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CIA Annual Meeting Assemblée annuelle de l’ICA

CIA Annual Meeting Assemblée annuelle de l’ICA. June 29 & 30, 2006 Ÿ Les 29 et 30 juin 2006 Ottawa, Ontario. CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA. s.3855 Valuation Challenges. Lesley Thomson. CALM testing done at Q3 for many blocks How to roll-forward to December 31?

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CIA Annual Meeting Assemblée annuelle de l’ICA

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

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

  3. 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) CIA Annual Meeting ŸAssemblée annuelle de l’ICA Timing of CALM testing

  4. 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 CIA Annual Meeting ŸAssemblée annuelle de l’ICA (a) PPM with FV adjustment

  5. 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 CIA Annual Meeting ŸAssemblée annuelle de l’ICA (a) PPM with FV adjustment

  6. 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 ŸAssemblée annuelle de l’ICA (b) FV liabilities with Q4 adjustment

  7. 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 ŸAssemblée annuelle de l’ICA (c) CFVM

  8. 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 ŸAssemblée annuelle de l’ICA Issues

  9. 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 CIA Annual Meeting ŸAssemblée annuelle de l’ICA Taxes

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