Sun Life 2010 Annual Report Download - page 62

In addition to allowances reflected in the carrying value of mortgages and corporate loans, we have provided $2.9 billion for possible
future asset defaults over the lifetime of our actuarial liabilities as at December 31, 2010. To the extent an asset is written off or
disposed of, any amounts set aside for possible future asset defaults in actuarial liabilities in respect of that asset will be released into
income. The $2.9 billion for possible future asset defaults excludes the portion of the provision that can be passed through to
participating policyholders and provisions for possible reductions in the value of equity and real estate assets supporting actuarial
liabilities.
AFS bonds, stocks and other invested assets are generally identified as temporarily impaired if their amortized cost is greater than their
fair value, resulting in an unrealized loss. Unrealized losses may be due to interest rate fluctuations or depressed fair values in sectors
which have experienced unusually strong negative market reactions. The fair value of temporarily impaired financial assets represented
$3.1 billion and the associated unrealized losses amounted to $0.2 billion as at December 31, 2010. Our gross unrealized losses as at
December 31, 2010, for AFS and HFT bonds were $0.1 billion and $1.2 billion, respectively, compared with $0.4 billion and $2.4 billion,
respectively, as at December 31, 2009. The decrease in gross unrealized losses was largely due to decreases in interest rates and a
narrowing of credit spreads, which had a positive impact on the fair value of bonds.
Additional details concerning impaired assets can be found in Note 6 to our 2010 Consolidated Financial Statements.
Risk Management
Risk Management Framework
We have a comprehensive framework for the management of enterprise risk. This framework highlights five major categories of risk
(credit risk, market risk, insurance risk, operational risk and strategic risk) and sets out key processes for their management in the
areas of risk appetite articulation, risk identification, measurement and assessment, risk response development, monitoring and control,
and risk reporting and communication.
The framework recognizes the important role that risk culture plays in the effective management of enterprise risk. Our risk culture is
supported by a strong “tone from the top”, which is reinforced and emanates from the Board of Directors and cascades through the
Board Committees, our executive officers, line management and staff. A key premise of our enterprise risk management culture is that
all employees and distributors have an important role to play in managing enterprise risks, and collectively form part of our extended
risk management team.
Our enterprise risk management framework is rooted in a corporate risk philosophy that reflects the understanding that we are in the
business of taking risk for appropriate return. This is core to our corporate vision, mission and customer value proposition. Effective
risk-taking and risk management are critical to the overall profitability, competitive market positioning and long-term financial viability of
the Company. We seek to instill a disciplined approach to optimizing the inherent tradeoffs between risk and return in all our risk
management practices.
Risk Philosophy and Principles
Our risk philosophy reflects a number of core principles that embody our overall risk appetite and values. These principles are outlined
below:
Strategic Alignment
Our risk appetite is aligned with the Company’s overall vision, mission and business goals. This alignment is obtained by the
consideration of which risks are deemed core, non-core or collateral risks.
Core risks are those risks that we are willing to accept in order to achieve return expectations and successfully achieve our stated
mission to “help customers achieve lifetime financial security”, and our business objectives. These core risks include equity, interest
rate, mortality, morbidity, asset-liability management and credit risks. We have established a range of explicit risk appetite limits and
operational control points for these core risks.
Non-core risks are those associated with activities outside of our risk appetite and approved business strategies and are therefore
generally avoided, regardless of expected returns.
Collateral risks are those that are incurred as a by-product or are collateral to the pursuit of the risk and return optimization of core
risks. Operational risks often fall into this category. We endeavour to mitigate collateral risks to the extent that the benefit of risk
reduction is commensurate with the cost of mitigation.
Stakeholder Interests
Our risk framework considers the interests of a large number of key stakeholder groups, including policyholders, shareholders, debt-
holders, employees, regulators, rating agencies and other capital market participants. Our risk framework endeavours to appropriately
balance the needs, expectations, risk and reward perspectives and investment horizons of these stakeholders. In particular, our risk
appetite framework is established to support the pursuit of shareholder value while ensuring that our ability to pay claims and fulfill
long-term policyholder commitments is not compromised. Our risk management approach is designed to support long-term credit and
financial strength ratings, strong capital levels, ongoing favourable access to capital markets and the continuing enhancement of our
overall franchise value and brand.
58 Sun Life Financial Inc. Annual Report 2010 Management’s Discussion and Analysis