Sun Life 2010 Annual Report Download - page 29

Asset Default
Asset default provisions are included in actuarial liabilities for possible future asset defaults over the lifetime of our actuarial liabilities.
The amount included in actuarial liabilities is based on possible reductions in the expected future investment yield depending on the
creditworthiness of the asset. The underlying asset default assumptions for bonds and mortgages are derived from long-term studies.
The bond assumptions are based on total U.S. market experience. The mortgage assumptions are based on the Company’s
experience. We have provided $2.9 billion for possible future asset defaults over the lifetime of our actuarial liabilities as at
December 31, 2010. The amount excludes defaults that can be passed through to participating policyholders and excludes provisions
for loss in the value of equity and real estate assets supporting actuarial liabilities.
Sensitivities to Best Estimate Assumptions
Our sensitivities relative to our best estimate assumptions are included in the table below. The sensitivities presented below are
forward-looking information. They are measures of our estimated net income sensitivity to changes in the best estimate assumptions in
our actuarial liabilities based on a starting point and business mix as of December 31, 2010. They reflect the update of actuarial
method and assumption changes described in this MD&A under the heading Management Actions and Assumption Changes. Where
appropriate, these sensitivities take into account hedging programs in place as at December 31, 2010. A description of these hedging
programs can be found in this MD&A under the heading Market Risk. The sensitivity to changes in our accounting estimates in the
table below represents the Company’s estimate of changes in market conditions or best estimate assumptions that are reasonably
likely based on the Company’s and/or the industry’s historical experience and industry standards and best practices as at
December 31, 2010.
Changes to the starting point for interest rates, equity market prices and business mix will result in different estimated sensitivities.
Additional information regarding equity and interest rate sensitivities, including key assumptions, can be found in the Risk Management
section of this document under the heading Market Risk Sensitivities.
Critical Accounting Estimate Sensitivity Impact on Net Income ($ millions)
Interest Rates 1% parallel increase in interest rates across the entire yield curve 50 – 150
1% parallel decrease in interest rates across the entire yield curve (150) – (250)
Equity Markets 10% increase across all equity markets 25 – 75
10% decrease across all equity markets (125) – (175)
25% increase across all equity markets 50 – 150
25% decrease across all equity markets (475) – (575)
1% reduction in assumed future equity and real estate returns (350) – (450)
Mortality 2% increase in the best estimate assumption – insurance products (40)
2% decrease in the best estimate assumption – annuity products (85)
Morbidity 5% adverse change in the best estimate assumption (110)
Policy Termination Rates 10% decrease in the termination rate – where fewer terminations
would be financially adverse (225)
10% increase in the termination rate – where more terminations
would be financially adverse (80)
Operating Expenses and Inflation 5% increase in unit maintenance expenses (140)
Fair Value of Investments
HFT and AFS bonds and stocks are recorded at fair value. Changes in fair value of HFT assets are recorded in income, while changes
in fair value of AFS assets are recorded in OCI, a component of equity. The fair value of publicly traded fixed maturity and equity
securities is determined using quoted market bid prices in active markets that are readily and regularly obtainable, when available.
When quoted prices in active markets are not available, the determination of fair value is based on market standard valuation
methodologies, which include matrix-pricing, consensus pricing from various broker dealers that are typically the market makers,
discounted cash flows or other similar techniques. The assumptions and valuation inputs in applying these market standard valuation
methodologies are determined primarily using observable market inputs, which include, but are not limited to, benchmark yields, issuer
spreads, reported trades of identical or similar instruments and prepayment speeds. Prices obtained from independent pricing services
are validated through back-testing to trade data, comparisons to observable market inputs or other economic indicators, and other
qualitative analysis to ensure that the fair value is reasonable. For securities in which the fair value is based solely on non-binding
broker quotes that cannot be validated to observable market data, we typically consider the fair value to be based on unobservable
inputs, due to a general lack of transparency in the process that the brokers use to develop the prices. Where pricing services or broker
dealers are used in determining fair value, generally one quote or price is obtained per security. Quotes and prices obtained from third
parties are adjusted in very limited circumstances, such as where there is an error in the information obtained from the pricing service.
Stocks that do not have a quoted market price on an active market and are designated as AFS are reported at cost and are not
material to our Consolidated Financial Statements.
The fair value of non-publicly traded bonds is determined using a discounted cash flow approach that includes provisions for credit risk,
liquidity premium, and the expected maturities of the securities. Since quoted market prices are not readily and regularly obtainable,
management judgment is required to estimate the fair value of these bonds. The valuation techniques used are based primarily on
observable market prices or rates.
Derivative financial instruments are recorded at fair value with changes in fair value recorded to income unless the derivative is part of
a qualifying hedging relationship. The fair value of derivative financial instruments depends upon the type of derivative and is
determined primarily using observable market inputs. Fair values of exchange-traded futures are based on quoted market prices. When
quoted market prices are not readily available, management estimates fair value using valuation models dependent on the type of
Management’s Discussion and Analysis Sun Life Financial Inc. Annual Report 2010 25