Participating Account Management policy

Participating Account Management Policy for Sun Life Assurance Company of Canada

Sun Life Assurance Company of Canada (“Sun Life”) is a company governed by the Insurance Companies Act (Canada) (ICA) that was converted from a mutual company into a company with common shares in 2000. (Such a transaction is referred to as a “Conversion”.) Clarica Life Insurance Company (“Clarica”) was converted from a mutual company into a company with common shares in 1999 and was amalgamated with Sun Life in 2002. (The amalgamated company, named Sun Life Assurance Company of Canada, is referred to as the “Company”.)

This Participating Account Management Policy applies to participating accounts of the Company set up pursuant to section 456 of the ICA.

(a) Business Governed by the Participating Account Management Policy

The Company maintains territorial participating accounts, some of which have sub-accounts (e.g., pre-Conversion and post-Conversion sub-accounts), for its participating policies that are separate from the accounts for its non-participating policies and other businesses. Each participating account records the assets, liabilities, premiums and any earnings for participating policies only. Participating policies issued by Sun Life are also accounted for separately from participating policies issued by Clarica in order to be able to administer all business in accordance with commitments made by Sun Life and Clarica at the time of their Conversions.

The Company has seven territorial participating accounts, one each for

  • Canadian participating policies issued by Sun Life (including policies issued in Bermuda) prior to and after its Conversion
  • Canadian participating policies issued or acquired by Clarica prior to and after its Conversion
  • U.S. participating policies issued by Sun Life prior to and after its Conversion
  • Philippines participating policies issued by Sun Life prior to its Conversion
  • International participating policies issued by Sun Life after its Conversion
  • Malta participating policies issued by Sun Life prior to its Conversion
  • Other Foreign participating policies issued by Sun Life prior to its Conversion

Only the participating account for Canadian participating policies issued by Sun Life is open to new business. For participating accounts that are closed to new business, dividend scales are managed with the objective of avoiding tontine effects, while at the same time maintaining dividend scales that meet policyholders’ reasonable expectations and other explicit commitments as set out in the Company’s Conversion Plans.

(b) Investment Policy for the Participating Account

The Company has an investment policy for the assets in each participating account. These policies outline investment criteria related to asset mix, liquidity, credit risk, currency risk, interest rate risk, thereby recognizing the specific liability characteristics of each of the participating accounts.

The investment objectives are designed and managed to optimize long-term, after-tax investment earnings, subject to risk tolerances and limits.

The specific investments used to achieve the investment objectives of the participating accounts vary, and may include combinations of fixed income assets, equity, real estate and other non-fixed income assets. The Company may use derivative products for risk management purposes or in investment replication strategies.

These policies are reviewed regularly by management to ensure they meet the Board approved requirements. The Company monitors each participating account to ensure that its investment policy is followed consistently and controls are in place to ensure target mixes by type of asset, quality and term are maintained within defined tolerance limits.

(c) Allocating Investment Income to the Participating Account

Assets are maintained at the territorial participating account level, and are equal to the account’s total liabilities and surplus. The investment income credited to each account is the earnings on assets allocated to that account. Changes to investment income allocation methodology, if any, will be in accordance with accepted actuarial practice in Canada. The Appointed Actuary of the Company provides an annual opinion to the Board as to whether the allocations are fair and equitable to participating policyholders.

(d) Allocation of Expenses, including Taxes, to the Participating Account

The allocation of Company expenses to each participating account is supported by expense analysis prepared in accordance with professional standards and legal requirements. The allocation includes an appropriate assignment of overhead costs. Premium taxes are

allocated directly with the premium that gives rise to the tax. Income taxes are allocated based on accounting income subject to tax multiplied by the effective tax rate. In the Philippines, final taxes relating to investment income are allocated in the same proportion as the investment income. The Appointed Actuary provides an annual opinion to the Board as to whether the allocations are fair and equitable to participating policyholders. 

Commitments made at the time of demutualization may impact allocations of expenses at the sub-account level.

(e) Management and Use of Surplus

Blocks of participating business sold pre-Conversion do not generate surplus as these were funded at Conversion to meet policyholders’ reasonable expectations and all funds are expected to be returned to policyholders over time. 

For post-Conversion participating business, the Company retains a portion of earnings as a permanent contribution to surplus, which is managed through the dividend scale process. The permanent contribution to surplus is a portion of earnings retained in the Participating Account surplus along with the investment returns earned on the Participating Account surplus assets. Surplus is required for a number of purposes including to help ensure the Company can meet its obligations to participating policyholders, help ensure financial strength and stability of the Company, finance new business growth, provide for transitions during periods of major change, and avoid undue fluctuations in dividends*, all of which are subject to items such as practical considerations and limits, legal and regulatory requirements, and industry practices. The surplus position is reviewed annually, having regard for the circumstances of the Participating Account, to help ensure these purposes are fulfilled. Based on the review, contributions to surplus may

be adjusted by increasing or decreasing the dividend scale. Any accumulated permanent contribution to surplus remains part of the Participating Account surplus after policyholder insurance coverage terminates. Transfers of surplus to shareholders are limited by the ICA.

(f) Factors which Might Result in Modification of the Policy

Changes might be contemplated to clarify the intent of this policy or in the event of legislative and regulatory changes, changes in accounting rules, acquisitions, divestitures, or any significant corporate restructuring.

(g) Management and Disposal of Surplus in Participating Accounts for which New Business is Not Accepted

The participating accounts are managed in accordance with the commitments made at the time of Conversion. Under the ICA, Sun Life has the right to transfer surplus amounts not required by the participating business to the shareholders with the permission of the Regulator.

(h) Measures to Ensure Fairness to Participating Policyholders whose Policies form part of a pre-Conversion Block Created as Part of Conversion Terms

The management of pre-Conversion Blocks of participating business sold pre-Conversion are specified by the terms of the Conversion plans of Sun Life and Clarica.

Measures to ensure fairness to participating policyholders in the pre-Conversion Blocks were described in the Conversion Plans which provided the information upon which participating policyholders voted for Conversion. As part of Conversion, each of Sun Life and Clarica made commitments to provide for policyholders’ reasonable expectation. The commitments were further described in supplementary documents which guide the administration of participating business. 

The Appointed Actuary provides an annual opinion to the Regulator as to whether all participating blocks are being managed according to the commitments made at Conversion. The Appointed Actuary also provides fairness opinions with respect to the dividend policy, the dividend recommendations, participating account management and allocations of income and expenses to the participating accounts.

(i) Percentage of Participating Account Income Transferred to Shareholders or Shareholder Accounts as a Percentage of Maximum Allowed

Transfers made from the Participating Account under ICA section 461 are restricted to between 2.5% and 10% (depending on the size of the Participating Account of the Company) of total amounts distributed in respect of participating policies issued after demutualization. The maximum percentage is redetermined annually and is close to 2.5% at this time. The Company intends to transfer the maximum amount allowed. 

* The use of surplus for this purpose is limited to the occurrence of unusual events, and as such, is not a common occurrence.

Approved by the Board on November 1, 2023, and is effective immediately. 
Date: November 1, 2023