Sun Life 2010 Annual Report Download - page 66

We have implemented ongoing asset-liability management and hedging programs involving regular monitoring and adjustment of
risk exposures using financial assets, derivative instruments and repurchase agreements to maintain interest rate exposures within
our risk tolerances. The general availability and cost of these hedging instruments may be adversely impacted by changes in
interest rate levels and volatility, and in addition, these programs may themselves expose us to other risks.
A sustained low interest rate environment may adversely impact the primary demand for a number of our core insurance offerings
requiring a significant repositioning of the product portfolio, and also increase the likelihood of higher surrenders (redemptions) and
insurance claims (for example, increased incidence and reduced termination rates in respect of disability related claims). This may
contribute to adverse developments in revenues and cost trends and our overall profitability.
Market Risk Sensitivities
We utilize a variety of methods and measures to quantify our market risk exposures. These include duration management, key rate
duration techniques, convexity measures, cash flow gaps, scenario testing, and sensitivity testing of earnings and regulatory capital
ratios versus risk tolerance limits which are calibrated to our risk appetite.
Our earnings are affected by the determination of policyholder obligations under our annuity and insurance contracts. These
amounts are determined using internal valuation models and are recorded in the Company’s Consolidated Financial Statements,
primarily as actuarial liabilities. The determination of these obligations requires that we make assumptions about the future level of
equity market performance, interest rates and other factors over the life of our products. Differences between our actual experience
and our best estimate assumptions are reflected in the financial statements. Debt securities and equities designated as AFS
generally do not support liabilities. Changes in the fair value of AFS debt securities and equities are recorded to OCI. The following
table sets out the estimated immediate impact or sensitivity of our net income and OCI to certain instantaneous changes in interest
rates and equity market prices as at December 31, 2010, independently, assuming all other variables remain constant. In addition,
we have provided the estimated impact on our MCCSR ratio using the same instantaneous changes in interest rates and equity
market prices.
Market Risk Sensitivities
as at December 31, 2010
Changes in interest rates(1)
Net income(3)
($ millions)
Increase (decrease)
in after-tax OCI
($ millions) MCCSR(4)
1% increase $50 to $150 $(300) to $(400) Up to 8 percentage points increase
1% decrease $(150) to $(250) $325 to $425 Up to 10 percentage points decrease
Changes in equity markets(2)
10% increase $25 to $75 $25 to $75 Up to 5 percentage points increase
10% decrease $(125) to $(175) $(25) to $(75) Up to 5 percentage points decrease
25% increase $50 to $150 $100 to $200 Up to 5 percentage points increase
25% decrease $(475) to $(575) $(100) to $(200) Up to 10 percentage points decrease
as at December 31, 2009
Changes in interest rates(1)
Net income(3)
($ millions)
Increase/(decrease)
in after-tax OCI
($ millions) MCCSR(4)
1% increase $(50) to $50 $(375) to $(425) Up to 8 percentage points increase
1% decrease $(150) to $(250) $375 to $425 Up to 12 percentage points decrease
Changes in equity markets(2)
10% increase $75 to $125 $25 to $75 Up to 5 percentage points increase
10% decrease $(150) to $(200) $(25) to $(75) Up to 5 percentage points decrease
25% increase $150 to $250 n/a Up to 5 percentage points increase
25% decrease $(475) to $(575) n/a Up to 15 percentage points decrease
(1) Represents a 1% parallel shift in assumed interest rates across the entire yield curve as at December 31. Variations in realized yields based on different terms to maturity,
asset class types, credit spreads and ratings may result in realized sensitivities being significantly different from those illustrated above.
(2) Represents the respective change across all equity markets as at December 31. Assumes that actual equity exposures consistently and precisely track the broader equity
markets. Since in actual practice equity-related exposures generally differ from broad market indices (due to the impact of active management, basis risk and other
factors), realized sensitivities may differ significantly from those illustrated above.
(3) The market risk sensitivities include the expected mitigation impact of our hedging programs in effect as at December 31 and include new business added and product
changes implemented during the year.
(4) The MCCSR sensitivities illustrate the impact on the MCCSR ratio for Sun Life Assurance as at December 31. This excludes the impact on assets and liabilities that are
included in Sun Life Financial but not included in Sun Life Assurance.
We used a 1% increase (decrease) in interest rates and a 10% increase (decrease) in our equity markets to determine the above
sensitivities because we believe that these market shocks were reasonably possible as at December 31, 2010. We have also
disclosed the impact of a 25% increase or decrease in our equity market sensitivity to illustrate that changes in equity markets in
excess of 10% may result in other than proportionate impacts.
Variable Annuity and Segregated Fund Guarantees
Approximately 80% to 90% of our sensitivity to equity market risk is derived from segregated fund products in SLF Canada, variable
annuities in SLF U.S. and run-off reinsurance in our Corporate business segment. These products provide benefit guarantees, which
are linked to underlying fund performance and may be triggered upon death, maturity, withdrawal or annuitizations.
62 Sun Life Financial Inc. Annual Report 2010 Management’s Discussion and Analysis