Sun Life 2010 Annual Report Download - page 76

The following table shows the components of Sun Life Assurance’s MCCSR ratio for the last three years.
Sun Life Assurance MCCSR
($ millions) 2010 2009 2008
Capital available
Retained earnings and contributed surplus 10,079 9,733 10,117
Other comprehensive income (1,752) (1,510) (841)
Common and preferred shares 2,996 2,596 1,996
Innovative instruments and subordinated debt 2,794 3,094 2,600
Other 247 269 219
Less:
Goodwill and intangibles in excess of limit 1,777 1,859 1,893
Non-life investments and other 1,696 1,660 1,585
Total capital available 10,891 10,663 10,613
Required capital
Asset default and market risks 2,967 2,699 2,620
Insurance risks 1,046 1,397 1,279
Interest rate risks 765 735 683
Total capital required 4,778 4,831 4,582
MCCSR ratio 228% 221% 232%
Sun Life Assurance’s MCCSR ratio increased from 221% as at December 31, 2009, to 228% as at December 31, 2010. The MCCSR
ratio was favourably impacted by 14 points by the sale of the Company’s life reinsurance business and by 12 points from an external
reinsurance agreement in SLF Canada’s Group Benefits operation. This was partially offset by a 6 point reduction from the redemption
of $300 million 6.65% Debentures, Series 3, along with unfavourable impacts from 2010 MCCSR guideline changes, lower interest
rates and business growth. Available capital remained relatively flat as increased earnings and the issuance of $280 million of
preferred shares were substantively offset by the unfavourable impact of the strengthening of the Canadian dollar relative to foreign
currencies, the redemption of $300 million subordinated debt and dividends paid to SLF Inc. Additional details concerning the
calculation of available capital and MCCSR are included in SLF Inc.’s 2010 AIF under the heading Regulatory Matters.
Sun Life Financial adopted International Financial Reporting Standards as of January 1, 2011. The adoption of IFRS will impact the
level of available regulatory capital. The net impact to retained earnings from conversion to IFRS is recognized in available capital.
OSFI’s Advisory on Conversion to International Financial Reporting Standards by Federally Regulated Entities allows companies to
elect to phase-in the impact on adjusted net Tier 1 capital on a straight-line basis over eight quarters ending December 31, 2012. The
impact of IFRS conversion on Sun Life Assurance’s MCCSR ratio, in the initial reporting period, is not expected to be material as we
have elected the phase-in provision.
In December 2010, OSFI issued revised guidelines for segregated fund capital requirements for business written on or after January 1,
2011. The existing capital requirements will continue to apply to business written prior to January 1, 2011, until a new approach is
developed. OSFI expects the review of the new approach to take several years, likely into 2013. It is premature to draw conclusions
about the impact this process will have on capital requirements for Canadian life insurance companies.
Significant foreign life subsidiaries that are not subject to the MCCSR rules are required to comply with the capital adequacy
requirements imposed in the foreign jurisdictions in which they operate. Our principal operating life insurance subsidiary in the United
States, Sun Life (U.S.), is subject to the risk-based capital (“RBC”) rules issued by the National Association of Insurance
Commissioners, which measures the ratio of the company’s total adjusted capital to the minimum capital required by the RBC formula.
The RBC formula for life insurance companies’ measures exposures to investment risk, insurance risk, interest rate and other market
risks and general business risk. A company’s RBC is normally expressed in terms of the company action level (“CAL”). If a life
insurance company’s total adjusted capital is less than or equal to the CAL (100% of CAL or less), a comprehensive financial plan
must be submitted to its state regulator. Sun Life (U.S.) has established an internal target range for its RBC ratio of 300% – 350% of
the CAL.
The investment, interest rate and market risk components of Sun Life (U.S.)’s statutory and risk based capital are sensitive to equity
and interest rate levels as well as the overall economic environment. Declining interest rates and unfavourable credit experience,
coupled with changes in equity markets, will negatively impact its RBC ratio. The insurance and business risk components of Sun Life
(U.S.)’s statutory and risk based capital are sensitive to policyholder experience. Unfavourable experience could also negatively impact
the RBC ratio.
In addition, other foreign operations and foreign subsidiaries of SLF Inc. must comply with local capital or solvency requirements in the
jurisdictions in which they operate. The Company maintained capital levels above the minimum local regulatory requirements as at
December 31, 2010.
Financial Strength Ratings
Independent rating agencies assign credit ratings to securities issued by companies, as well as financial strength ratings. The credit
ratings assigned to the securities issued by SLF Inc. and its subsidiaries are described in SLF Inc.’s 2010 AIF under the heading
Security Ratings.
72 Sun Life Financial Inc. Annual Report 2010 Management’s Discussion and Analysis