Sun Life 2010 Annual Report Download - page 67

The following table provides information with respect to the guarantees provided in the Company’s variable annuity and segregated
fund businesses.
Variable Annuity and Segregated Fund Risk Exposures
($ millions) December 31, 2010
Fund value Amount at risk(1) Value of guarantees(2) Actuarial liabilities(3)
SLF Canada 12,494 300 11,347 116
SLF U.S. 23,923 2,064 25,697 221
Run-off reinsurance(4) 3,070 642 2,614 403
Total 39,487 3,006 39,658 740
December 31, 2009
Fund value Amount at risk(1) Value of guarantees(2) Actuarial liabilities(3)
SLF Canada 10,796 539 10,380 215
SLF U.S. 21,069 3,006 23,944 675
Run-off reinsurance(4) 3,049 811 2,930 452
Total 34,915 4,356 37,254 1,342
(1) The “amount at risk” represents the excess of the value of the guarantees over fund values on all policies where the value of the guarantees exceeds the fund value. The
amount at risk is not currently payable as the guarantees are only payable upon death, maturity, withdrawal or annuitization if fund values remain below guaranteed values.
(2) For guaranteed lifetime withdrawal benefits, the “value of guarantees” is calculated as the present value of the maximum future withdrawals assuming market conditions
remain unchanged from current levels. For all other benefits, the value of guarantees is determined assuming 100% of the claims are made at the valuation date.
(3) The “actuarial liabilities” represent management’s provision for future costs associated with these guarantees in accordance with accounting guidelines and include a provision
for adverse deviation in accordance with valuation standards.
(4) The run-off reinsurance business includes risks assumed through reinsurance of variable annuity products issued by various North American insurance companies between
1997 and 2001. This line of business has been discontinued and is part of a closed block of reinsurance which is included in our Corporate business segment.
The movement of the items in the table above from December 31, 2009 to December 31, 2010 was primarily as a result of:
(i) fund value increased due to favourable equity market movements and new business written in 2010. This was partially offset
by the strengthening of the Canadian dollar against foreign currencies relative to prior period end exchange rates
(ii) the amount at risk decreased due to favourable equity market movements and the strengthening of the Canadian dollar
against foreign currencies relative to prior period end exchange rates
(iii) the value of guarantees has increased as a result of net sales during the year and the associated increase in fund values,
partially offset by the impact of the strengthening of the Canadian dollar relative to the prior period
(iv) actuarial liabilities decreased due to favourable equity market movements and the strengthening of the Canadian dollar
against foreign currencies relative to prior period end exchange rates
The ultimate cost of providing for the guarantees in respect of the Company’s variable annuity and segregated fund contracts is
uncertain and will depend upon a number of factors including general capital market conditions, policyholder behaviour and mortality
experience, each of which may result in negative impacts on net income and capital.
Variable Annuity and Segregated Fund Equity Hedging
We have implemented hedging programs, involving the use of derivative instruments, to mitigate a portion of the equity market-related
volatility in the cost of providing for these guarantees, thereby reducing our exposure to this particular class of equity market risk. As at
December 31, 2010, over 90% of our total variable annuity and segregated fund contracts, as measured by associated fund values,
were included in an equity hedging program. This hedging program reduces our net income sensitivity to equity market declines from
variable annuity and segregated fund contracts by approximately 55% to 65%. While a large percentage of contracts are included in
the equity hedging program, not all of our equity exposure related to these contracts is hedged. For those variable annuity and
segregated fund contracts included in the equity hedging program, we generally hedge the fair value of expected future net claims
costs and a portion of the policy fees as we are primarily focused on hedging the expected economic costs associated with providing
segregated fund and variable annuity guarantees. The following table illustrates the impact of our hedging program related to our
sensitivity to a 10% and 25% decrease in equity markets for variable annuity and segregated fund contracts.
Impact of Variable Annuity and Segregated Fund Equity Hedging
December 31, 2010
Net income(1) 10% decrease(2) 25% decrease(2)
Before hedging (350) – (400) (1,075) – (1,175)
Equity hedging impact 225 – 275 600 – 700
Net of equity hedging (100) – (150) (425) – (525)
(1) Since the fair value of benefits being hedged will generally differ from the financial statement value (due to different valuation methods and the inclusion of valuation margins in
respect of financial statement values), this approach will result in residual volatility to equity market shocks in reported income and capital. The general availability and cost of
these hedging instruments may be adversely impacted by a number of factors, including volatile and declining equity and interest rate market conditions.
(2) Represents the respective change across all equity markets as at December 31, 2010. Assumes that actual equity exposures consistently and precisely track the broader
equity markets. Since in actual practice equity-related exposures generally differ from broad market indices (due to the impact of active management, basis risk and other
factors), realized sensitivities may differ significantly from those illustrated above.
Our hedging strategy is applied both at the line of business/product level and enterprise level using a combination of static (i.e.,
purchasing of longer dated equity put options) and dynamic (i.e. frequent re-balancing of short-dated equity derivative contracts)
hedging techniques. We actively monitor our overall market exposure and may implement tactical hedge overlay strategies (primarily in
the form of equity futures contracts) in order to align expected earnings sensitivities with enterprise risk management objectives.
Management’s Discussion and Analysis Sun Life Financial Inc. Annual Report 2010 63