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MAKING LIVES
BRIGHTER
Life’s brighter under the sun
Annual Report
2015

Table of contents

  • Page 1
    Annual Report 2015 MAKING LIVES BRIGHTER Life's brighter under the sun

  • Page 2
    ... protection and wealth solutions in our Canadian home market. Leader in U.S. group benefits and international high net worth solutions. Premier global asset manager, anchored by MFS. Growing Asia through distribution excellence in higher growth markets. 1 2 3 As of December 31, 2015. Includes 11...

  • Page 3
    ... Sun Life Assurance Company of Canada 209% 2012 2013 2014 2015 240% 219% 217% $1.0 billion cash level at Sun life Financial Inc. as of December 31, 2015. 3 On December 17, 2015, DBRS released its revised Global Insurance Methodology and withdrew the Claims Paying Rating of Sun Life Assurance...

  • Page 4
    ... business on March 1, 2016. Your management team has been disciplined in the approach it takes to acquisitions, only bidding for business that will truly support the strategy and ensuring that we stay focused on our return on equity (ROE) targets. 2 | SUN LIFE FINANCIAL INC. | ANNUAL REPORT 2015

  • Page 5
    ... asset management professional, who joined us in November. We thank Richard for his service, and look forward to working with Scott in the years to come. In November, your Board was once again recognized for its sound governance practices by The Globe and Mail Report on Business' annual Board Games...

  • Page 6
    ...Sun Life on many fronts. We celebrated our 150th birthday, pausing to reflect upon our past achievements and to look ahead at the next phase of our growth. It was a year of strong business performance, and Operating Net Income grew 17% to $2.25 billion, surpassing the 2015 target set at Investor Day...

  • Page 7
    ...year performance rankings. MFS's market share grew, but overall net flows were negative due to market volatility, industry trends to passive investments and portfolio rebalancing by institutional investors, as well as MFS's decision to cap certain products in order to protect client returns. Looking...

  • Page 8
    ... the second largest dental provider network in the country. Our International business provides financial solutions to high net worth clients residing outside of the U.S., Canada and Bermuda. In 2015, we closed the International wealth business to new sales in order to focus on life insurance, where...

  • Page 9
    ... Assistant that extends a helping hand to Group Benefits and Group Retirement Services plan members right when they need it, by reaching out proactively with relevant information and convenient solutions that help them use their plans fully. Using our mobile app, group benefit plan members in Canada...

  • Page 10
    ...economic conditions. Looking ahead, we have ambitious growth plans across all four pillars, plans that should drive us to be one of the top performing life insurance and investment management companies globally. To our shareholders and clients, thank you for your continued confidence in our business...

  • Page 11
    ... Risk Culture and Philosophy Governance Structure and Accountabilities Risk Management Policies Risk Categories CAPITAL AND LIQUIDITY MANAGEMENT Principal Sources and Uses of Funds Liquidity Capital Capital Adequacy Financial Strength Ratings Off-Balance Sheet Arrangements Commitments, Guarantees...

  • Page 12
    ... Sun Life Assurance Description Management's Discussion and Analysis MFS Investment Management Mandatory Provident Fund Other Comprehensive Income Office of the Superintendent of Financial Institutions Return on Equity United States Securities and Exchange Commission Sun Life ExchangEable Capital...

  • Page 13
    ... portfolios managed for clients such as segregated and mutual funds; our international operations, including our joint ventures; market conditions that affect our capital position or ability to raise capital; downgrades in financial strength or credit ratings; and the impact of mergers, acquisitions...

  • Page 14
    ... anchored by MFS • In 2015, we completed the acquisitions of Bentall Kennedy, Prime Advisors, and Ryan Labs. These acquisitions build out our strategy to expand our capabilities in customized fixed income solutions and alternative asset classes in SLIM, now part of our asset management pillar. SLF...

  • Page 15
    ...the acquisition of Bentall Kennedy, a real estate investment manager operating in Canada and the U.S. (1) Based on figures released in 2015 by the Insurance Commission in the Philippines based on premium income in 2014. Management's Discussion and Analysis Sun Life Financial Inc. Annual Report 2015...

  • Page 16
    ... pension, savings and health care solutions provided by life insurance companies. Volatile equity markets have resulted in the demand for sophisticated investment and risk management solutions through asset management products. We believe that our asset management businesses will benefit from this...

  • Page 17
    ...%, and a common share dividend payout ratio of 40%-50% of underlying net income. Our ability to achieve our medium-term financial objectives is dependent on the Company's success in achieving the growth initiatives and business objectives that were described at our March 5, 2015 Investor Day and on...

  • Page 18
    ...)(1) Reported basic EPS ($) Dividends per common share Dividend payout ratio(3) Dividend yield MCCSR ratio(5) Return on equity (%) Operating ROE(1) Underlying ROE(1) Premiums and deposits Net premium revenue Segregated fund deposits Mutual fund sales(1) Managed fund sales(1) ASO premium and deposit...

  • Page 19
    ... per quarter in the reporting period and of basis risk inherent in our hedging program for products that provide benefit guarantees; and (iii) the impact of changes in the fair value of real estate properties in the reporting period. Additional information regarding these adjustments is available...

  • Page 20
    ... management actions related to the sale of our U.S. Annuity Business Acquisition, integration and restructuring costs(2) Total adjusting items Operating net income Net equity market impact Net interest rate impact Net increases (decreases) from changes in the fair value of real estate Market related...

  • Page 21
    ... measures in IFRS: (i) ASO premium and deposit equivalents, mutual fund sales, managed fund sales, life and health sales, and total premiums and deposits; (ii) AUM, mutual fund assets, managed fund assets, other AUM and assets under administration; (iii) the value of new business, which is used to...

  • Page 22
    ... for hedge accounting in SLF Canada Fair value adjustments on MFS's share-based payment awards Acquisition, integration and restructuring costs(1) Operating net income(2) Equity market impact Impact from equity market changes Basis risk impact Equity market impact(3) Interest rate impact Impact...

  • Page 23
    ... (vii) changes in liabilities for defined benefit plans in OCI of $49 million. Revenue Revenue includes: (i) premiums received on life and health insurance policies and fixed annuity products, net of premiums ceded to reinsurers; (ii) net investment income comprised of income earned on general fund...

  • Page 24
    ... year, across the Company. Fee income was $5.3 billion in 2015, compared to $4.5 billion in 2014. The increase was driven by favourable currency impact from the weakening Canadian dollar, and increased fee income in SLF Asset Management, SLF Canada and SLF Asia. 22 Sun Life Financial Inc. Annual...

  • Page 25
    ... from the weakening Canadian dollar. (1) The International wealth business was closed to new sales in December 2015. (2) We increased our ownership stake in PVI Sun Life in Vietnam from 49% to 75% on January 7, 2016. Management's Discussion and Analysis Sun Life Financial Inc. Annual Report 2015 23

  • Page 26
    ... impact of $0.7 billion from the weakening Canadian dollar, higher claims and benefits paid in GRS and GB in SLF Canada, and Hong Kong in SLF Asia. Changes in insurance/investment contract liabilities and reinsurance assets (net of recoveries) of $5.4 billion, decreased by $9.0 billion over 2014...

  • Page 27
    ...41 million related to the SLF U.S. International wealth business recorded in the "Model enhancements and other" line in the table above is included in the adjustment to operating net income. Additional information is provided in the section in this MD&A under the heading Financial Performance - 2015...

  • Page 28
    ... Business"), to Delaware Life Holdings, LLC. The transaction consisted primarily of the sale of 100% of the shares of Sun Life Assurance Company of Canada (U.S.), which included U.S. domestic variable annuity, fixed annuity and fixed indexed annuity products, corporate and bank-owned life insurance...

  • Page 29
    ...that do not qualify for hedge accounting Fair value adjustments on MFS's sharebased payment awards Acquisition, integration and restructuring costs Operating net income (loss)(1) Market related impacts Assumption changes and management action Underlying net income (loss)(1) 10 - - 200 (56) (13) 269...

  • Page 30
    ... for hedge accounting in SLF Canada Fair value adjustments on MFS's share-based payment awards Acquisition, integration and restructuring costs(1) Operating net income(2) Equity market impact Impact from equity market changes Basis risk impact Equity market impact(3) Interest rate impact Impact...

  • Page 31
    ... spreads partially offset by interest rate changes. Net income in the fourth quarter of 2015 also reflected the impact in Group Benefits related to pricing increases on new and renewing business, expense actions, and continued investment in our disability claim operations. Results also reflected the...

  • Page 32
    ... due to SLF Asset Management, with lower fund sales in MFS partially offset by fund sales in SLIM including the 2015 acquisitions, and increased net premium revenue and segregated fund deposits in SLF Canada. 30 Sun Life Financial Inc. Annual Report 2015 Management's Discussion and Analysis

  • Page 33
    ...contract liabilities, positive credit experience, tax benefits and business growth. These items were partially offset by unfavourable impacts from interest rate changes, mortality and morbidity and expense experience. Management's Discussion and Analysis Sun Life Financial Inc. Annual Report 2015...

  • Page 34
    ... culture, technology leadership and brand recognition provide an excellent platform for growth. SLF Canada has three main business units - Individual Insurance & Wealth, Group Benefits and Group Retirement Services - which offer a full range of protection, wealth accumulation and income products...

  • Page 35
    ...Canada. Client Solutions announced the development of Digital Benefits Assistant, an innovative technology-based capability that will proactively engage group plan members, deliver personalized and relevant interactions across multiple channels, and further support plan members in their goal of well...

  • Page 36
    ... strong sales of our new segregated funds, Sun Life Guaranteed Investment Funds. Group Benefits Our GB business unit is a leading provider of group life and health insurance products in Canada. We provide life, dental, drug, extended health care, disability and critical illness benefits programs to...

  • Page 37
    ... products and services such as our new group of segregated funds, Sun Life Guaranteed Investment Funds, and our SLGI wealth management solutions to further strengthen our position in the retirement market; Expanding our leadership position in the DBS business through innovative de-risking solutions...

  • Page 38
    ... group life, disability, medical stop-loss and dental insurance products, as well as a suite of voluntary benefits products. International serves high net worth clients in international markets, offering individual life insurance products and serving a closed block of wealth products(1). In-force...

  • Page 39
    ...interest rates. Assumption changes and management actions in 2014 included the release of the future funding cost liability of US$170 million related to our closed block of individual universal life insurance products. Net income in 2015 also reflected the impact in Group Benefits related to pricing...

  • Page 40
    ... U.S. Group Benefits business unit leverages its underwriting and claims capabilities and extensive distribution network to provide group life, long-term and short-term disability, medical stop-loss and dental insurance, as well as a suite of voluntary products, to over 10 million group plan members...

  • Page 41
    ... the Sun Life Center for Healthy Work and integrated absence management offerings. Capitalizing on the strong voluntary capabilities that Assurant EB will deliver after the acquisition closes, with a particular emphasis on the broad product portfolio and enrolment solutions. Building market share in...

  • Page 42
    ... to ensure MFS continues to deliver world-class customer service and to handle future growth. Bentall Kennedy was named the top North American firm and a top firm globally in the 2015 Global Real Estate Sustainability Benchmark rankings. This is the fifth year that the team at Bentall Kennedy has...

  • Page 43
    ... corporate and public pension plans, defined contribution plans, multiemployer plans, sovereign wealth funds, investment authorities, and endowments and foundations. Institutional products are sold by an internal sales force, which is aided by a network of independent consultants. MFS's reported net...

  • Page 44
    ...-driven investing through: (i) Bentall Kennedy, a real estate investment manager operating in Canada and the U.S.; (ii) Prime Advisors, a U.S.-based investment management firm specializing in customized fixed income portfolios primarily for U.S. insurance companies; (iii) Ryan Labs, a New York-based...

  • Page 45
    ... effect in 2014 primarily driven by interest rates partially offset by equity market changes. (1) Based on figures released in 2015 by the Insurance Commission in the Philippines based on premium income in 2014. Management's Discussion and Analysis Sun Life Financial Inc. Annual Report 2015 43

  • Page 46
    ...in 2015. India Birla Sun Life Insurance Company Limited, our insurance joint venture with the Aditya Birla Group in India(1), provides a full range of individual and group protection, savings and retirement products through a multi-channel distribution network, including a career agency sales force...

  • Page 47
    ...well as investment income, expenses, capital and other items not allocated to Sun Life Financial's other business segments. Our Run-off reinsurance business is a closed block of reinsurance assumed from other insurers. Coverage includes long-term care, medical coverage, and guaranteed minimum income...

  • Page 48
    ... and change in insurance contract liabilities Commissions and other expenses Income tax expense (benefit) Dividends paid to preferred shareholders Reported net income (loss) Less: Assumption changes and management actions related to the sale of our U.S. Annuity Business SLF U.K. Corporate Support...

  • Page 49
    ...Committee of the Board of Directors monitors the Company's Investment Plan and investment performance, oversees practices, procedures and controls related to the management of the general fund investment portfolio, and reviews corporate governance guidelines and processes. Investment Profile We had...

  • Page 50
    ... exposure was invested in companies involved in exploration and production, refining and drilling and servicing, which included approximately 7% in drilling and oil field services. Our mortgage and real estate portfolio includes office, industrial, retail, and multi-family buildings occupied by...

  • Page 51
    ... 24,078 7,091 11,258 66,214 Annual Report 2015 49 FVTPL debt securities 20,400 20,432 6,416 9,537 56,785 AFS debt securities 3,373 6,546 662 2,530 13,111 Debt securities Canada United States United Kingdom Other Total debt securities Management's Discussion and Analysis Sun Life Financial Inc.

  • Page 52
    ... described in this MD&A under the heading Risk Categories - Credit Risk Management Governance and Control. Corporate Loans by Credit Rating As at December 31 ($ millions) 2015 Loans by credit rating: AAA AA A BBB BB and lower Impaired Total loans 409 3,174 11,532 8,499 697 - 24,311 2014 374 2,199...

  • Page 53
    ..., representing approximately 83.6% as at December 31, 2015. Our investment properties included 68.9% located in Canada, 29.5% in the United States and the remaining 1.6% in the United Kingdom as at December 31, 2015. Management's Discussion and Analysis Sun Life Financial Inc. Annual Report 2015...

  • Page 54
    ...Additionally, we designate certain equity forwards in cash flow hedging relationships for anticipated payments of awards under certain stock-based compensation plans. In addition to the general policies and monitoring, we use a variety of tools in counterparty risk management. Over-the-counter ("OTC...

  • Page 55
    ... of the Canadian dollar and increases in the provision for assets purchased net of dispositions, partially offset by the release of provisions on fixed income assets supporting our insurance contract liabilities. Management's Discussion and Analysis Sun Life Financial Inc. Annual Report 2015 53

  • Page 56
    ... and business planning process and controls over the implementation of these strategic and business plans. Risks associated with activities outside our risk appetite or outside the acceptable defined risks are avoided. 54 Sun Life Financial Inc. Annual Report 2015 Management's Discussion...

  • Page 57
    ... Policy, and the results of this testing are reported to the Board of Directors. Compensation programs for employees are approved by the Board of Directors and the Board Committees and are aligned with the Company's risk philosophy, values, business and risk management strategies, and the long-term...

  • Page 58
    ... behaviour, and developing processes to assess the effectiveness of the Board and its Committees. The Audit & Conduct Review Committee is responsible for assisting the Board of Directors in reviewing the integrity of financial statements and related information provided to shareholders and others...

  • Page 59
    ... risk management strategies aimed at optimizing the risk-return profile of the Company. The CRO is supported by a network of business segment risk officers. The functional heads support the CRO in the implementation and communication of our Risk Framework and Risk Appetite Policy. The Internal Audit...

  • Page 60
    ...value or future cash flows of an insurance contract or financial instrument will fluctuate because of changes or volatility in market prices. Market risk includes equity market, interest rate and spread, real estate and foreign currency risks. 58 Sun Life Financial Inc. Annual Report 2015 Management...

  • Page 61
    ... risk arises from certain general account products and segregated fund contracts which contain explicit or implicit investment guarantees in the form of minimum crediting rates, guaranteed premium rates, settlement options and benefit guarantees. If investment returns fall below guaranteed levels...

  • Page 62
    ... using internal valuation models and are recorded in our Annual Consolidated Financial Statements, primarily as Insurance contract liabilities. The determination of these obligations requires management to make assumptions about the future level of equity market performance, interest rates, credit...

  • Page 63
    ..., from our fixed annuity and segregated funds products. Our net income sensitivities to interest rates and equity markets have changed since December 31, 2014. This is primarily as a result of changes in measurement of sensitivities related to assumption changes and management actions. The above...

  • Page 64
    ... other risks. Our market risk management strategies are developed based on policies and operating guidelines at the enterprise level, business segment level and product level. Liabilities having a similar risk profile are grouped together and a customized investment and hedging strategy is developed...

  • Page 65
    ... of variable annuity products issued by various North American insurance companies between 1997 and 2001. This line of business is part of a closed block of reinsurance, which is included in the Corporate segment. Management's Discussion and Analysis Sun Life Financial Inc. Annual Report 2015 63

  • Page 66
    ...financial losses resulting from the direct ownership of real estate investments or indirectly through fixed income investments secured by real estate property, leasehold interests, ground rents, and purchase and leaseback transactions. Real estate price risk may arise from external market conditions...

  • Page 67
    ..., investments in foreign subsidiaries and net income from foreign operations. Changes or volatility in foreign exchange rates could adversely affect our financial condition and results of operations. As an international provider of financial services, we operate in a number of countries, with...

  • Page 68
    ... volatility in our financial results. External factors including medical advances could adversely affect our life insurance, health insurance, critical illness, disability, long-term care insurance and annuity businesses. 66 Sun Life Financial Inc. Annual Report 2015 Management's Discussion and...

  • Page 69
    ... endowments, segregated funds, and specific types of health contracts). Additionally, our longevity risk exposure is exacerbated for certain annuity products such as guaranteed annuity options by an increase in equity market levels. To improve management of longevity risk, we monitor research in the...

  • Page 70
    ... or product strategy and related services (including online sales and customer support capabilities and technologies) are not developed, modified or executed in line with our strategic objectives or in consideration of the changes in 68 Sun Life Financial Inc. Annual Report 2015 Management...

  • Page 71
    ... are in place, including independent monitoring and review and reporting to senior management and the Board Committees. Comprehensive Operational Risk Management Policies, guidelines and practices are in place. Management's Discussion and Analysis Sun Life Financial Inc. Annual Report 2015 69

  • Page 72
    ...growth goals, could be adversely affected. To mitigate this risk, we have comprehensive Human Resource policies, practices and programs in place. In addition, training, development and compensation programs are designed to attract, motivate and retain high-performing employees. Our leadership review...

  • Page 73
    ... strategy not being agile enough to adapt to new business demands in a timely manner leading to financial losses, increased costs and the inability to meet customer needs. To manage the risks associated with our technology infrastructure and applications, we have implemented a number of policies...

  • Page 74
    ... dividends on capital stock. Sources of available cash flow include general fund premiums and deposits, investment related inflows (such as maturities, principal repayments, investment income and proceeds of asset sales), proceeds generated from financing activities in normal markets, and dividends...

  • Page 75
    ... and disability claims, policy surrenders, policy maturities, annuity payments, minimum guarantees on segregated fund products, policyholder dividends, amounts on deposit, commissions and premium taxes offset by contractual future premiums and fees on in-force contracts. These estimated cash flows...

  • Page 76
    ... source of funds is cash provided by operating activities, including premiums, investment management fees and net investment income. These funds are used primarily to pay policy benefits, dividends to policyholders, claims, commissions, operating expenses, interest expenses and shareholder dividends...

  • Page 77
    ... of Directors reviews and approves SLF Inc.'s capital risk policy annually. Our Corporate Treasury and Risk Management functions are responsible for the development and implementation of the capital risk policy. The Company's capital base consists mainly of common shareholders' equity. Other sources...

  • Page 78
    ... five years thereafter. Holders of Series 13QR Shares will be entitled to receive quarterly floating rate non-cumulative dividend at an annual rate equal to the then 3-month Government of Canada treasury bill yield plus 2.73%. 76 Sun Life Financial Inc. Annual Report 2015 Management's Discussion...

  • Page 79
    ... factors. The Board of Directors reviews the level of dividends on a quarterly basis. A regular and appropriate level of dividend payout and growth provides a stable source of return to common shareholders. We target a dividend payout ratio of between 40% and 50% based on underlying income, except...

  • Page 80
    ...shares Innovative capital instruments and subordinated debt Other Less: Goodwill Non-life investments and other Total capital available Required capital Asset default and market risks Insurance risks Interest rate risks Total capital required MCCSR ratio 78 Sun Life Financial Inc. Annual Report 2015

  • Page 81
    ... AA(low)(1) IC-1 (1) On December 17, 2015, DBRS published a new global insurance methodology, implementing the financial strength rating scale and withdrawing the previous claims paying ability rating. All rating agencies currently have stable outlooks on Sun Life Assurance's financial strength...

  • Page 82
    ... for insurance contracts represent the estimated amounts which, together with estimated future premiums and net investment income, will provide for outstanding claims, estimated future benefits, policyholders' dividends, taxes (other than income taxes), and expenses on in-force insurance contracts...

  • Page 83
    ... insurance and certain forms of universal life policies and annuities, policyholders share investment performance through routine changes in the amount of dividends declared or in the rate of interest credited. These products generally have minimum interest rate guarantees. Hedging programs...

  • Page 84
    ... their policy for the cash surrender value. Assumptions for lapse experience on life insurance are generally based on our five-year average experience. Lapse rates vary by plan, age at issue, method of premium payment, and policy duration. Premium Payment Patterns For universal life contracts, it...

  • Page 85
    .... The fair value of derivative financial instruments depends upon derivative types. The fair value of exchange-traded futures and options is determined using quoted prices in active markets, while the fair value of Management's Discussion and Analysis Sun Life Financial Inc. Annual Report 2015 83

  • Page 86
    ... accounts of segregated fund holders is determined using quoted prices in active markets or independent valuation information provided by investment managers. The fair value of direct investments within investments for accounts of segregated fund holders, such as short-term securities and government...

  • Page 87
    ... Prime Advisors, and Bentall Kennedy acquisitions, as well as software costs. Our indefinite life intangible assets had a carrying value of $673 million as at December 31, 2015. The value of the indefinite life intangible assets reflected fund management contracts of MFS and Bentall Kennedy. Income...

  • Page 88
    ... matching investments over the next few years. The target for our significant plans is to minimize volatility in funded status arising from changes in discount rates and exposure to equity markets. Due to the long-term nature of these defined benefit plans, the calculation of benefit expenses...

  • Page 89
    ...), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, we have concluded that our internal control over financial reporting was effective as of December 31, 2015. Management's Discussion and Analysis Sun Life Financial Inc. Annual Report 2015 87

  • Page 90
    Our internal control over financial reporting, as of December 31, 2015, has been audited by Deloitte LLP, the Company's Independent Registered Chartered Accountants, who also audited our Consolidated Financial Statements for the year ended December 31, 2015. As stated in the Report of Independent ...

  • Page 91
    ...Cash Flows NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Significant Accounting Policies Note 1 Changes in Accounting Policies Note 2 Acquisitions Note 3 Segmented Information Note 4 Total Invested Assets and Related Net Investment Income Note 5 Financial Instrument Risk Management Note 6 Insurance...

  • Page 92
    ... Audit & Conduct Review Committee to discuss the results of its audit. Dean A. Connor President and Chief Executive Officer Colm J. Freyne, CPA, CA Executive Vice-President and Chief Financial Officer Toronto, Canada February 10, 2016 90 Sun Life Financial Inc. Annual Report 2015 Consolidated...

  • Page 93
    ... shareholders' net income (loss) Average exchange rates during the reporting periods: U.S. dollars U.K. pounds Earnings (loss) per share (Note 27) Basic earnings (loss) per share Diluted earnings (loss) per share Dividends per common share The attached notes form part of these Consolidated Financial...

  • Page 94
    ... to income Total income tax benefit (expense) included in other comprehensive income (loss) The attached notes form part of these Consolidated Financial Statements. 2015 2014 $ (18) 61 54 (1) 2 98 12 12 $ 2 (99) 36 (5) 7 (59) 63 63 $ 110 $ 4 92 Sun Life Financial Inc. Annual Report 2015...

  • Page 95
    ...$ $ $ 204,485 10,805 8,067 18,872 223,357 1.38 2.04 1.16 1.81 Approved on behalf of the Board of Directors on February 10, 2016. Dean A. Connor President and Chief Executive Officer William D. Anderson Director Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2015 93

  • Page 96
    ...) on transfers to investment properties Unrealized gains (losses) on derivatives designated as cash flow hedges Cumulative changes in liabilities for defined benefit plans Balance, beginning of year Total other comprehensive income (loss) for the year Balance, end of year Total shareholders' equity...

  • Page 97
    ... items Operating cash items: Deferred acquisition costs Realized (gains) losses on assets Sales, maturities and repayments of invested assets Purchases of invested assets Change in policy loans Income taxes received (paid) Mortgage securitization (Note 5) Other cash items Net cash provided by (used...

  • Page 98
    ... services organization providing savings, retirement, and pension products, and life and health insurance to individuals and groups through our operations in Canada, the United States ("U.S."), the United Kingdom ("U.K."), and Asia. We also operate mutual fund and investment management businesses...

  • Page 99
    ... and Related Net Investment Income Note 1 Financial Assets Excluding Derivative Financial Instruments Note 6 Financial Instrument Risk Management Note 1 Income Taxes Note 21 Income Taxes Note 1 Pension Plans and Other Post-Retirement Benefits Note 26 Pension Plans and Other Post-Retirement Benefits...

  • Page 100
    ... to support products where investment returns are passed through to policyholders and therefore, changes in the fair value of those assets are significantly offset by changes in insurance contract liabilities. 98 Sun Life Financial Inc. Annual Report 2015 Notes to Consolidated Financial Statements

  • Page 101
    ...for an investment in an equity instrument or other invested asset also includes, but is not limited to, the financial condition and near-term prospects of the issuer, including information about significant changes with adverse effects that have taken place in the technological, market, economic, or...

  • Page 102
    ... as fair value hedges of the interest rate or foreign exchange rate risks associated with AFS assets. Changes in fair value of the derivatives are recorded in Interest and other investment income in our Consolidated Statements of Operations. The change in fair value of the AFS assets related to the...

  • Page 103
    ...for discount rates, capital, the value of new business, and expenses as well as cash flow projections, due to the uncertainty in the timing of and amount of cash flows and the forward-looking nature of these inputs. The assumptions may differ from the actual experience, and estimates may change from...

  • Page 104
    ...associated with the underlying investments are classified as Insurance contracts for account of segregated fund holders in our Consolidated Statements of Financial Position. Insurance contract liabilities, including policy benefits payable and provisions for policyholder dividends, are determined in...

  • Page 105
    ... associated with guarantees provided by us, are included in general fund liabilities in Insurance contract liabilities in our Consolidated Statements of Financial Position. Investment Contracts for Account of Segregated Fund Holders Investment contracts for account of segregated fund holders are...

  • Page 106
    .... Fee income includes fund management and other asset-based fees, commissions from intermediary activities, and fees on service contracts and is recognized when services are rendered. Share-Based Payments Stock options of SLF Inc. granted to employees are accounted for as equity-settled share-based...

  • Page 107
    2. Changes in Accounting Policies 2.A New and Amended International Financial Reporting Standards Adopted in 2015 We have adopted the following amended IFRS in the current year. In November 2013, Defined Benefit Plans: Employee Contributions was issued to amend IAS 19 Employee Benefits. These ...

  • Page 108
    ... with Assurant, Inc. ("Assurant") to acquire Assurant's U.S. Employee Benefits business for cash consideration of US$940 which consists of a ceding commission and a payment for the acquisition of direct 106 Sun Life Financial Inc. Annual Report 2015 Notes to Consolidated Financial Statements

  • Page 109
    ...derived principally from life and health insurance, investment management and annuities, and mutual funds. Revenues not attributed to the strategic business units are derived primarily from Corporate investments and earnings on capital. Transactions between segments are executed and priced on an arm...

  • Page 110
    SLF Canada 2014 Gross premiums: Annuities Life insurance Health insurance Total gross premiums Less: ceded premiums Net investment income (loss) Fee income Total revenue Less: Total benefits and expenses Income tax expense (benefit) Total net income (loss) $ SLF U.S. SLF Asset Management SLF Asia...

  • Page 111
    ... Bentall Kennedy. (2) Due to changes in how we report our segments, goodwill of $449 and intangible assets of $221 pertaining to MFS, previously classified in Corporate, have been reclassified to SLF Asset Management to be consistent with the 2015 presentation. 5. Total Invested Assets and Related...

  • Page 112
    ...segregated fund holders is determined using quoted prices in active markets or independent valuation information provided by investment managers. The fair value of direct investments within investments for account of segregated fund holders, such as short-term securities and government and corporate...

  • Page 113
    ... for account of segregated fund holders. Level 3: Fair value is based on valuation techniques that require one or more significant inputs that are not based on observable market inputs. These unobservable inputs reflect our expectations about the assumptions market participants would use in pricing...

  • Page 114
    ...,127 13,087 4,357 866 1,839 1,483 6,108 87,685 83,938 171,623 16 1,603 1,619 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ During 2014, we did not have any significant transfers between Level 1 and Level 2. 112 Sun Life Financial Inc. Annual Report 2015 Notes to Consolidated Financial Statements

  • Page 115
    ...reporting date(1) Assets Debt securities - fair value through profit or loss Debt securities - available-for-sale Equity securities - fair value through profit or loss Other invested assets Investment properties Total invested assets measured at fair value Investments for account of segregated fund...

  • Page 116
    ... based on NAV. The financial statements used in calculating the NAV are generally audited annually. We review the NAV of the limited partnership investments and perform analytical and other procedures to ensure the fair value is reasonable. 114 Sun Life Financial Inc. Annual Report 2015 Notes to...

  • Page 117
    ... the years ended December 31, Interest income: Cash, cash equivalents and short-term securities Debt securities - fair value through profit or loss Debt securities - available-for-sale Mortgages and loans Derivative investments Policy loans Total interest income Equity securities - dividends on fair...

  • Page 118
    ... Interest rate contracts Foreign exchange contracts Other contracts Total derivatives $ 1,707 71 88 1,866 Liabilities $ (437) (2,925) (16) (3,378) $ 2014 Fair value Assets 1,657 67 115 1,839 $ Liabilities (346) (1,240) (17) (1,603) $ $ $ $ 116 Sun Life Financial Inc. Annual Report 2015 Notes...

  • Page 119
    ... purchase of an equity investment in 2016. The reclassification of accumulated OCI to income relating to foreign currency forwards occurs upon disposal or impairment of the equity investment. 5.G Investment Properties Changes in investment properties are as follows: For the years ended December 31...

  • Page 120
    ...cash collateral of $193 and $155 as at December 31, 2015 and 2014, which is recognized on our Consolidated Statements of Financial Position. 6. Financial Instrument Risk Management The significant risks related to financial instruments are credit risk, market risk (equity market risk, interest rate...

  • Page 121
    ... quality ratings for portfolio investments has been established and is reviewed regularly. Internal rating decisions for new fixed income investments and ongoing review of existing rating decisions are independently adjudicated by corporate risk management. Comprehensive due diligence processes and...

  • Page 122
    ... higher recoveries in the event of default. The following tables provide details of the debt securities, mortgages, and loans held by issuer country, geographic location and industry sector, where applicable. 120 Sun Life Financial Inc. Annual Report 2015 Notes to Consolidated Financial Statements

  • Page 123
    ...921 2,911 2,733 31,661 2,812 $ 53,127 Availablefor-sale $ 1,717 768 406 536 3,427 3,034 1,384 516 1,556 576 962 8,028 1,632 $ 13,087 Total debt securities $ 3,548 11,103 1,589 5,841 22,081 12,544 11,262 2,224 6,477 3,487 3,695 39,689 4,444 $ 66,214 121 Sun Life Financial Inc. Annual Report 2015

  • Page 124
    ... for losses, is as follows: As at December 31, Due in 1 year or less Due in years 2-5 Due in years 6-10 Due after 10 years Total loans 122 Sun Life Financial Inc. Annual Report 2015 Notes to Consolidated Financial Statements 2015 $ 1,364 4,367 6,114 2,989 14,834 $ 2014 1,137 4,784 4,979 2,548...

  • Page 125
    ...short derivative positions that may include interest rate options, swaptions, or floors. (2) Our credit default swap program consists entirely of contracts based on investment grade underlying reference securities. Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2015...

  • Page 126
    ... the use of credit scoring models, to a particular mortgage or corporate loan. The internal credit ratings reflect the credit quality of the borrower as well as the value of any collateral held as security. 124 Sun Life Financial Inc. Annual Report 2015 Notes to Consolidated Financial Statements

  • Page 127
    ... following the reporting date as the exposure is affected by each transaction subject to the arrangement. (4) Net replacement cost is positive replacement cost less the impact of master netting agreements. Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2015 125

  • Page 128
    ... Impairment of Assets Management assesses debt and equity securities, mortgages and loans, and other invested assets for objective evidence of impairment at each reporting date. We employ a portfolio monitoring process to identify assets or groups of assets that have objective evidence of impairment...

  • Page 129
    ... risks, such as unemployment rates and housing prices, and loan-specific information such as delinquency rates and loan-to-value ratios. Equity Securities and Other Invested Assets Objective evidence of impairment for equity securities and investments in limited partnerships, segregated funds...

  • Page 130
    ... below: Market risk governance practices are in place, including independent monitoring and review and reporting to senior management and the Risk Review Committee. Risk appetite limits have been established for equity market, interest rate, real estate and foreign currency risks. Income and...

  • Page 131
    ... in certain general account products and segregated fund contracts, which contain explicit or implicit investment guarantees in the form of minimum crediting rates, guaranteed premium rates, settlement options, and benefit guarantees. If investment returns fall below guaranteed levels, we may be...

  • Page 132
    ... dividends on capital stock. Sources of available cash flow include general fund premiums and deposits, investment related inflows (such as maturities, principal repayments, investment income and proceeds of asset sales), proceeds generated from financing activities in normal markets, and dividends...

  • Page 133
    ...segregated funds, and specific types of health contracts). Additionally, our longevity risk exposure is exacerbated for certain annuity products such as guaranteed annuity options by an increase in equity market levels. Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report...

  • Page 134
    ... against those assumed in pricing and valuation. On experience rated, participating, and adjustable products, emerging experience is reflected through changes in policyholder dividend scales as well as other policy adjustment mechanisms such as premium and benefit levels. Limits and restrictions may...

  • Page 135
    ... monitored closely and reported annually to the Risk Review Committee. New sales of our products can be discontinued or changed to reflect developments in the reinsurance markets. Rates for in-force reinsurance treaties can be either guaranteed or adjustable for the life of the ceded policy. There...

  • Page 136
    ...report our segments, goodwill pertaining to MFS ($449 as at December 31, 2014), previously classified in Corporate, has been reclassified to SLF Asset Management to be consistent with the 2015 presentation. 134 Sun Life Financial Inc. Annual Report 2015 Notes to Consolidated Financial Statements

  • Page 137
    ... Individual Group retirement services Group benefits SLF U.S. Employee benefits group SLF Asia Hong Kong SLF Asset Management MFS(1) SLIM(2) Corporate U.K. Total $ 2015 1,066 453 1,054 464 609 523 261 216 $ 4,646 $ $ 2014 1,066 453 1,054 390 511 449 - 194 4,117 (1) Due to changes in how we report...

  • Page 138
    ... the Company are insurance contracts. These contracts include all forms of life, health and critical illness insurance sold to individuals and groups, life contingent annuities, accumulation annuities, and segregated fund products with guarantees. 136 Sun Life Financial Inc. Annual Report 2015 Notes...

  • Page 139
    ... for insurance contracts represent the estimated amounts which, together with estimated future premiums and net investment income, will provide for outstanding claims, estimated future benefits, policyholders' dividends, taxes (other than income taxes), and expenses on in-force insurance contracts...

  • Page 140
    ... outcomes. Non-Fixed Income Rates of Return We are exposed to equity markets through our segregated fund products (including variable annuities) that provide guarantees linked to underlying fund performance and through insurance products where the insurance contract liabilities are supported by...

  • Page 141
    ... of amounts on deposit, policy benefits payable, provisions for unreported claims, provisions for policyholder dividends, and provisions for experience rating refunds. (3) Balances have been changed to conform with current year presentation. 11.A.iv Changes in Insurance Contract Liabilities and...

  • Page 142
    ...of Investment contracts in-force Term certain payout annuities in Canada and the U.S. Guaranteed Investment Contracts in Canada Unit-linked products issued in the U.K. and Hong Kong Non-unit-linked pensions contracts issued in the U.K. and Hong Kong 140 Sun Life Financial Inc. Annual Report 2015...

  • Page 143
    ... cash payments to the liability at the date of initial recognition. 11.B.iii Investment Contract Liabilities Investment contract liabilities consist of the following: As at December 31, 2015 Individual participating life Individual non-participating life Individual annuities Group annuities...

  • Page 144
    ... December 31, Maturities and surrenders Annuity payments Death and disability benefits Health benefits Policyholder dividends and interest on claims and deposits Total gross claims and benefits paid (1) Balances have been changed to conform with current year presentation. 2015 $ 2,913 1,865 3,499...

  • Page 145
    ... on deposit, policy benefits payable, provisions for unreported claims, provisions for policyholder dividends, and provisions for experience rating refunds. As at December 31, 2014 Individual participating life Individual non-participating life Group life Individual annuities Health insurance...

  • Page 146
    ... fair value is determined by discounting the expected future cash flows using a current market interest rate adjusted by SLF Inc.'s credit spread and is categorized in Level 3 of the fair value hierarchy. 144 Sun Life Financial Inc. Annual Report 2015 Notes to Consolidated Financial Statements

  • Page 147
    ... shares of Sun Life Assurance. In the case of the SLEECS B, if a Missed Dividend Event occurs, the net distributable funds of SLCT I will be distributed to Sun Life Assurance as the holder of Special Trust Securities of that trust. If the SL Capital Trusts fail to pay in cash the semi-annual...

  • Page 148
    ... payment date. Redemption of all subordinated debentures is subject to regulatory approval. The notes issued by Sun Canada Financial Co. are not redeemable prior to maturity. (2) 6.30% Debentures, Series 2, due 2028. Issued by The Mutual Life Assurance Company of Canada, which thereafter changed...

  • Page 149
    ... for dividend reinvestments in all of 2014 and 2015 were issued with no discount. An insignificant number of common shares were issued from treasury in 2014 and 2015 for optional cash purchases at no discount. Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2015 147

  • Page 150
    ... Kong, the Philippines, and Indonesia. These insurance operations are operated directly by Sun Life Assurance Company of Canada or through other subsidiaries. Sun Life Global Investments Inc. holds our asset management businesses, including Massachusetts Financial Services Company, Bentall Kennedy...

  • Page 151
    ..., the Philippines, Vietnam, and Malaysia. We also have interests in joint ventures related to certain real estate investments in Canada. Our interests in these joint ventures and associates range from 24.99% to 49%. The following table summarizes, in aggregate, the financial information of these...

  • Page 152
    ... funds managed by SLIM Inc. that invest primarily in mortgages and loans and investment properties. During 2014, we contributed $656 of assets to these funds in exchange for units issued by the funds. 150 Sun Life Financial Inc. Annual Report 2015 Notes to Consolidated Financial Statements

  • Page 153
    ... employees under the Executive Stock Option Plan. These options are granted at the closing price of the common shares on the Toronto Stock Exchange ("TSX") on the grant date for stock options granted after January 1, 2007, and the closing price of the trading day preceding the grant date for stock...

  • Page 154
    ... government bond yield curve in effect at the time of grant. 20.B Employee Share Ownership Plan In Canada, we match eligible employees' contributions to the Sun Life Financial Employee Stock Plan. Employees may elect to contribute from 1% to 20% of their target annual compensation to the Sun Life...

  • Page 155
    ...the vesting period at the same rate as the dividends on MFS's shares. Although restricted share awards and stock option awards are settled in shares, all of the MFS share-based awards, including outstanding MFS shares, are accounted for as cash-settled share-based payment awards due to the fact that...

  • Page 156
    ... benefits $ 364 2 (29) 12 27 376 $ Investments As at December 31, 2014 Acquisitions (disposals) through business combinations Charged to statement of operations Charged to other comprehensive income Foreign exchange rate movements As at December 31, 2015 $ (1,157) - 235 86 (101) $ (937) Policy...

  • Page 157
    ...tax rate differences related to various types of investment income that is taxed at rates lower than our statutory income tax rate, such as dividend income, capital gains arising in Canada, and various others. Fluctuations in foreign exchange rates, changes in market values of real estate properties...

  • Page 158
    ... with their individual risk profiles. The Board of Directors of SLF Inc. is responsible for the annual review and approval of the Company's capital plan and capital risk policy. Management oversight of our capital programs and position is provided by the Company's Executive Risk Committee, the...

  • Page 159
    ...to equity market risk and interest rate risk as a result of these guarantees. Further details on these guarantees and our risk management activities related to these guarantees are included in the Risk Management section of the MD&A. We derive fee income from segregated funds. Market value movements...

  • Page 160
    ...and investment contracts for account of segregated fund holders are as follows: Insurance contracts For the years ended December 31, Balance as at January 1 Additions to segregated funds: Deposits Net transfer (to) from general funds Net realized and unrealized gains (losses) Other investment income...

  • Page 161
    ... putative class action lawsuits have been filed against Sun Life Assurance in connection with sales practices relating to, and the administration of, individual policies issued by the Metropolitan Life Insurance Company ("MLIC"). These policies were assumed by Clarica when Clarica acquired the bulk...

  • Page 162
    ... have access to voluntary retiree-paid health care coverage. In the U.S., certain post-retirement health care and life insurance benefits are provided to eligible retirees. In 2015, changes in the U.S. retiree benefits program were announced; employees who are not age 50 with 10 years of service as...

  • Page 163
    ... years. The target for our material funded defined benefit plans is to minimize volatility in funded status arising from changes in discount rates and exposure to equity markets. 26.B Defined Benefit Pension and Other Post-Retirement Benefit Plans 2015 Pension Change in defined benefit obligations...

  • Page 164
    ... 2015 Canada % To determine defined benefit obligation at end of year: Discount rate for pension plans Rate of compensation increase Pension increases To determine net benefit expense for year: Discount rate for pension plans Rate of compensation increase Pension increases Health care trend rates...

  • Page 165
    ...benefit obligations vary by country. The discount rate assumption used in each country is based on the market yields, as of December 31, of high quality corporate bonds that have terms to maturity approximating the terms of the related obligation. Health care cost calculations are based on long-term...

  • Page 166
    ... B issued by Sun Life Capital Trust I. (2) Excludes the impact of 2 million stock options for the year ended December 31, 2015 (2 million for the year ended December 31, 2014) because these stock options were antidilutive for the period. 164 Sun Life Financial Inc. Annual Report 2015 Notes to...

  • Page 167
    ...'s Report THE SHAREHOLDERS AND DIRECTORS OF SUN LIFE FINANCIAL INC. I have valued the policy liabilities and reinsurance recoverables of Sun Life Financial Inc. and its subsidiaries for its Consolidated Statements of Financial Position at December 31, 2015 and December 31, 2014 and their change in...

  • Page 168
    ... statements of comprehensive income (loss), consolidated statements of changes in equity, and consolidated statements of cash flows for each of the years in the two-year period ended December 31, 2015, and a summary of significant accounting policies and other explanatory information. Management...

  • Page 169
    ... internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide...

  • Page 170
    ... best-estimate assumptions at the start of the reporting period. Management actions and changes in assumptions Impact on pre-tax net income resulting from changes in actuarial methods and assumptions or other management actions. 168 Sun Life Financial Inc. Annual Report 2015 Sources of Earnings

  • Page 171
    ... Participating Policyholders' Net Income Preferred Share Dividends Operating Net Income (Loss) Plus: Fair value adjustments on share based payment awards in MFS Hedges in Canada that do not qualify for hedge accounting Acquisition, integration and restructuring costs Common Shareholders' Net Income...

  • Page 172
    ... than a year ago. The increase was primarily due to higher investment income on surplus assets, higher real estate mark to market impacts and lower interest payments on external debt, offset partially by lower available-for-sale gains. 170 Sun Life Financial Inc. Annual Report 2015 Sources of...

  • Page 173
    ... Corporate Director (1) (2) (3) (4) Member of Audit & Conduct Review Committee Member of Governance, Nomination & Investment Committee Member of Management Resources Committee Member of Risk Review Committee Additional information on the directors and a report on the Board's corporate governance...

  • Page 174
    ..., Inc. Sun Life of Canada (Philippines), Inc. Sun Life Asset Management Company, Inc. Sun Life Financial Plans, Inc. Sun Life Financial Trust Inc. Sun Life Hong Kong Limited Sun Life Asset Management (HK) Limited Sun Life Trustee Company Limited Sun Life India Service Centre Private Limited Sun Life...

  • Page 175
    ... LLC Prime Advisors, Inc. Ryan Labs Asset Management Inc. Ryan Labs Fund Management, LLC Ryan Labs TIPS Partners, L.P. Sun Life of Canada (U.S.) Financial Services Holdings, Inc. Massachusetts Financial Services Company MFS Bermuda Holdings Ltd. MFS Development Funds, LLC MFS Exchange LLC MFS Fund...

  • Page 176
    ... Ltd MFS International Singapore Pte. Ltd. MFS Investment Management Company (LUX) S.Ã .r.l. MFS Investment Management K.K. MFS Service Center, Inc. Sun Life of Canada (U.S.) Holdings, Inc. Independence Life and Annuity Company Sun Life Financial (U.S.) Reinsurance Company II Professional Insurance...

  • Page 177
    ... New York, NY 10110 Tel: 212-635-2300 Website: ryanlabs.com Sun Life Asset Management Company Inc. Head Office 8/F Sun Life Centre 5th Avenue cor. Rizal Drive Bonifacio Global City Taguig, Metro Manila Philippines Call Centre: (632) 555-8888 Website: sunlife.com.ph Birla Sun Life Asset Management...

  • Page 178
    Notes 176 Sun Life Financial Inc. Annual Report 2015

  • Page 179
    ...TSX), New York (NYSE) and Philippine (PSE) stock exchanges. Ticker Symbol: SLF 2016 Annual Meeting The Annual Meeting will be held on: Date: Wednesday, May 11, 2016 Time: 9:00 a.m. Place: Sun Life Financial Tower 150 King Street West (at University Avenue) 2nd Floor, Toronto, Canada Dividends 2016...

  • Page 180
    ... the paper stock comes from well managed forests, controlled sources and recycled wood fibre. The greenhouse gas emissions associated with the production, distribution and paper lifecycle of this report have been calculated and offset by Carbonzero. SUN LIFE FINANCIAL INC . ANNUAL REPORT 2015 150...