Sun Life 2015 Annual Report Download - page 120

5.H.i Mortgage Securitization
We securitize certain insured fixed rate commercial mortgages through the creation of mortgage-backed securities under the National
Housing Act Mortgage-Backed Securities (“NHA MBS”) Program sponsored by the Canada Mortgage and Housing Corporation
(“CMHC”). The NHA MBS are then sold to Canada Housing Trust, a government-sponsored security trust that issues securities to third-
party investors under the Canadian Mortgage Bond (“CMB”) program. The securitization of these assets does not qualify for
derecognition as we have not transferred substantially all of the risks and rewards of ownership. Specifically, we continue to be
exposed to pre-payment and interest rate risk associated with these assets. There are no expected credit losses on the securitized
mortgages, as the mortgages were already insured by the CMHC prior to securitization. These assets continue to be recognized as
Mortgages and loans in our Consolidated Statements of Financial Position. Proceeds from securitization transactions are recognized
as secured borrowings and included in Other liabilities in our Consolidated Statements of Financial Position.
Receipts of principal on the securitized mortgages are deposited into a principal reinvestment account (“PRA”) to meet our repayment
obligation upon maturity under the CMB program. The assets in the PRA are typically comprised of cash and cash equivalents and
certain asset-backed securities. We are exposed to reinvestment risk due to the amortizing nature of the securitized mortgages relative
to our repayment obligation for the full principal amount due at maturity. We mitigate this reinvestment risk using interest rate swaps.
The carrying value and fair value of the securitized mortgages as at December 31, 2015 are $654 and $668, respectively ($299 and
$311 as at December 31, 2014). The carrying value and fair value of the associated liabilities as at December 31, 2015 are $667 and
$689, respectively ($303 and $313 as at December 31, 2014). The carrying value of asset-backed securities in the PRA as at
December 31, 2015 and 2014 are $17 and $6, respectively. There are no cash and cash equivalents in the PRA as at December 31,
2015 and 2014.
The fair value of the secured borrowings from mortgage securitization is based on the methodologies and assumptions for asset-
backed securities described in Note 5.A. The fair value of these liabilities is categorized in Level 2 of the fair value hierarchy as at
December 31, 2015 and 2014.
5.H.ii Repurchase Agreements
We enter into repurchase agreements for operational funding and liquidity purposes. Repurchase agreements have maturities ranging
from 8 to 76 days, averaging 50 days, and bear interest at an average rate of 0.61% as at December 31, 2015 (1.04% as at
December 31, 2014). The fair values of the transferred assets and the obligations related to their repurchase, which approximate their
carrying values, are $1,549 as at December 31, 2015 ($1,333 as at December 31, 2014). These liabilities are categorized in Level 2 of
the fair value hierarchy. Collateral primarily consists of cash and cash equivalents as well as government guaranteed securities. Details
on the collateral pledged are included in Note 6.A.ii.
5.H.iii Securities Lending
The Company engages in securities lending to generate additional income. Certain securities from its portfolio are lent to other
institutions for short periods. Collateral exceeding the fair value of the securities lent, is deposited by the borrower with a lending agent,
usually a securities custodian, and maintained by the lending agent until the underlying security has been returned to us. The fair value
of the securities lent is monitored on a daily basis with additional collateral obtained or refunded as the fair values fluctuate. Collateral
primarily consists of Canadian federal and provincial government securities and cash and cash equivalents. Certain arrangements
allow us to invest the cash collateral received for the securities lent. The carrying values of the securities lent approximate their fair
values. The carrying values of the securities lent and the related collateral held are $1,438 and $1,511 as at December 31, 2015
($1,415 and $1,485 as at December 31, 2014). Of the collateral held, we held 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 and spread risk, and
foreign currency risk) and liquidity risk. The following sections describe how we manage these risks.
Some of our financial instruments risk management policies and procedures are described in our Annual Management’s Discussion
and Analysis (“MD&A”) for the year ended December 31, 2015. The shaded text and tables in the Risk Management section of the
MD&A represent part of our disclosures on credit, market and liquidity risks and include a description of how we measure our risk and
our objectives, policies and methodologies for managing these risks. Therefore, the shaded text and tables are an integral part of these
Consolidated Financial Statements.
We use derivative instruments to manage risks related to equity market, interest rate and currency fluctuations and in replication
strategies for permissible investments. We do not engage in speculative investment in derivatives. The gap in market sensitivities or
exposures between liabilities and supporting assets is monitored and managed within defined tolerance limits, by using derivative
instruments, where appropriate. We use models and techniques to measure the effectiveness of our risk management strategies.
6.A Credit Risk
Risk Description
Credit risk is the possibility of loss from amounts owed by our borrowers or financial counterparties. We are subject to credit risk in
connection with issuers of securities held in our investment portfolio, debtors, structured securities, reinsurers, counterparties (including
derivative, repurchase agreement and securities lending counterparties), other financial institutions and other entities. Losses may
occur when a counterparty fails to make timely payments pursuant to the terms of the underlying contractual arrangement or when the
counterparty’s credit rating or risk profile otherwise deteriorates. Credit risk can also arise in connection with deterioration in the value
of, or ability to, realize on any underlying security that may be used as collateral for the debt obligation. Credit risk can occur at multiple
levels, as a result of broad economic conditions, challenges within specific sectors of the economy, or from issues affecting individual
118 Sun Life Financial Inc. Annual Report 2015 Notes to Consolidated Financial Statements