CIA Annual Meeting Assemblée annuelle de l’ICA June 29 & 30, 2006 Ÿ Les 29 et 30 juin 2006 Ottawa, Ontario

s.3855 Valuation Challenges CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA s.3855 Valuation Challenges Lesley Thomson

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Timing of CALM testing CALM testing done at Q3 for many blocks How to roll-forward to December 31? Same issue today, but statement value of assets will be more volatile than in the past Adjustments more likely to be material At Sun Life, different approaches will be used for different blocks (3 variations)

(a) PPM with FV adjustment CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA (a) PPM with FV adjustment Post-3855 liability = Pre-3855 liability X (Post-3855 statement value of assets) (Pre-3855 statement value of assets) Pre-3855 statement value adjusted for DRG etc. Pre-3855 statement value need not be exactly the same as today Need any stable “book value” approach

(a) PPM with FV adjustment CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA (a) PPM with FV adjustment Approach requires a “book value” of assets to be maintained Not in G/L, so watch out for control issues BV may be useful for other purposes SOE analysis Dividend management for par business Credited rates on UL

(b) FV liabilities with Q4 adjustment CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA (b) FV liabilities with Q4 adjustment Two approaches: Solve for spread (j) at Q3 such that FV liability = pv liability cash flows at Q3 spot rates + j Q4 liability = pv liability cash flows at Q4 spot rates + j Solve for PPM-type interest vector at Q3 such that FV liability = pv Q3 liability cash flows Q4 liability = pv liability cash flows + change in fair value of bonds backing liabilities

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA (c) CFVM Determine C-3 provision in basis points from CALM testing Liability = Statement value of assets + pv liability cash flows (including C-3) - pv asset cash flows Only appropriate for certain annuity blocks

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Issues Availability of required information in time to do the valuation Materiality of adjustments required to account for changes in asset quality, mix, duration, matching etc. during the quarter Materiality of adjustments required for new business issued during the quarter Commingled assets (par/non-par; surplus/liabilities) can add complications

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Taxes Taxes always seem to be a problem! New/changed timing differences Assets backing liabilities (grandfathered block) Dividends on deposit (if liability not equal AV) Tax-preferred assets? Potential volatility issues in Canada for assets backing 1996-2006 business Transition issues still outstanding