Sun Life 2010 Annual Report Download - page 27

The operating ROE objective that was established in 2010 was based on the assumptions described below relating to equity market
performance, interest rates and credit markets and the Company’s economic and business outlook at the time. The following table
summarizes the differences between the assumptions used in establishing our operating ROE objective and the actual experience in
2010.
Factor Assumptions 2010 Experience
Equity Markets A steady rise in the annual level of equity market
indices, primarily the S&P 500, by approximately
7% – 8%
The S&P 500 increased by 13%, while the S&P/TSX
Composite Index increased by 14%
Interest Rates Near-term stability in North American interest rates
across the yield curve and over the longer term;
interest rates that are generally higher than statutory
or contractual minimums required on certain
guaranteed products offered by the Company
Interest rates were volatile in 2010 with interest rates
on government securities that were generally lower
than the prior year
Credit A credit environment within historical norms, which
reflects the Company’s best estimates on credit
Credit conditions improved in 2010 relative to the
prior year, however certain asset classes such as
commercial mortgages remained under pressure
Currency Stability in exchange rates between the Canadian
dollar and foreign currencies, primarily the U.S. dollar
and the British pound sterling
The Canadian dollar appreciated by $0.05 against
both the U.S. dollar and British pound in 2010
During 2010, we maintained a capital level commensurate with our risk profile, while maintaining a capital efficient structure to optimize
shareholder returns. Sun Life Assurance, our principal operating subsidiary in Canada, ended the year with an MCCSR ratio of 228%,
well in excess of OSFI’s capital target for life insurance companies.
Our operating ROE objective for 2011 is unchanged from last year. This objective reflects the impact of a low interest rate environment,
higher risk management costs and uncertainty in capital markets, expected higher levels of capital required by regulators, as well as
the adoption of IFRS.
• to achieve an operating ROE in the 12% – 14% range over a three-to-five year period, while maintaining a strong capital position
and effective capital deployment
Our three-to-five year operating ROE objective remains based on the assumptions with respect to equity markets, interest rates, credit
and currency described in the table above. It is based on business mix and best estimate actuarial assumptions as at December 31,
2010. In addition, this objective reflects the adoption of IFRS (including a reduction in shareholders equity of $2.2 billion) and revised
criteria for variable annuity and segregated fund capital requirements on new business, both of which became effective January 1,
2011. Our operating ROE objective is significantly dependent on business written in the past and reflects economic conditions, capital
requirements, pricing and other assumptions in effect at that time.
We expect to maintain the current level of dividends on SLF Inc.’s common shares, which are subject to the approval of the Board of
Directors each quarter, provided that economic conditions and the Company’s results allow it to do so while maintaining a strong
capital position. The information concerning future dividends is forward-looking information and is based on the assumptions set out
above and is subject to the risk factors described under Forward-looking Information. Additional information is provided under the
heading Shareholders Dividends.
Accounting and Control Matters
Critical Accounting Policies and Estimates
Our significant accounting and actuarial policies are described in Notes 1, 2, 5 and 9 of our 2010 Consolidated Financial Statements.
Management must make judgments involving assumptions and estimates, some of which may relate to matters that are inherently
uncertain, under these policies. The estimates described below are considered particularly significant to understanding our financial
performance. As part of our financial control and reporting, judgments involving assumptions and estimates are reviewed by the
independent auditor and by other independent advisors on a periodic basis. Accounting policies requiring estimates are applied
consistently in the determination of our financial results. Unless indicated otherwise, the discussion of Critical Accounting Policies and
Estimates is based on Canadian GAAP. Effective January 1, 2011, we adopted IFRS. Additional information regarding IFRS can be
found in this section of the document under the heading International Financial Reporting Standards.
Benefits to Policyholders
Our benefit payment obligations are estimated over the life of our annuity and insurance products based on internal valuation models
and are recorded in our financial statements, primarily in the form of actuarial liabilities. The determination of these obligations is
fundamental to our financial results and requires management to make assumptions about equity market performance, interest rates,
asset default, mortality and morbidity rates, policy terminations, expenses and inflation, and other factors over the life of our products.
We use best estimate assumptions for expected future experience. Some assumptions relate to events that are anticipated to occur
many years in the future and are likely to require subsequent revision. Additional provisions are included in our actuarial liabilities to
provide for possible adverse deviations from the best estimates. If an assumption is more susceptible to volatility or if there is
uncertainty about an underlying best estimate assumption, a correspondingly larger provision is included in our actuarial liabilities.
Management’s Discussion and Analysis Sun Life Financial Inc. Annual Report 2010 23