2009 Annual Meeting ● Assemblée annuelle 2009 Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse) 2009 Annual Meeting ● Assemblée annuelle 2009 Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse) Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

PD-23 Guaranteed Minimum Withdrawal Benefits 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009 Presented by: Dave Wylie Friday June 26, :30am – 10:45am

2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009 Product Perspectives Risks Revisited Risk Mitigation Hedging Taking Action/Risk Revisited (x2) Industry Actions Sun Life Financial Actions Future Possibilities

Risks Revisited: Pierre’s Slide Equity market returns and volatility Interest rate Longevity / mortality Lapse Currency Regulatory Market conduct Sales distribution – Age – Sex – Registration status – By fund – Multiple contracts Advisor behavior Policyholder behavior – Timing of deposits to maximize bonuses – Re-deposits – Lapse behavior – Withdrawal behavior 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Risk Mitigation 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009 Contract flexibility re: future changes Fee increases Eliminate or price higher for riskier design choices (e.g. 100/100) Eliminate riskier funds from portfolio Increase diversification Fund choices Time Soft caps/Hard caps Remove/Reduce policyholder options (eg. Resets) Up-market riders Hedging

2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009 What is hedging? Quantifying and managing specific market risks ALM Strategy: –Typically achieved by entering into offsetting hedging instruments that mitigate existing risk exposure Transacting with derivative instruments that mirror embedded options built into products (maturity/death benefit, return of premium, rate guarantee, etc.)

Hedging: Getting Started 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009 Capability and expertise requirements IT –Hardware requirements –Software requirements Tools and Metrics –Measure effectiveness of strategy –Reporting metrics Reflect hedging costs in pricing

2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009 Hedging: Measuring Risk Risk of different guarantees in the products we sell: –Changing underlying fund prices –Changing interest rates –Fund price volatility Once we have identified the product risks to hedge, how do we go about quantifying how much of each risk our products contain?

2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009 Measuring Risk continued Treat embedded optionality built into our products as if they were separate, distinguishable options Once the optionality has been separated, we can use Greeks analysis to quantify our risk exposures Greeks analysis uses Greek letters to represent option sensitivity to various market (risk) exposures –Delta: First order - change in option value relative to market value –Gamma: Second order - change in delta –Rho: change in option value relative to change in interest rate –Vega: change in option value relative to change in volatility

Hedging: Some Learnings Successful mitigation Complexity –“Nothing is simple” –Danger of extrapolation –Rationalizing results –Explaining to senior management –Implications: Labour and intellectually intensive “Lifelong” learning => Good for CPD! Hedge Costs –Sensitive to volatility but –Especially sensitive to interest rates Cross Greeks 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Economic Environment What Happened? Market Downturn 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Taking Action/Risk Revisited (x2) So Far: Focus on insurance and market risk Also need to think about Operational Risk In particular –Market Conduct –Risk to Reputation Considerations –Contract language/restrictions: What options are available? –Repricing: How much is too much? Look at competitors, other markets (US) Fundamental change limits –Engage Legal Department 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

US Industry Actions Was a heated marketplace/Now slowing of arms race Examples: –Exit international markets (Hartford) –Greatly reduce number of product offerings (SLF US, Lincoln National, AIG, Mass Mutual, ING) –Move to simplified, lesser guarantees, de-risked products (John Hancock, Met) –Feature reductions (Most if not all) –More nimbleness, ability to pull levers (JH, AXA, ING) –Fund/Mix restrictions and limitations (SLF US, JH, Lincoln National) –Repricing basis points (Many) 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Sun Life US: Actions Closed some GMWB products Increased Fees on remaining GMWB riders Reduced maximum equity exposure on build your own portfolios Reduced withdrawal benefit tiers 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Canadian Industry Actions (To Date) Manulife –Closed 100/100 products –Fund restrictions, dropped some equity funds –Age 80 deposit restrictions Desjardins –Closed 100/100 product Empire –Age 80 deposit restrictions –No resets over age Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Sun Life Canada/CI Relationship CI – Fund Management, Administration SLF – Insurance Guarantees, Pricing 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Sun Life Canada: Actions Repricing –Base Plan: 0 – 30 basis point (bp) increase –GMWB Rider: 10 – 30 bp increase De-risking –Removal of 100%/100% product for new sales –Modified hard cap of legacy and 100/100 products (PAC’s allowed to continue) –Fund removals/restrictions –Maximum 70% equity/minimum 30% fixed income requirements 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Reflection and Future Possibilities Action has been taken (significant in US) –Window of Opportunity? Can point to: Poor market performance Competitor actions –US has happened in “waves” –Will Canada be similar? –Different than Level COI UL Q: Why? A?: Big More De-risking/Repricing 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Questions? 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009