Competitive edge: Fixed income quality and duration

All values as of December 31, 2021

*31% in Canadian federal bonds, 69% in provincial bonds.

Balancing exposure across durations

We don’t bet on the direction of interest rates. Instead, we focus on purchasing appropriate high-value assets to match the long-term nature of our liabilities (death claims).

Interest rates may be on the rise, but they remain low in comparison to what we experienced decades ago. Maturing bonds will likely rollover into lower yields. Sun Life has the lowest percentage of fixed income maturing in the next five years (14.1% as of December 31, 2021). In comparison, our major Par competitors have 25-50%. And the quantity of our new premiums relative to our Par account size is only 3-5%. As a result, the current low interest rate environment should have less impact to our portfolio. In contrast, when interest rates increase, there is a lagged impact to an insurer’s Par dividend rate. However, those who have a greater percentage maturing in the short term may see their portfolio yield increase sooner and more rapidly. 

Well-diversified by asset quality

Rating agencies group bonds into categories based on their expected level of default risk. But the spread (difference in annual yields) between grade categories may change. When spreads compress, seeking additional return may come at the cost of a disproportionate increase in risk. While spreads declined in recent years, Sun Life shifted its bond portfolio up in quality. Over the same time, some other insurers shifted down in quality, opting for slightly more yield in this narrower spread environment.