchase for cancellation of shares issued by an Insurance Holding Company or a Canadian life insurance company or the redemption of redeemable shares or other similar capital transactions, if there are reasonable grounds for believing that the company does not have, or the payment would cause the company not to have, adequate capital or liquidity. Further, any purchase for cancellation of any shares issued by an Insurance Holding Company or a Canadian life insurance company or the redemption of redeemable shares or similar capital transactions is prohibited without the prior approval of the Superintendent.
Restrictions on ownership
The Insurance Act contains restrictions on the purchase or other acquisition, issue, transfer and voting of the shares of an insurance company. Pursuant to these restrictions:
• | No person is permitted to acquire any shares of SLF Inc. if the acquisition would cause the person to have a “significant interest” in any class of shares of SLF Inc., without the prior approval of the Minister of Finance of Canada. | ||
• | SLF Inc. is not permitted to record any transfer or issue of shares of SLF Inc. if the transfer or issue would cause the person to have a significant interest in SLF Inc., unless prior approval is obtained from the Minister of Finance of Canada. | ||
• | No person who has a significant interest in SLF Inc. may exercise any voting rights attached to the shares held by that person, unless prior approval of the Minister of Finance of Canada is obtained. A person has a significant interest in a class of shares where the aggregate of any shares of that class beneficially owned by that person, any entity controlled by that person and any person acting jointly or in concert with that person exceeds 10% of all of the outstanding shares of that class of shares. |
Under the Insurance Act, the Minister of Finance of Canada may approve only the acquisition of a significant interest of up to 30% of any class of non-voting shares and up to 20% of a class of voting shares, provided that the person acquiring those shares does not have direct or indirect influence over SLF Inc. that, if exercised, would result in that person having control in fact of SLF Inc. In addition, the Insurance Act prohibits life insurance companies, including SLF Inc., from recording a transfer or issuing shares of any class to Her Majesty in right of Canada or of a province, an agent of Her Majesty, a foreign government or an agent of a foreign government.
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SLF Inc. is required to continue to control, but not wholly own, Sun Life Assurance. Any shares of Sun Life Assurance that are not owned by SLF Inc. are required to meet the widely held criteria (no individual may own more than 10% of any class of shares without prior Minister approval). The 20% limit on voting share ownership and 30% limit on non-voting share ownership apply to the direct and indirect cumulative ownership of Sun Life Assurance, with the effect that no single investor will be able to use the holding company structure to exceed the ownership restrictions.
Appointed Actuary
In accordance with the Insurance Act, SLF Inc.’s Board of Directors has appointed a Fellow of the Canadian Institute of Actuaries as its “Appointed Actuary”. The Appointed Actuary must provide an opinion on:
• | the value of the Company’s consolidated policy liabilities as at the end of each period in accordance with accepted actuarial practices, including the selection of appropriate assumptions and methods, | |
• | whether the amount of policy liabilities makes appropriate provisions for all obligations to policyholders, and | |
• | whether the valuation of liabilities is fairly presented in the consolidated financial statements. |
The Insurance Act requires that the Appointed Actuary meet with the Board of Directors or the Audit and Conduct Review Committee at least once in each financial year to report, in accordance with accepted actuarial practice, on the Company’s financial position and its expected future financial condition. The Appointed Actuary must report to the Chief Executive Officer and the Chief Financial Officer of SLF Inc. if the Appointed Actuary identifies any matters which, in the Appointed Actuary’s opinion, could have material adverse effects on the financial condition of SLF Inc.
Provincial/territorial insurance regulation
Sun Life Financial is subject to provincial regulation and supervision in each province and territory in Canada in which it carries on business. Provincial insurance regulation is concerned primarily with the form of insurance contracts and the sale and marketing of insurance and annuity products, including the licensing and supervision of insurance producers. Individual variable insurance and annuity products and the underlying segregated funds to which they relate are subject to guidelines adopted by the Canadian Council of Insurance Regulators and incorporated by reference into provincial insurance regulations. These guidelines govern a number of matters relating to the sale of these products and the administration of the underlying segregated funds. Sun Life Financial is licensed to transact business in all provinces and territories in Canada.
Privacy of customer information
Canadian federal, and some provincial, laws and regulations require financial institutions to protect the security and confidentiality of customer information and to notify customers about their policies and practices relating to their collection and disclosure of customer information and their policies relating to protecting the security and confidentiality of that information. These laws also regulate disclosure of customer information.
Securities laws
Certain of SLF Inc.’s subsidiaries, including McLean Budden Limited and Clarica Investco Inc., certain of their employees or sales representatives and certain of the products offered by these subsidiaries are registered with provincial and territorial securities commissions and are subject to regulation and supervision under securities laws in each of the provinces and territories of Canada.
United States
General regulation at the state level
In the United States, each state, the District of Columbia, and U.S. territories and possessions have insurance laws that apply to companies licensed to carry on an insurance business in the jurisdiction. However, the state of domicile of the insurer is the primary regulator of the company. Most jurisdictions have laws and regulations governing the financial aspects of insurers, including standards of solvency, reserves, reinsurance, capital adequacy and the business conduct of insurers. In addition, the laws of the various states establish state insurance departments with broad administrative powers to approve policy forms and related materials and, for certain lines of insurance, approve rates, grant and revoke licenses to transact business, regulate trade practices, license agents, require statutory financial statements and prescribe the type and amount of investments permitted. The primary purpose of such regulation by the state insurance departments is for the benefit of policyholders, rather than shareholders.
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Insurance companies are required to file detailed annual and quarterly financial statements with state insurance regulators in each of the states in which they are licensed, and their business and accounts are subject to examination by such regulators at any time. Regulators have discretionary authority, in connection with the continued licensing of life insurance companies, to limit or prohibit the ability to issue new policies if, in their judgment, the regulators determine that an insurer is not maintaining minimum statutory surplus or capital or if the further transaction of business would be detrimental to policyholders. As part of their routine oversight process, state insurance departments conduct detailed examinations periodically (generally every three to five years) of the books, records, accounts and market conduct of insurance companies domiciled in their states. Market conduct reviews examine, among other things, content of disclosures, illustrations, advertising, sales practices and complaint handling. Examinations are sometimes conducted in cooperation with the departments of other states under guidelines published by the National Association of Insurance Commissioners (NAIC).
SLF Inc. is not regulated as an insurance company in the United States. SLF Inc. is the direct or indirect owner of the capital stock of Sun Life Assurance and several U.S. insurance subsidiaries that are regulated as insurance companies in the United States, and which are therefore subject to the insurance holding company legislation in the states in which they are domiciled (or deemed to be commercially domiciled). Most states have enacted legislation that generally requires each insurer that is domiciled therein and that is a member of a holding company system to register with the insurance regulatory authority of that state and, annually, to furnish those authorities certain reports including information concerning capital structure, ownership, financial condition, certain intercompany transactions and general business operations.
SLF Inc.’s U.S. insurance subsidiaries are domiciled in Delaware, Rhode Island and New York. Michigan is Sun Life Assurance’s “state of entry” and it is treated as Sun Life Assurance’s state of domicile in the United States for purposes of the insurance holding company laws. Under most states’ holding company laws, transactions within the holding company system to which the domestic insurer is a party must be fair and equitable and such insurer’s policyholder surplus following any such transaction must be both reasonable in relation to its outstanding liabilities and adequate for its needs. Most states require prior regulatory approval of the change of control of the domestic insurer or an entity that controls the domestic insurer and prior notice or regulatory approval of material intercorporate transfers of assets or other material affiliate transactions to which a domestic insurer is a party. Generally, under such laws, a state insurance authority must approve in advance the direct or indirect acquisition of 10% or more of the voting securities of an insurance company domiciled in the state.
Sun Life Assurance is licensed to transact business through its U.S. branch in every state in the United States (except New York, where it is an accredited reinsurer), the District of Columbia, Puerto Rico and the U.S. Virgin Islands. SLF Inc.’s U.S. insurance subsidiaries are, collectively, licensed to transact business in all states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands.
Restrictions on dividends
The U.S. insurance holding company system laws and regulations of various states regulate the amount of dividends that an insurance company may pay to its parent without prior regulatory approval. In addition, covenants in surplus notes affect SLF Inc.’s Delaware domestic insurance company’s ability to pay dividends by requiring it to maintain certain levels of surplus.
NAIC IRIS ratios
The NAIC has developed a set of financial relationships or “tests” known as the NAIC Insurance Regulatory Information System (IRIS) to assist state regulators in monitoring the financial condition of insurance companies and identifying companies that may require special attention or action by insurance regulatory authorities. A second set of confidential ratios, called the Financial Analysis Solvency Tracking System, is also used for monitoring. Insurance companies generally submit data to the NAIC, which in turn analyzes the data using prescribed financial data ratios, each with defined “usual ranges”. Generally, if four or more of an insurance company’s ratios fall outside the usual ranges, regulators will begin to investigate or monitor the company. Regulators have the authority to impose remedies ranging from increased monitoring to certain business limitations with various degrees of supervision. For the 12 months ended December 31, 2005, the most recent period for which results are currently available, Sun Life Assurance’s U.S. branch and SLF Inc.’s U.S. insurance subsidiaries were within the usual ranges for most of the IRIS ratios. Management believes that the ratios which were outside the usual range did not indicate any adverse solvency issues.
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Statutory investment and other valuation reserves
Under NAIC rules, life insurance companies must maintain an asset valuation reserve (AVR), supplemented by an interest maintenance reserve. These reserves are recorded for purposes of statutory accounting practices; they are not recorded under the provisions of Canadian GAAP and therefore have no impact on SLF Inc.’s reported results of operations or financial position. These reserves effect the determination of statutory surplus, and changes in such reserves may impact the ability of a U.S. insurance subsidiary to pay dividends or other distributions to its parent and also may impact the amounts required to be maintained in trust by Sun Life Assurance’s U.S. branch (see discussion below under “Minimum Statutory Surplus and Capital”). The impact of the AVR, which is a provision for potential asset credit defaults, will depend upon future composition of the investment portfolios of Sun Life Assurance’s U.S. branch and SLF Inc.’s U.S. life insurance subsidiaries.
Michigan insurance law and the laws of several other states require life insurance companies to analyze the adequacy of their reserves annually. The appointed actuary for Sun Life Assurance’s U.S. branch must submit an opinion that such reserves, when considered in light of the assets held with respect to those reserves, make adequate provision for Sun Life Assurance’s associated contractual obligations and related expenses. The appointed actuary for each of the U.S. life insurance subsidiaries is required to submit a similar annual opinion. If such opinion cannot be provided, the affected insurer must set up additional reserves by moving funds from surplus.
In 1998, the NAIC revised its “Valuation of Life Insurance Policies Model Regulation” to change the minimum statutory reserve requirements for certain new individual life insurance policies issued after January 1, 2000. These reserve standards have been enacted by most of the states. As a result, insurers selling certain individual life insurance products such as term life insurance with guaranteed premium periods and universal life products with secondary guarantees may need to adjust reserves and/or shorten guarantee periods. The NAIC has recently adopted revisions to certain actuarial guidance related to this model regulation that will reduce its impact with respect to new policies issued after January 1, 2007.
Risk-based capital requirements
In order to enhance the regulation of insurers’ solvency, the NAIC adopted a model law to implement risk-based capital (RBC) requirements for life, health and property and casualty insurance companies. All states have adopted the NAIC’s model law or a substantially similar law. The RBC calculation, which regulators use to assess the sufficiency of an insurer’s capital, measures the risk characteristics of a company’s assets, liabilities and certain off-balance sheet items. RBC is calculated by applying factors to various asset, premium and liability items. Within a given risk category, these factors are higher for those items with greater underlying risk and lower for items with lower underlying risk. Insurers that have less statutory capital than the RBC calculation requires are considered to have inadequate capital and are subject to varying degrees of regulatory action depending upon the level of capital inadequacy. Management believes that the RBC ratios for Sun Life Assurance’s U.S. branch and SLF Inc.’s U.S. insurance subsidiaries as of December 31, 2006, exceeded the levels that would require any regulatory or corrective action.
Minimum statutory surplus and capital
Sun Life Assurance’s U.S. branch and SLF Inc.’s U.S. life insurance subsidiaries are required to have minimum statutory surplus and capital of various amounts, depending on the state in which they are licensed and the types of business they transact.
Sun Life Assurance’s U.S. branch is required to maintain a certain amount of assets in trust with a financial institution acceptable to the Michigan Insurance Commissioner in an amount at all times at least equal to the sum of the U.S. branch’s reserves and other liabilities, the minimum required capital and surplus and any additional amounts considered necessary by the Michigan Insurance Commissioner to cover Sun Life Assurance’s liabilities plus a portion of its surplus in the United States. These assets are generally only available to meet the policyholder obligations of Sun Life Assurance to its U.S. policyholders, claimants and other U.S. branch creditors. Amendments to the trust agreement must be approved by the Michigan Insurance Commissioner. Management believes that as at December 31, 2006, Sun Life Assurance’s U.S. branch had assets in trust in excess of Michigan’s requirements for branches of alien insurers.
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Regulation of investments
Sun Life Assurance’s U.S. branch and SLF Inc.’s U.S. insurance subsidiaries are subject to state laws and regulations that require diversification of their investment portfolios and limit the amount of investments in certain in vestment categories such as below investment grade fixed income securities, equity real estate and equity investments. Failure to comply with these laws and regulations would cause investments exceeding regulatory limits to be treated as non-admitted assets for purposes of measuring surplus and, in some instances, would require divestiture of such non-qualifying investments.
Assessments against insurers
Insurance guaranty association laws exist in all states, the District of Columbia and Puerto Rico. These laws require insurers doing business in a state to participate in the local association. The associations may levy assessments for policyholder losses incurred by impaired or insolvent insurance companies. Generally, assessments up to certain prescribed limits are based upon the proportionate share of premiums written by member insurers in the lines of business in which the impaired or insolvent insurer is engaged. A large part of the assessments paid by Sun Life Financial pursuant to these laws may be used as credits for a portion of its U.S. premium taxes.
General regulation of insurance at federal level
Although the U.S. federal government does not directly regulate the insurance business, federal legislation and administrative policies in several areas affect the insurance business, including pension regulation, age and sex discrimination, investment company regulation, financial services regulation and federal taxation. For example, the U.S. Congress has from time to time considered legislation related to the deferral of taxation on the accretion of value within certain annuities and life insurance products, limitations on antitrust immunity, the alteration of the federal income tax structure and the availability of 401(k) or individual retirement accounts. In addition, legislation has been introduced from time to time in recent years which, if ever enacted, could result in the U.S. federal government assuming a more direct role in the regulation of the insurance industry.
ThePension Protection Act of 2006amended many provisions of theInternal Revenue Code and theEmployee Retirement Income Security Act of 1974 (ERISA). Among other things, the act allows the combination of life insurance and annuity contracts with long-term care insurance features beginning in 2010, makes annuities more available through employer-sponsored plans, and codifies current best practices on corporate-owned life insurance policies into federal law.
During 2006, legislation entitledThe National Insurance Act of 2006was introduced in the U. S. House of Representatives and the U.S. Senate. This legislation would have allowed insurers to choose between being regulated by a single federal regulator to remain regulated by the states. It is likely that similar legislation will be introduced in 2007.
During 2005, legislation entitledThe Retirement Security for Life Act of 2005was introduced in the U.S. House of Representatives and the U.S. Senate. This legislation would have provided an income tax incentive that would encourage retirees to choose annuities that provide for lifetime income. It is likely that similar legislation will be introduced in 2007.
TheAmerican Jobs Creation Act of 2004was signed into law in October 2004. While this legislation had major implications for many other companies, including others in the insurance industry, it has not had a material impact on SLF Inc. or any of it s U.S. subsidiaries.
Title III of theUSA PATRIOT Act of 2001(PATRIOT Act) amended the Money Laundering Control Act of 1986 and the Bank Secrecy Act of 1970 to expand anti-money laundering and financial transparency laws to apply to financial services companies, including some categories of insurance companies. The PATRIOT Act, among other things, seeks to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism, money laundering or other illegal activities. To the extent required by applicable laws and regulations, the subsidiaries of SLF Inc. that are deemed “financial institutions” under the PATRIOT Act have adopted anti-money laundering programs that include policies, procedures and controls to detect and prevent money laundering, designate a compliance officer to oversee the program, provide for on-going employee training, and ensure periodic independent testing of the program. On November 3, 2005, the U.S. Treasury Department issued final regulations applicable to the insurance industry. Effective May 2, 2006, these regulations required insurance companies issuing “covered products” to implement anti-money laundering programs and file suspicious activity reports with the U.S. Treasury Department. Sun Life Assurance and SLF Inc.’s U.S. insurance subsidiaries issue covered products and have taken steps to comply with the new rules. It is anticipated that the U.S. Treasury Department will issue regulations requiring insurance companies to establish and enforce customer identification programs in early 2007.
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Privacy of customer information
U.S. federal and state laws require financial institutions to protect the security and confidentiality of customer information and to notify customers about their policies and practices relating to their collection, use and disclosure and protection of customer information and their policies relating to protecting the security and confidentiality of that information. U.S. federal and state laws also regulate disclosure of customer information. The U.S. Congress and state legislatures are considering additional laws and regulations to further protect customer information.
Securities laws
Certain subsidiaries of SLF Inc. and certain policies and contracts offered by these subsidiaries are subject to various levels of regulation under U.S. federal securities laws administered by the SEC and under certain state securities laws.
The investment advisory activities of SLF Inc.’s U.S. subsidiaries are subject to federal and state laws and regulations in jurisdictions in which they conduct business. These laws and regulations are primarily intended to benefit investment advisory clients and investment company shareholders. MFS and certain of SLF Inc.’s other U.S. subsidiaries are investment advisors registered under theInvestment Advisers Act of 1940, as amended (Investment Advisers Act), and, as such, are regulated by and subject to examination by the SEC. The Investment Advisers Act imposes numerous obligations on registered investment advisors, including fiduciary duties record keeping and reporting requirements, operational requirements and disclosure obligations. The SEC is authorized to institute proceedings and impose sanctions for violations of the Investment Advisers Act, ranging from censure to limitations on the investment advisor’s activities to termination of an investment advisor’s registration. Certain investment companies managed by such subsidiaries, including the MFS funds, are registered with the SEC under the
Investment Company Act of 1940, as amended, and are subject to theSecurities Exchange Act of 1934, as amended (Exchange Act), and the shares of certain of these entities are registered under theSecurities Act of 1933, as amended (Securities Act), and are qualified for sale in certain states in the United States and the District of Columbia and in certain foreign countries.
Investment Company Act of 1940, as amended, and are subject to theSecurities Exchange Act of 1934, as amended (Exchange Act), and the shares of certain of these entities are registered under theSecurities Act of 1933, as amended (Securities Act), and are qualified for sale in certain states in the United States and the District of Columbia and in certain foreign countries.
Certain annuity contracts and insurance policies issued by SLF Inc.’s U.S. subsidiaries are registered under the Securities Act . Sun Life Assurance Company of Canada (U.S.) and Sun Life Insurance and Annuity Company of New York file periodic reports with the SEC under the Exchange Act. Certain of SLF Inc.’s U.S. subsidiaries are registered as broker-dealers under the Exchange Act and are subject, for example, to the SEC’s net capital rules, and are members of, and subject to regulation by, the National Association of Securities Dealers, Inc. (NASD). Certain other U.S. subsidiaries of SLF Inc. are registered as transfer agents under the Exchange Act.
Certain U.S. subsidiaries of SLF Inc. issue fixed index annuities, which are not required to be registered under the Securities Act. However, the SEC has been considering whether fixed index annuities should continue to be excluded from registration requirements. In August 2005, the NASD recommended that, due to this uncertainty, broker-dealers should consider supervising their representatives’ sales of such products. Sun Life Financial is closely monitoring these developments.
United Kingdom
Insurance regulation
SLF Inc.’s U.K. life insurance subsidiary, Sun Life Assurance Company of Canada (U.K.) Limited (Sun Life (U.K.)) carries on certain regulated activities as principal and by way of business in the United Kingdom in relation to long-term contracts of insurance and, therefore, is required to be authorized and regulated under theFinancial Services and Markets Act 2000(FSM Act) by the Financial Services Authority (FSA). All insurance companies authorized under the FSM Act are required to conduct their business in accordance with the senior management arrangements, systems and controls, prudential and conduct of business rules and guidance set out in theFSA Handbook of Rules and Guidance(FSA Handbook), including thePrinciples for Businessescontained in theHigh Level Standardsof the FSA Handbook. These include a requirement for firms, including insurance companies authorized under the FSM Act, to maintain systems, procedures and controls appropriate to the nature, scale and complexity of their business, to conduct their business with due regard to the interests of their customers and to treat them fairly. Insurance companies that are authorized under the FSM Act are also required under the General Prudential Sourcebook (‘GENPRU’) and the Prudential Sourcebook for Insurers (‘INSPRU’) (which are part of the FSA Handbook) to file their accounts and balance sheets and other information in the prescribed form with the FSA on an annual basis (with certain information now required to be submitted semi-annually). The regulatory requirements determined at the European Union level are also en acted in the United Kingdom. As a member of the European Union, the United Kingdom is subject to European regulation and a number of relevant European Commission Directives that have been published. While being authorized and regulated by the FSA, Sun Life (U.K.) is also required to comply with the conduct of business standards of the Irish Financial Services Regulatory Authority (IFSRA) in respect of the Company’s book of Irish policies, which are also in run-off.
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Long-term assets and liabilities
In accordance with the FSA rules set out in the Handbook, Sun Life (U.K.) is required to maintain a separate account and records in respect of its long-term insurance business and to apply the assets and liabilities attributable to its long-term insurance business to a long-term insurance fund, separate from the assets and liabilities attributable to its non-life insurance business, if any, or to shareholders. Within its long-term insurance fund, Sun Life (U.K.) maintains separate sub-funds in respect of assets and liabilities attributable to its participating insurance business and to its non-participating insurance business, respectively. The FSA rules set out in the PRU impose restrictions on Sun Life (U.K.) from applying assets attributable to its long-term insurance business for purposes other than its long-term business.
Capital resources requirements
The FSA requires that insurance companies authorized under the FSM Act satisfy the capital resource requirements set out in the PRU. The PRU requires insurers to meet the higher of two capital adequacy standards. The first is the long- term insurance capital requirement, which is prescriptive and based on European Commission minimum solvency requirements. The second is the individual capital adequacy framework, which requires each insurer to self-assess what an appropriate amount of capital would be for their business to hold, taking into account the various risks that the insurer faces. The FSA reviews this self-assessment and gives the insurance company individual capital guidance (i.e. the amount of any additional capital the FSA believes the company should hold), where appropriate.
Failure to maintain adequate capital resources is one of the grounds on which the FSA may exercise its wide powers of intervention provided for in the FSM Act. Currently Sun Life (U.K.) meets its capital resources requirements in the United Kingdom.
Restrictions on dividends and capital transactions
Insurance companies in the United Kingdom are subject to the provisions of theCompanies Act 1985governing the payment of dividends, which prevent any distribution by a company except out of profits available for this purpose. In addition, Sun Life (U.K.) is prohibited from transferring any assets maintained in the account for participating policies to its shareholders and can only pay dividends out of non-participating surplus once this has been transferred from the long-term fund to the shareholders’ fund after the annual valuation.
Financial Ombudsman Service
The FSM Act provides for the establishment of an Ombudsman service to provide consumers with a free, independent service to enable disputes with financial firms to be resolved. The rules defining how the Financial Ombudsman Service (FOS) operates are written by the FSA and the two organizations operate closely together. The FOS is funded partly by a statutory levy on authorized firms and partly by a case fee in respect of cases referred to it.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS) established under the FSM Act provides for the protection of certain individual financial services customers in the United Kingdom who may be affected by the inability of financial services companies, including insurance companies, who carry on regulated business in the United Kingdom to meet their liabilities. The FSCS is funded by statutory levies on authorized and regulated companies.
Intervention
The FSA has extensive powers to intervene in the affairs of an authorized insurance company. These include the power to fine the insurance company and to vary or cancel its permission to carry on regulated activities in the United Kingdom, to require information or documents and to investigate the business of the insurance company and to require the company to take appropriate actions in order to satisfy required threshold conditions for authorization.
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Reform proposals
The regulation of the insurance industry in the United Kingdom has undergone significant changes. In particular, the FSA has implemented a number of regulatory work streams to achieve a new risk-based cross-sectoral prudential regulatory framework which includes enhanced individual capital adequacy standards for long-term insurance companies (see above) and, specifically, a realistic approach to assessing the capital adequacy of an insurance company’s participating business. In addition to these reforms, the FSA has reviewed the governance for participating business and ensuring the fair treatment of policyholders. In line with these reforms, Sun Life (U.K.) published a “Principles and Practices of Financial Management” for its participating funds from May 1, 2004 and a “policyholder friendly” version of that was available from January 1, 2006. A new reform theme that the FSA is considering relates to the governance and management of segregated funds. This aspect of insurance has not received the same degree of regulatory focus in the past as has characterized the treatment of mutual funds. The Association of British Insurers is working with the industry to identify and define the standards of best practice required in managing segregated funds.
The FSA has announced that it will emphasize a principles-based regulatory framework, rather than the current rules-based regulations. The FSA proposes to integrate existing principles and rules into its supervisory framework. Where the FSA decide s to use rules, where possible, these will generally be high level and outcome focused rules. This principles-based regulatory framework may result in some additional uncertainty for regulated firms and the FSA has indicated that it may need to issue guidance on how the FSA expects regulated firms to comply with its principles.
Other jurisdictions
In each of the countries in which subsidiaries or joint ventures of Sun Life Financial operate, local regulatory authorities supervise and monitor their business and financial condition. In a number of countries, certain insurance subsidiaries or joint ventures are required to meet specific minimum working and regulatory capital requirements.
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Risk factors
The risks inherent in Sun Life Financial’s operations and its risk management framework are described in SLF Inc.’s 2006 MD& A under the heading “Risk Management”. In addition, the following risk factors have been identified by management as those which may affect one or more of Sun Life Financial’s reportable business segments in the nearer term. These risk factors should be considered in conjunction with the other information in this AIF and the documents incorporated by reference in this AIF.
Equity market risk
Declines and volatility in equity markets could have an adverse effect on Sun Life Financial’s business and profitability in several ways. Equity market volatility or declines could occur as a result of general market volatility or as a result of specific social, political or general economic events.
Sun Life Financial derives a portion of its revenue from fee income generated by its wealth management business, which is assessed as a percentage of assets under management and therefore varies directly with the value of such assets. Accordingly, fluctuations in the market value of such assets may result in fluctuations in Sun Life Financial’s revenue and net income.
Sun Life Financial is exposed to certain equity-market related risks associated with its fixed-indexed annuity products that provide for the crediting of interest at rates related to the performance of various equity indices. A substantial decline in the applicable index could prompt holders of fixed-indexed annuities to surrender their policies prior to maturity. While fixed-indexed annuity policies typically provide for early surrender charges and restrictions, an increase in surrenders in such annuities could have an adverse effect on Sun Life Financial.
Certain of Sun Life Financial’s variable annuity products sold in the United States and Canada contain guarantees upon death, maturity, withdrawal or annuitization, where the guarantee may vary with, or may be triggered by, the market performance of the underlying funds. Although Sun Life Financial has economic hedging programs in place, has entered into various reinsurance arrangements with respect to these products (whereby Sun Life Financial has ceded certain risk to other insurance companies), and has diversified its exposure to market changes in either direction, if a significant market shift is experienced, the resulting increased cost of providing these guarantees could have an adverse effect on Sun Life Financial’s financial position and results of operations.
Sun Life Financial has also assumed some risk, through reinsurance transactions, with respect to certain variable annuity policies issued in the United States by other insurance companies that contain guarantees upon death or annuitization , where the guarantee may vary with, or be triggered by, the market performance of the underlying funds. While Sun Life Financial has established a hedging program for these reinsured policies and established reserves related to these guarantees, these guarantees could have an adverse effect on Sun Life Financial, if a significant market shift is experienced that affects these reinsured policies.
Sun Life Financial also has direct exposure to equity markets as a result of the investments supporting surplus. Fluctuations in the market value of those assets could result in fluctuations in profitability.
Interest rate risk
Movements in interest rates could have an adverse effect on Sun Life Financial’s business and profitability in several ways. Interest rate volatility could occur as a result of the general market volatility or as a result of specific social, political or general economic events.
Many of the Company’s products contain explicit or implicit guarantees and, if long-term interest rates fall below those guaranteed rates, the Company may be required to increase reserves against losses, thereby adversely affecting its results of operations. Interest rate changes can also cause compression of net spread between interest earned on investments and interest credited, thereby adversely affecting the Company’s results of operations. Rapid declines in interest rates may result in, among other things, increased asset calls, mortgage prepayments or policy withdrawals and reinvestment at significantly lower yields, which could adversely affect earnings. Rapid increases in interest rates may result in, among other things, increased surrenders. Interest rate changes can also produce an unanticipated increase in transfers to separate account (variable) options or surrenders, which may force the Company to sell investment assets at a loss in order to fund such transfers or surrenders and accelerate recognition of certain acquisition expenses. In addition an interest rate sensitivity mismatch between assets and liabilities they are designated to support could result in an adverse effect on Sun Life Financial’s financial position and results of operations.
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Certain of Sun Life Financial’s protection products also have product features that create interest rate exposure. If long term interest rates remain low for an extended period of time, fixed income portfolio rates may fail to support products with crediting rate guarantees and products with no-lapse guarantees. If interest rates rise rapidly, book value surrenders may occur whereby assets must be disinvested at depressed levels which may not support the surrender provision. While Sun Life
Financial has established hedging programs and its annuity and protection products typically contain surrender mitigation features, interest rate movements could have an adverse effect on Sun Life Financial’s business and profitability.
Sun Life Financial also has direct exposure to interest rates as a result of the investments supporting surplus. Fluctuations in the market value of those assets could result in fluctuations in profitability.
Changes in legislation and regulations
Most of Sun Life Financial’s businesses are subject to extensive regulation and supervision. Changes in laws, regulations, or government policies, or in the manner in which those laws, regulations or policies are interpreted or enforced, could have an adverse effect on Sun Life Financial’s business and operations.
For example, under NAIC rules, U.S. insurance companies are entitled to credit for statutory reserves for universal life policies that are reinsured by unaccredited reinsures to the extent that those obligations are secured by letters of credit, assets held in trust or other acceptable security. Sun Life Financial provides letters of credit and assets in trust as security to support certain affiliated reinsurance transactions related to universal life policies issued by Sun Life Financial in the U.S. Changes in the NAIC rules or in Sun Life Financial’s ability to purchase or renew letters of credit could require Sun Life Financial’s U.S. operations to increase their NAIC statutory reserves, incur higher operating costs or reduce sales of affected products.
Sun Life Financial currently has an effective tax rate that is lower than the Canadian statutory income tax rate for corporations. This lower effective income tax rate is predominantly caused by generating earnings in jurisdictions with income tax rates lower than the Canadian income tax rate and by organizing business operations in a tax effective manner. Changes in tax legislation, regulations or treaties to disallow these arrangements could have an adverse effect on Sun Life Financial’s profitability and its business and operations.
Legal, regulatory and market conduct matters
Failure to comply with laws, or to conduct Sun Life Financial’s business consistent with changing regulatory or public expectations, could adversely impact Sun Life Financial’s reputation. Sun Life Financial’s business is based on public trust and confidence and any damage to that trust or confidence could cause customers not to buy, or to redeem, Sun Life Financial’s products. Insurance and securities regulatory authorities in certain jurisdictions regularly make inquiries, hold investigations and administer market conduct examinations with respect to insurers’ compliance with applicable insurance and securities laws and regulations, and certain regulatory authorities, industry groups and rating agencies have developed initiatives regarding market conduct. In recent years, financial services regulators in many of the countries in which Sun Life Financial operates have raised issues and commenced regulatory inquiries, investigations and proceedings with respect to current and past business practices in the financial services industry, and have given greater emphasis to the investigation of those practices, including investigations into the payment of commissions and other fees to intermediaries, market timing and late trading in investment funds, sales of mortgage endowment and pension products in the United Kingdom, allegations of improper life insurance pricing and sales practices by life and annuity insurers, including “churning”, inappropriate sales and other misleading practices by insurance agents and business practices between brokers and insurance companies. Current and future investigations, examinations and regulatory settlements and civil actions arising out of such matters could adversely affect Sun Life Financial’s reputation and its profitability and future financial results. In addition, there is heightened litigation risk generally arising from the conduct of business in certain jurisdictions.
Product design and pricing
Sun Life Financial is subject to various risks arising from the design and pricing of its insurance products, including adverse deviations from assumptions used in the pricing of products as a result of uncertainty concerning future investment yields, mortality and morbidity experience, policyholder behaviour, sales levels, expenses and taxes. Although some of Sun Life Financial’s products permit it to increase premiums or adjust other charges and credits during the life of the policy or contract,
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the adjustments permitted under the terms of the policies or contracts may not be sufficient to maintain profitability, and therefore could have an adverse effect on Sun Life Financial’s results of operations.
Credit risk
Sun Life Financial is subject to credit risk relating to the uncertainty associated with the continued ability of debtors to make timely payments pursuant to the contractual terms underlying debt instruments. Although Sun Life Financial holds predominantly investment-grade bonds and first mortgages, and believes that it maintains prudent issuer diversification, a major economic downturn could result in issuer defaults, potentially leading to increased provisions for losses.
Insurance risk – mortality, morbidity and longevity
The Company is exposed to the catastrophic risk of natural or man-made disasters such as earthquakes or acts of terrorism, as well as pandemics such as those which could arise from the avian flu. These could result in a significant increase in mortality and morbidity experience above the assumptions used in pricing of products, which could have a material adverse effect on the Company’s operations and profitability.
Many of the Company’s wealth management products provide benefits over the policyholder’s continued lifetime. Higher than expected ongoing improvements in policyholder life expectancy could therefore increase the ultimate cost of providing these benefits, with a resulting adverse effect on the Company’s results of operations.
Operations in Asia
The future success of the Company’s businesses in Asia depends in large part on Sun Life Financial’s ability to compete in disparate markets. Among other things, this requires appropriate resources, skills and organization to execute the business strategy. The risks include the availability, depth and retention of resources required for operations, succession planning and project implementation. Competition for talented and skilled employees and executives with local experience may limit Sun Life Financial’s potential to grow its business in Asia as quickly as planned. In addition, regulations are evolving in many markets in Asia and the risk associated with changing regulations is consequently higher.
Sun Life Financial’s joint venture operations in India and China have risks generally associated with joint venture relationships. In particular, the allocation of control among, and continued co-operation between, the joint venture participants may be adversely affected by new or existing regulations in the markets in which the joint ventures operate. A temporary or permanent disruption to these arrangements could have an adverse effect on Sun Life Financial’s results of operations.
Business continuity
Sun Life Financial’s businesses are dependent on computer and Internet-enabled technology. Although Sun Life Financial has implemented and periodically tests its business continuity/crisis management plans, a sustained failure of one or more of Sun Life Financial’s business systems could materially and adversely impact Sun Life Financial’s business and operations, and its employees. In addition, because some of Sun Life Financial’s systems interface with and are dependent on third party systems, Sun Life Financial could experience service interruptions if third party systems fail or experience interruptions .
Computer security and privacy
A serious security breach of Sun Life Financial’s systems could damage the Company’s reputation or result in liability. Sun Life Financial retains private and personal information about its customers and employees in its computer and other record retention systems, and also enables customer on-line access to certain products and services. Although Sun Life Financial has implemented extensive security measures, it may be vulnerable to physical break-ins, computer viruses, programming and/or human errors, fraud or similar disruptive problems. Such events could have an adverse effect on Sun Life Financial’s results of operations and reputation.
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Reinsurance markets
As part of its overall risk management strategy, Sun Life Financial purchases reinsurance for certain risks underwritten by its various insurance businesses. Market conditions beyond Sun Life Financial’s control determine the availability and cost of this reinsurance protection. Accordingly, Sun Life Financial’s insurance businesses may be forced to incur additional expenses for reinsurance or may not be able to obtain sufficient reinsurance on acceptable terms which could adversely affect the Company’s ability to write future business.
Reinsurance does not relieve Sun Life Financial’s insurance businesses of their direct liability to policyholders. Accordingly, Sun Life Financial bears credit risk with respect to its reinsurers. A reinsurer’s insolvency, inability or unwillingness to make payments under the terms of its reinsurance agreement could have an adverse effect on Sun Life Financial’ s business.
Distribution channels
Sun Life Financial distributes its products through a variety of distribution channels, including direct sales agents, managing general agents, independent general agents, financial intermediaries, broker-dealers, banks, pension and benefits consultants and other third party marketing organizations. Sun Life Financial competes with other financial institutions to attract and retain these intermediaries and agents on the basis of products, compensation, support services and financial position. Sun Life Financial’s sales and results of operations and financial strength ratings could be materially adversely affected if it is unsuccessful in attracting and retaining these intermediaries and agents. In addition, rapid growth in the distribution channel s may heighten the risks of market conduct issues (as outlined in this AIF under the heading“Legal, regulatory and market conduct matters”) and channel conflicts or overlaps
Dependence on third party relationships
Sun Life Financial has outsourced certain business functions to third parties in certain jurisdictions, including Canada and the United Kingdom. An interruption in Sun Life Financial’s continuing relationship with certain of these third parties, the impairment of their reputation or creditworthiness, or failure to provide contracted services could materially and adversely affect Sun Life Financial’s ability to market or service its products. There can be no assurance that Sun Life Financial would be able to find alternate sources for these outsourcing arrangements in a timely manner. Additional information concerning the Company’s outsourcing arrangements is provided in SLF Inc.’s 2006 MD&A under the heading “Financial position and liquidity – commitments, guarantees, contingencies and reinsurance matters”.
Currency exchange rate fluctuations
As an international provider of financial services, Sun Life Financial operates in a number of countries, with revenues and expenses denominated in several local currencies. In each territory in which it operates, Sun Life Financial generally maintains the currency profile of its assets so as to match the currency of aggregate liabilities and minimum surplus requirements in that territory. This approach provides an operational hedge against disruptions in local operations caused by currency fluctuations. However, changes in exchange rates can affect Sun Life Financial’s net income and surplus when results in local currencies are translated into Canadian dollars. Strengthening of the Canadian dollar against the currencies of the countries in which it operates could have an adverse effect on Sun Life Financial’s reported net income.
Competition
The businesses in which Sun Life Financial engages are highly competitive, with several factors affecting Sun Life Financial’s ability to sell its products, including price and yields offered, financial strength ratings, range of product lines and product quality, brand strength and name recognition, investment management performance, historical dividend levels and the ability to provide value-added services to distributors and customers. Sun Life Financial’s products compete not only with those offered by other insurance companies, but with those offered by mutual fund companies, banks, financial planners and other providers. Sun Life Financial has many large and well-capitalized competitors with access to significant resources. Among other things, the competition in these industries throughout the world has resulted in a trend towards the global consolidation of the financial services industry including, in particular, the insurance, banking and investment management sectors. To the extent that consolidation continues, Sun Life Financial will increasingly face more competition from large, well-capitalized financial services companies in each jurisdiction in which it operates. There can be no assurance that this increasing level of competition will not adversely affect Sun Life Financial’s businesses in certain countries.
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Sun Life Financial reports its results based on Canadian GAAP. Some of the Company’s competitors report on different accounting bases, such as U.S. GAAP. Because of differences in the emergence of earnings between different accounting bases, the Company may be at a disadvantage compared to some of its competitors in certain of its businesses.
In Canada, the federal government is reviewing its policies concerning bank and insurance affiliations and the distribution of insurance products through bank branches and may elect to remove the current restrictions o n such affiliations or distribution. The ability of banks to affiliate with insurance companies or, in Canada, to distribute insurance products through their branches, may materially adversely affect all of Sun Life Financial’s products by increasing the number and financial strength of potential competitors.
Financial strength and credit ratings
Financial strength ratings represent the opinions of rating agencies regarding the financial ability of an insurance company to meet its obligations under insurance policies. The financial strength ratings of SLF Inc.’s insurance company subsidiaries are a key competitive factor in marketing products and in attracting and retaining agents and distributors. Should the financial strength rating of one or more of those subsidiaries decline, Sun Life Financial’s competitive position could be negatively impacted.
In addition, rating agencies also publish credit ratings for certain of the Sun Life Financial companies, which have an impact on the interest rates paid by those companies on borrowed funds. A downgrade in credit ratings could increase Sun Life Financial’s cost of borrowing and have an adverse effect on its financial condition and results of operations.
Merger & acquisition transactions
Sun Life Financial regularly explores opportunities to acquire other financial services companies or parts of their businesses. The success of these acquisitions depends on a number of factors and there is no assurance that Sun Life Financial will achieve its financial or strategic objectives or anticipated cost savings following an acquisition. In particular, Sun Life Financial could experience client losses, surrenders or withdrawals materially different from those it anticipated, as well as difficulties in integrating and realizing the projected results of acquisitions and restructurings and managing the litigation and regulatory matters to which acquired entities are party.
Ability to attract employees
Competition for qualified employees, including executives, is intense both in the financial services industry and non-financial industries. If Sun Life Financial is unable to retain and attract qualified employees and executives, the results of its operations and financial condition, including its competitive position, could be adversely affected.
Investment performance
The performance of Sun Life Financial’s investment portfolios depends in part upon the level of and changes in interest rates, equity prices, real estate values, the performance of the economy in general, the performance of the specific obligors included in these portfolios and other factors that are beyond Sun Life Financial’s control. Changes in these factors can affect Sun Life Financial’s net investment income in any period, and such changes could be substantial.
In addition, poor investment performance by Sun Life Financial’s wealth management operations could adversely affect net sales or reduce the level of assets under management, potentially negatively impacting Sun Life Financial’s revenues and income. Investment performance, along with achieving and maintaining superior distribution and client services, is critical to the success of Sun Life Financial’s wealth management businesses.
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Legal and regulatory proceedings
Like other financial institutions, over the past several years, certain of SLF Inc.’s U.S. subsidiaries have received inquiries including requests for information and subpoenas from, and have entered into regulatory settlements with various U.S. regulators. Certain of SLF Inc.’s U.S. subsidiaries are continuing to cooperate with U.S. regulatory authorities in their ongoing investigations, which may result in regulatory proceedings or settlements and civil actions.
As previously disclosed, SLF Inc. and MFS have been named as defendants in multiple lawsuits in U.S. federal and state courts (commenced as class actions or individual actions, as ERISA actions, or as derivative actions), relating to the matters that led to the settlements between MFS and U.S. regulators in 2004. These lawsuits generally allege that some or all of the defendants (i) permitted or acquiesced in market timing and/or late trading in some of the MFS funds and, inadequately disclosed MFS’s internal policies concerning market timing and such matters, (ii) received excessive compensation as fiduciaries to the MFS funds, or (iii) permitted or acquiesced in the improper use of fund assets by MFS to support the distribution of MFS funds shares and inadequately disclosed MFS’s use of fund assets in this manner. MFS continues to defend these actions. While it is not possible to predict the resolution of these actions, the Company believes, based on the information currently available to it, that the ultimate resolution of these actions will not be material to its consolidated financial position or results of operations. Additional information concerning these actions is provided in Note 20 to SLF Inc.’s 2006 Consolidated Financial Statements.
In addition, Sun Life Financial Inc. and its subsidiaries are engaged in other legal actions, which are not expected to have a material adverse effect, individually or in the aggregate, on the consolidated financial position or results of operations of Sun Life Financial Inc.
Additional information
Additional information including Directors’ and officers’ remuneration and indebtedness, principal holders of SLF Inc.’s securities, securities authorized for issuance under equity compensation plans and interests of informed persons in material transactions, if applicable, is contained in SLF Inc.’s information circular for its most recent annual meeting of security holders that involved the election of Directors. Additional financial information is provided in SLF Inc.’s MD&A and Consolidated Financial Statements for its most recently completed financial year.
When SLF Inc. is in the course of a distribution pursuant to a short form prospectus or a preliminary short form prospectus has been filed in respect of a distribution of its securities, SLF Inc. will provide to any person one copy of each of the following documents (Disclosure Documents) upon request:
(i) | this AIF and any document or the pertinent pages of any document incorporated by reference herein, | ||
(ii) | the comparative consolidated financial statements of SLF Inc. for the most recently completed financial year with the accompanying auditor’s report, | ||
(iii) | any interim consolidated financial statements of SLF Inc. subsequent to the financial statements for its most recently completed financial year, | ||
(iv) | SLF Inc.’s most recent proxy circular, and | ||
(v) | any other documents incorporated by reference into a preliminary short form prospectus or a short form prospectus. When SLF Inc. has not filed a preliminary short form prospectus or is not in the course of a distribution, it shall provide copies of any of the foregoing Disclosure Documents subject to its right to require persons who are not security holders to pay a reasonable charge. |
Requests for such copies may be sent to the Corporate Secretary of SLF Inc. at 150 King Street West, 6th Floor, Toronto, Ontario, Canada M5H 1J9. The Disclosure Documents and other additional information related to SLF Inc. are accessible at www.sunlife.com.
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APPENDIX A - Charter of the Audit and Conduct Review Committee
Purpose
The Audit and Conduct Review Committee is a standing committee of the Board of Directors whose primary functions are to assist the Board of Directors with its oversight role with respect to:
1. | The integrity of financial statements and information provided to shareholders and others. | |
2. | The Corporation’s compliance with financial regulatory requirements. | |
3. | The adequacy and effectiveness of the internal control environment implemented and maintained by management. | |
4. | The qualifications, independence and performance of the External Auditor who is accountable to the Audit and Conduct Review Committee, the Board of Directors and the shareholders. |
Membership
The Audit and Conduct Review Committee is comprised of not less than three Directors, including a Committee Chair, appointed by the Board of Directors on an annual basis following each annual meeting.
Each member of the Committee shall be independent as defined in the Director Independence Policy and financially literate. In the Board of Director’s judgment, a member of the Audit and Conduct Committee is financially literate if, after seeking and receiving any explanations or information from senior financial management of the Corporation or the auditors of the Corporation that the member requires, the member is able to read and understand the consolidated financial statements of the Corporation to the extent sufficient to be able to intelligently ask, and to evaluate the answers to, probing questions about the material aspects of those financial statements.
Any member of the Committee may be removed or replaced at any time by the Board of Directors and the Board of Directors shall fill vacancies on the Committee.
Structure and Operations
A meeting of the Committee may be called at any time by the Non-Executive Chairman of the Board, by the Committee Chair or by two members of the Committee. The Committee meets as frequently as necessary, but not less than four times a year. A quorum at any meeting of the Committee shall be three members and meetings must be constituted so that resident Canadian requirements of theInsurance Companies Act (Canada)are met.
The External Auditor reports to the Committee, receives Notice of, and may attend all Committee meetings. The Committee holds a private session at each regularly scheduled meeting, with the External Auditor without management present and with the Chief Auditor without management or the External Auditor present. The Committee holds a private session with the Chief Actuary periodically. The Committee holds a private session at each regularly scheduled meeting of the Committee members only. The Committee, in consultation with the Non-Executive Chairman of the Board, may engage any special advisors it deems necessary to provide independent advice, at the expense of the Corporation.
On an annual basis, the Committee will review this Charter and the Forward Agenda for the Committee and, where necessary, recommend changes to the Board of Directors for approval. This Charter will be posted on the Corporation’s website and the Committee will prepare a report for inclusion in the annual meeting proxy material. The Committee shall undertake and review with the Board of Directors an annual performance evaluation of the Committee.
Duties and Responsibilities of the Audit and Conduct Review Committee
1. | Reviews with management and the External Auditors the interim unaudited consolidated financial statements and Management’s Discussion and Analysis, including a discussion with the External Auditors of those matters required to be discussed under generally accepted auditing standards applicable to the Corporation. | |
2. | Reviews the Corporation’s earnings press releases. | |
3. | Reviews with management and the External Auditors following completion of th e annual audit: |
a. | the annual audited consolidated financial statements; | ||
b. | the External Auditor’s audit of the annual consolidated financial statements and their report; | ||
c. | Management’s Discussion and Analysis; | ||
d. | any significant changes that were required in the external audit plan; |
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(e) | any significant issues raised with management during the course of the audit, including any restrictions on the scope of activities or access to information; and | ||
(f) | those matters related to the conduct of the audit that are required to be discussed under generally accepted auditing standards applicable to the Corporation. |
4. | Receives a report from management of their quarterly and annual review of financial statements, Management’s Discussion and Analysis and earnings press releases and discusses with the Chief Executive Officer and the Chief Financial Officer the certifications relating to financial disclosure and controls that those officers are required by law to file with securities regulatory authorities. | |
5. | Assures itself that the External Auditor is satisfied that the accounting estimates and judgements made by management, and management’s selection of accounting principles, reflect an appropriate application of generally accepted accounting principles. | |
6. | Discusses with the Chief Actuary the parts of the annual audited consolidated financial statements prepared by that officer. | |
7. | Reviews with management and the External Auditor the Corporation’s principal accounting practices and policies. | |
8. | Reviews the independence of the Chief Auditor and the External Auditor, including the requirements relating to such independence of the laws governing the Corporation and the applicable rules of stock exchanges on which the Corporation’s securities are listed. At least annually, the Committee receives from and reviews with the External Auditor their written statement delineating relationships with the Corporation and, if necessary, recommends that the Board take appropriate action to satisfy itself of the External Auditors’ independence and accountability to the Committee and the Board. | |
9. | Reviews and approves the Policy Restricting the Use of External Auditors which outlines the services for which the External Auditor can be engaged and the policy regarding the employment of former employees of the External Auditor. | |
10. | Appraises the performance of the External Auditor and recommends to the Board th e appointment or, if so determined by the Committee, the replacement of the External Auditor, subject to the approval of the shareholders. | |
11. | Determines, reviews and approves the services to be performed by the External Auditor and the fees to be paid to the External Auditors for audit, audit-related and other services permitted by law and in accordance with the policy issued by the Board restricting the use of the External Auditor. | |
12. | Reviews with the External Auditor and management the overall scope of the annual audit plan, quality control procedures and the resources that the External Auditor will devote to the audit. | |
13. | Reviews with the External Auditor any regulatory investigations that pertain to the External Auditor. | |
14. | Requires management to implement and maintain appropriate internal control procedures, and reviews, evaluates and approves the procedures. | |
15. | Reviews management’s reports on the effectiveness of Sun Life Financial’s disclosure controls and procedures and its internal control over financial reporting | |
16. | Reviews the attestation by the External Auditor on management’s assessment of th e effectiveness of Sun Life Financial’s internal control over financial reporting. | |
17. | Reviews with management and the Chief Auditor: |
(a) | the overall scope of the annual internal audit plan, including its coordination with the External Auditors’ audit plan, and the adequacy of the resources available to the Chief Auditor; and | ||
(b) | the effectiveness of the internal control procedures, including a report thereon received from the Chief Auditor that includes disclosure of any significant changes that were required in the internal audit plan and any significant issues raised with management during the course of the internal audit, including any restrictions on the scope of activities or access to information. |
18. | Reviews investments and transactions that could adversely affect the well-being of the Corporation as the External Auditors or management may bring to the attention of the Committee, and meets with the External Auditor to discuss any such investments and transactions. | |
19. | Reviews, and discusses with the External Auditor and the Chief Actuary suchre ports and regulatory returns of the Corporation as may be specified by law. | |
20. | Reviews matters within its mandate that are addressed in the regular examination and similar reports received from regulatory agencies. | |
21. | Discusses the qualifications for and determines whether a member of the Committee is a financial expert and in conjunction with the Governance Committee ensures the ongoing financial literacy of Committee members. | |
22. | Approves procedures established to handle complaints, and anonymous employee submissions, with respect to matters and concerns regarding accounting, internal control and auditing. | |
23. | Requires management to establish procedures for complying with the related party rules contained in the Insurance Companies Act (Canada) and reviews their effectiveness. | |
24. | Reviews the practices of the Corporation to ensure that any related party transaction that may have a material effect on the stability or solvency of the Corporation is identified. | |
25. | Reports to the Superintendent of Financial Institutions on the procedures for complying with the related party rules. | |
26. | Performs such other duties and exercises such other powers as may, from time to time, be assigned to or vested in the Committee by the Board, and such other functions as may be required of an audit committee by law, regulations or applicable stock exchange rules. |
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APPENDIX B - Policy restricting the use of external auditors
Introduction and purpose
This policy governs all proposals by the Corporation or any of its subsidiaries to engage, as a service provider, the Corporation’s external auditor or any of its affiliates, related businesses or associated persons as defined in the Sarbanes-Oxley Act of 2002 (S-O Act) (collectively referred to as the External Auditor).
Scope and application
This Policy applies to SLF Canada, SLF U.S., SLF Asia, M.F.S., SLF U.K, Enterprise Services and the Corporate Office, including each of the operating subsidiaries, Business Units or other divisions within those Business Groups or U nits. This Policy does not currently apply to the Corporation’s joint ventures.
Policy
The External Auditor will normally be engaged to provide audit and audit-related services, including advisory services related to the External Auditor’s audit and audit-related work such as advice pertaining to internal audit, tax, actuarial valuation, risk management, and regulatory and compliance matters, subject to the prohibitions contain ed in the S-O Act a nd in any other applicable laws, regulations or rules. Prohibitions are set out in Appendix A.
Each engagement of the External Auditor to provide services will require the approval in advance of the Audit and Conduct Review Committees of Sun Life Financial Inc. and/or Sun Life Assurance Company of Canada, as applicable, and the audit committee of any affected subsidiary that is itself directly subject to the S-O Act. The Audi t and Conduct Review Committee may establish procedures regarding the approval process, which will be co-ordinated by the Corporation’ s Senior Vice-President, Finance.
The Corporation and its subsidiaries will not employ or appoint as chief executive officer, president, chief financial officer, chief operating officer, general counsel, chief accounting officer, controller, director of internal audit, director of financial reporting, treasurer, appointed actuary or any equivalent position within the Corporation or subsidiary, any person who was, at any time during the previous two years, employed by the External Auditor and who provided any services to the Corporation or any subsidiary.
Personnel of the Corporation and its subsidiaries employed in the key financial reporting oversight roles described in Appendix B shall not use the External Auditor to prepare either their personal tax returns or those of their dependents.
The Corporation’s Senior Vice-President, Finance is responsible for the application and interpretation of this policy, and should be consulted in any case where there is uncertainty regarding whether a proposed service is, or is not, an audit or audit-related service. He/she will revise the Appendices as required, from time to time, to reflect changes in applicable laws, regulations, rules or management roles.
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Appendix A - - Prohibition on Services
The External Auditor is prohibited from providing the following services:
a) | bookkeeping or other services related to the accounting records or financial statements; | |
b) | financial information systems design and implementation; | |
c) | appraisal or valuation services, fairness opinions, or contribution in-kind report s; | |
d) | actuarial services; | |
e) | internal audit outsourcing services; | |
f) | management functions or human resources; | |
g) | broker or dealer, investment adviser, or investment banking services; | |
h) | legal services and expert services unrelated to the audit; | |
i) | any service for which no fee is payable unless a specific result is obtained (contingent fees or commissions); | |
j) | any non-audit tax services that recommend the Corporation engage in confidential transactions or aggressive tax position transactions, as defined by the U.S. Public Company Accountability Oversight Board ; and | |
k) | any other service that governing regulators or professional bodies determine to be impermissible. |
Appendix B - - Key Financial Reporting Oversight Roles
The incumbents in the following financial reporting oversight roles are not permitted to use the Corporation’s external auditors to prepare either their personal tax returns or those of their dependents:
§ | Chief Executive Officer | |
§ | Chief Operating Officer | |
§ | President | |
§ | Executive Vice-President and Chief Financial Officer | |
§ | Executive Vice-President and Chief Legal Officer | |
§ | Senior Vice-President, Finance | |
§ | Senior Vice-President and Chief Actuary | |
§ | Vice-President and Chief Accountant | |
§ | Vice-President and Chief Auditor | |
§ | Vice-President, Corporate Capital | |
§ | Vice-President, Tax | |
§ | Assistant Vice-President, Financial Reporting Standards |
The comparable positions in subsidiaries are similarly prohibited from using the Corporation’s external auditors for either their
own or their dependents’ personal tax returns.
own or their dependents’ personal tax returns.
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