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

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

3. 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)

4. (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

5. (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

6. (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

7. 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

8. 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

9. 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 business
Transition issues still outstanding