Sun Life 2012 Annual Report Download - page 77

The following table shows the components of Sun Life Assurance’s MCCSR ratio for the last two years.
Sun Life Assurance MCCSR
($ millions) 2012 2011
Capital available
Retained earnings and contributed surplus 8,497 7,937
Accumulated other comprehensive income (120) (79)
Common and preferred shares 4,346 3,296
Innovative instruments and subordinated debt 1,045 1,845
Other 230 253
Less:
Goodwill 1,184 1,225
Non-life investments and other 1,313 1,343
Total capital available 11,501 10,684
Required capital
Asset default and market risks 3,372 3,095
Insurance risks 1,252 1,127
Interest rate risks 888 845
Total capital required 5,512 5,067
MCCSR ratio 209% 211%
Sun Life Assurance’s MCCSR ratio was 209% as at December 31, 2012, compared to 211% as at December 31, 2011. Low interest
rates and volatile equity markets reduced the MCCSR ratio in 2012. The impact of the Sun Life Assurance’s subordinated debt
redemption was offset by net financing activities. Additional details concerning the calculation of available capital and MCCSR are
included in SLF Inc.’s 2012 AIF under the heading Regulatory Matters.
Sun Life Financial adopted IFRS as of January 1, 2011. Under OSFI’s IFRS transition guidance, companies could elect to phase in the
impact of the conversion to IFRS on adjusted tier 1 available capital over eight quarters ending in the fourth quarter of 2012. Sun Life
Assurance made this election and has now completed phasing in a reduction of approximately $300 million to its adjusted tier 1
available capital over this period, largely related to the recognition of deferred actuarial losses on defined benefit pension plans.
In December 2012, OSFI released the 2013 MCCSR Guideline effective for January 1, 2013. The guideline includes two significant
changes that impact Sun Life Assurance’s MCCSR ratio: (i) the impact of the change in accounting for defined benefit pension plans
(IAS 19 Employee Benefits); and (ii) reduced lapse risk requirement. In relation to the changes for defined benefit pension plans, the
actual impact is based on the balances as at December 31, 2012. Sun Life Assurance will phase in a reduction of approximately
$152 million to its gross tier 1 available capital over eight quarters, ending in the fourth quarter of 2014, resulting in a reduction of Sun
Life Assurance’s MCCSR ratio of approximately three percentage points over this two year period. The reduced lapse risk capital
requirement is effective first quarter of 2013. The reduced requirement will be immediately implemented with no transition. The impact
to Sun Life Assurance’s MCCSR ratio is expected to be an increase of three percentage points. Other changes do not have a material
impact on Sun Life Assurance’s MCCSR ratio.
Sun Life (U.S.)
Our principal operating life insurance subsidiary in the United States, Sun Life (U.S.) is part of our Discontinued Operations. 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 risk and other market risks and general
business risk. A company’s RBC is normally expressed in terms of the 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% to 400% 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. Unfavourable credit experience, coupled with changes in equity
markets or interest rates, may negatively impact Sun Life (U.S.)’s RBC ratio. The insurance and business risk components of Sun Life
(U.S.)’s statutory and risk-based capital are also sensitive to policyholder experience for which adverse experience could negatively
impact the RBC ratio.
Other Foreign Life Insurance Companies
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, 2012.
Financial Strength Ratings
Independent rating agencies assign credit ratings to securities issued by companies and assign financial strength ratings to financial
institutions. The credit ratings assigned to the securities issued by SLF Inc. and its subsidiaries are described in SLF Inc.’s 2012 AIF
under the heading Security Ratings.
The financial strength ratings assigned are intended to provide an independent view of the creditworthiness and financial strength of a
financial institution. Each rating agency has developed its own methodology for the assessment and subsequent rating of life insurance
Management’s Discussion and Analysis Sun Life Financial Inc. Annual Report 2012 75