Sun Life 2012 Annual Report Download - page 66

Individual insurance products include universal life and other long-term life and health insurance products. A major source of market
risk exposure for individual insurance products is the reinvestment risk related to future premiums and the guaranteed cost of
insurance. Interest rate risk for individual insurance products is typically managed on a duration basis, within tolerance ranges set out
in the applicable investment policy or guidelines. Targets and limits are established so that the level of residual exposure is
commensurate with our risk tolerance. Exposures are monitored frequently, and assets are rebalanced as necessary to maintain
compliance within policy limits using a combination of assets and derivative instruments. A portion of the longer-term cash flows are
backed with equities and real estate.
For participating insurance products and other insurance products with adjustability features the investment strategy objective is to
provide a total rate of return given a constant risk profile over the long term.
Fixed annuity products generally provide the policyholder with a guaranteed investment return or crediting rate. Interest rate risk for
these products is typically managed on a duration basis, within tolerance ranges set out in the applicable investment guidelines.
Targets and limits are established such that the level of residual exposure is commensurate with our risk tolerance. Exposures are
monitored frequently, and are re-balanced as necessary to maintain compliance within prescribed tolerances using a combination of
fixed income assets and derivative instruments.
Certain insurance and annuity products contain minimum interest rate guarantees. Market risk management strategies are
implemented to limit potential financial loss due to significant reductions in asset earned rates relative to contract guarantees. These
typically involve the use of hedging strategies utilizing interest rate derivatives such as interest rate floors, swaps and swaptions.
Certain insurance and annuity products contain features which allow the policyholder to surrender their policy at book value. Market
risk management strategies are implemented to limit the potential financial loss due to changes in interest rate levels and policyholder
behaviour. These typically involve the use of hedging strategies such as dynamic option replication and the purchase of interest rate
swaptions.
Certain products have guaranteed minimum annuitization rates. This exposure is hedged using both assets and derivative instruments.
Interest rate derivatives used in the hedging strategy may include interest rate swaps and swaptions.
Segregated Fund Guarantees
Approximately one third of our expected sensitivity to equity market risk and a small amount of interest rate risk sensitivity for
Continuing Operations is derived from segregated fund products. These products provide benefit guarantees, which are linked to
underlying fund performance and may be triggered upon death, maturity, withdrawal or annuitization. The cost of providing for the
guarantees in respect of our segregated fund contracts is uncertain and will depend upon a number of factors including general capital
market conditions, our hedging strategies, policyholder behaviour and mortality experience, each of which may result in negative
impacts on net income and capital.
The following table provides information with respect to the guarantees provided in our segregated fund businesses.
Segregated Fund Risk Exposures
($ millions) December 31, 2012(1)
Fund
value
Amount
at risk(2)
Value of
guarantees(3)
Insurance
contract
liabilities(4)
SLF Canada 12,283 554 11,731 488
SLF U.S. 4,062 238 4,164 101
Run-off reinsurance(5) 2,335 597 2,106 500
Total of Continuing Operations 18,680 1,389 18,001 1,089
($ millions) December 31, 2011(1)(6)
Fund
value
Amount at
risk(2)
Value of
guarantees(3)
Insurance
contract
liabilities(4)
SLF Canada 11,823 769 11,704 655
SLF U.S. 24,692 3,123 26,914 1,997
Run-off reinsurance(4) 2,542 642 2,267 536
Total 39,057 4,534 40,885 3,188
(1) Amounts as at December 31, 2012 do not include the impact of assets and liabilities of the Discontinued Operations. Comparative 2011 amounts have not been restated.
(2) 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.
(3) 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.
(4) The “insurance contract liabilities” represent management’s provision for future costs associated with these guarantees and include a provision for adverse deviation in
accordance with Canadian actuarial standards of practice.
(5) 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 is part of a closed block of reinsurance which is included in our Corporate segment.
(6) Fund value and value of guarantees for SLF U.S. as at December 31, 2011 have been restated to reflect a change in methodology adopted in 2012.
The movement of the items in the table above from December 31, 2011 to December 31, 2012 was primarily as a result of the following
factors:
(i) Fund values decreased due to the exclusion of the Discontinued Operations and the strengthening of the Canadian dollar against
the U.S. dollar, partially offset by favourable equity market movements.
(ii) The amount at risk decreased due to exclusion of the Discontinued Operations and favourable equity market movements.
64 Sun Life Financial Inc. Annual Report 2012 Management’s Discussion and Analysis