Sun Life 2015 Annual Report Download - page 121

companies. Events that result in defaults, impairments or downgrades of the securities in our investment portfolio would cause the
Company to record realized or unrealized losses and increase our provisions for asset default, adversely impacting earnings.
Credit Risk Management Governance and Control
We employ a wide range of credit risk management practices and controls, as outlined below:
• Credit 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 credit risk.
• Income and regulatory capital sensitivities are monitored, managed and reported against pre-established risk limits.
• Comprehensive Investment and Credit Risk Management Policy, guidelines and practices are in place.
• Specific investment diversification requirements are in place, such as defined investment limits for asset class, geography, and
industry.
• Risk-based credit portfolio, counterparty, and sector exposure limits have been established.
• Mandatory use of credit 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 ongoing credit analyses are conducted.
• Regulatory solvency requirements include risk-based capital requirements and are monitored regularly.
• Comprehensive compliance monitoring practices and procedures including reporting against pre-established investment limits are in
place.
• Reinsurance exposures are monitored to ensure that no single reinsurer represents an undue level of credit risk.
• Stress-testing techniques, such as Dynamic Capital Adequacy Testing (“DCAT”), are used to measure the effects of large and
sustained adverse credit developments.
• Insurance contract liabilities are established in accordance with Canadian actuarial standards of practice.
• Internal capital targets are established at an enterprise level to cover all risks and are above regulatory supervisory and minimum
targets. Actual capital levels are monitored to ensure they exceed internal targets.
6.A.i Maximum Exposure to Credit Risk
Our maximum credit exposure related to financial instruments as at December 31 is the balance as presented in our Consolidated
Statements of Financial Position as we believe that these carrying amounts best represent the maximum exposure to credit risk. The
credit exposure for debt securities may be increased to the extent that the amounts recovered from default are insufficient to satisfy the
actuarial liability cash flows that the assets are intended to support.
The positive fair value of derivative assets is used to determine the credit risk exposure if the counterparties were to default. The credit
risk exposure is the cost of replacing, at current market rates, all derivative contracts with a positive fair value. Additionally, we have
credit exposure to items not on the Consolidated Statements of Financial Position as follows:
As at December 31, 2015 2014
Off-balance sheet items:
Loan commitments(1) $ 816 $ 1,159
Guarantees 53 61
Total off-balance sheet items $ 869 $ 1,220
(1) Loan commitments include commitments to extend credit under commercial and residential mortgages and private debt securities not quoted in an active market.
Commitments on debt securities contain provisions that allow for withdrawal of the commitment if there is deterioration in the credit quality of the borrower.
6.A.ii Right of Offset and Collateral
We invest in financial assets which may be secured by real estate properties, pools of financial assets, third-party financial guarantees,
credit insurance, and other arrangements.
For OTC derivatives, collateral is collected from and pledged to counterparties to manage credit exposure according to the Credit
Support Annexes (“CSA”), which forms part of the International Swaps and Derivatives Association’s (“ISDA”) master agreements. It is
common practice to execute a CSA in conjunction with an ISDA master agreement. Under the ISDA master agreements for OTC
derivatives, we have a right of offset in the event of default, insolvency, bankruptcy, or other early termination. In the ordinary course of
business, bilateral OTC exposures under these agreements are substantially mitigated through associated collateral agreements with a
majority of our counterparties.
For exchange-traded derivatives subject to derivative clearing agreements with the exchanges and clearinghouses, there is no
provision for set-off at default. Initial margin is excluded from the table below as it would become part of a pooled settlement process.
For repurchase agreements and reverse repurchase agreements, assets are sold or purchased with a commitment to resell or
repurchase at a future date. Additional collateral may be pledged to or collected from counterparties to manage credit exposure
according to bilateral repurchase or reverse repurchase agreements. In the event of default by a counterparty, we are entitled to
liquidate the assets we hold as collateral to offset against obligations to the same counterparty.
In the case of securities lending, assets are lent with a commitment from the counterparty to return at a future date. Cash or securities
are received as collateral from the counterparty. In the event of default by the counterparty, we are entitled to liquidate the assets we
hold as collateral to offset against obligations to the same counterparty.
Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2015 119