Sun Life 2010 Annual Report Download - page 71

Strategic Risk
Risk Description
Strategic risk is the risk to future earnings and capital arising from structural or other large changes in the competitive, economic, legal
or political environment, changing customer behaviour, or a failure to achieve our strategic or long-term business plans, either through
incorrect choices or improper implementation of those choices.
Strategic Risk Management Governance and Control
The strategic risks for each of our Business Groups and for the Company as a whole are developed as part of the annual risk
identification process through which we develop and maintain a register of enterprise key risks. These risks are then included as one of
the key inputs into the development of the strategic plans as part of our integrated planning process. Our business plans, which include
the business initiatives to achieve our plan objectives, are then developed from these strategic plans.
Strategic risk is managed through our formal strategic and business planning process. Our strategic plans are reviewed and discussed
by our Executive Team and then the key themes, issues and risks emerging are discussed by the Board of Directors. Our business
plans are subject to approval by the Board of Directors, which also receive regular reviews of implementation progress against key
business plan objectives. Appropriate Board committees receive regular updates of the enterprise key risks.
Merger and acquisition transactions are governed by a Board-approved risk management policy and significant transactions require the
approval of the Board of Directors.
Capital and Liquidity Management
Our asset-liability management practices allow us to maintain a strong financial position by ensuring that sufficient liquid assets are
available to cover our potential funding requirements. We invest in various types of assets with a view to matching them with its
liabilities of various durations.
The regulatory environments in which we operate are expected to evolve as governments and regulators work to develop the
appropriate level of financial regulation required to ensure that capital, liquidity and risk management practices are sufficient to
withstand severe economic downturns. In Canada, OSFI is considering a number of changes to the insurance company capital rules,
including new guidelines that would establish stand-alone capital adequacy requirements for operating life insurance companies, such
as Sun Life Assurance, and that would update OSFI’s regulatory guidance for non-operating insurance companies acting as holding
companies, such as SLF Inc. OSFI is also reviewing the use of internally modelled capital requirements for variable annuity and
segregated fund guarantees. In addition, it is expected that OSFI may align some insurance regulations with those that emerge for
banks under the proposed new Basel Capital Accord. The outcome of these initiatives is uncertain and may impact our position relative
to that of other Canadian and international financial institutions with which we compete for business and capital.
Principal Sources of Funds
Our primary source of funds is cash provided by operating activities, including premiums, investment management fees and net
investment income. These funds are used primarily to pay policy benefits, dividends to policyholders, claims, commissions, operating
expenses, interest expenses and shareholder dividends. Cash flows generated from operating activities are generally invested to
support future payment requirements, including the payment of dividends to shareholders. We also raise funds from time to time,
through borrowing and issuing of securities, to finance growth, acquisitions or other needs.
As at December 31, 2010, we maintained cash, cash equivalents and short-term securities totalling $8.5 billion, of which 2% were held
in relation to certain derivative strategies and bond repurchase agreements. In addition to providing for near-term funding
commitments, cash, cash equivalents and short-term securities include amounts that support short-term liabilities.
Net cash, cash equivalents and short-term securities decreased by $3.4 billion in 2010. Cash flows generated by operating activities
decreased by $684 million in 2010 from 2009 mainly from lower premiums of $2.0 billion, partly offset by increased fee income, lower
policyholder payments and a lower level of current income taxes. Financing activities used $591 million of cash in 2010 and provided
$1.1 billion in 2009. The decrease was mainly due to higher levels of debt and preferred shares issued during 2009 and redemption of
subordinated debt for $300 million in 2010, partially offset by a lower level of common share dividends paid in cash due to a change in
timing of dividend payouts and a higher participation rate in the dividend reinvestment plan. Investing activities decreased cash by
$4.4 billion during 2010 compared to $3.5 billion in 2009. The increased investing activities arose mainly from higher levels of
investment in long-term securities. The strengthening of the Canadian dollar against the U.S. dollar decreased cash balances by
$85 million in 2010 compared to a decrease of $802 million in 2009.
($ millions) 2010 2009 2008
Net cash provided by operating activities 2,864 3,548 1,737
Net cash provided by (used in) financing activities (591) 1,052 (499)
Net cash provided by (used in) investing activities (4,444) (3,451) 35
Changes due to fluctuations in exchange rates (85) (802) 642
Increase (decrease) in cash and cash equivalents (2,256) 347 1,915
Cash and cash equivalents, beginning of year 5,865 5,518 3,603
Cash and cash equivalents, end of year 3,609 5,865 5,518
Short-term securities, end of year 4,878 6,003 3,361
Cash, cash equivalents and short-term securities, end of year 8,487 11,868 8,879
Management’s Discussion and Analysis Sun Life Financial Inc. Annual Report 2010 67