Sun Life 2015 Annual Report Download - page 158

Adjustments in respect of prior periods, including the resolution of tax disputes in 2015 relates primarily to audit adjustments and the
finalization of 2014 tax filings in Canada and the U.S. In 2014, the adjustments mainly related to the finalization of tax filings in various
jurisdictions.
Other in 2015 includes $50 ($4 in 2014) relating to withholding taxes on distributions from our foreign subsidiaries.
22. Capital Management
Our capital base is structured to exceed minimum regulatory and internal capital targets and maintain strong credit and financial
strength ratings while maintaining a capital efficient structure. We strive to achieve an optimal capital structure by balancing the use of
debt and equity financing. Capital is managed both on a consolidated basis under principles that consider all the risks associated with
the business as well as at the business group level under the principles appropriate to the jurisdiction in which each operates. We
manage the capital for all of our international subsidiaries on a local statutory basis in a manner commensurate 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
membership of which includes senior management from the finance, actuarial, and risk management functions.
We engage in a capital planning process annually in which capital deployment options, fundraising, and dividend recommendations are
presented to the Risk Review Committee of the Board of Directors. Capital reviews are regularly conducted which consider the
potential impacts under various business, interest rate, and equity market scenarios. Relevant components of these capital reviews,
including dividend recommendations, are presented to the Risk Review Committee on a quarterly basis. The Board of Directors is
responsible for the approval of the dividend recommendations.
The capital risk policy is designed to ensure that adequate capital is maintained to provide the flexibility necessary to take advantage of
growth opportunities, to support the risks associated with our businesses and to optimize return to our shareholders. This policy is also
intended to provide an appropriate level of risk management over capital adequacy risk, which is defined as the risk that capital is not
or will not be sufficient to withstand adverse economic conditions, to maintain financial strength or to allow us and our subsidiaries to
support ongoing operations and to take advantage of opportunities for expansion.
Prior to January 1, 2016, SLF Inc. was subject to OSFI’s Guideline A-2 – Capital Regime for Regulated Insurance Holding Companies
and Non-Operating Life Companies, which sets out the framework to assess capital adequacy for regulated insurance holding
companies and non-operating life companies (collectively, “Insurance Holding Companies”). In accordance with this guideline, SLF Inc.
manages its capital in a manner commensurate with its risk profile and control environment, and SLF Inc.‘s regulated subsidiaries
comply with the capital adequacy requirements imposed in the jurisdictions in which they operate. SLF Inc.‘s consolidated capital
position is above its internal target. SLF Inc. exceeded levels that would require regulatory or corrective action as at
December 31, 2015 and December 31, 2014. Effective January 1, 2016, Insurance Holding Companies are subject to the MCCSR
capital rules which have been established by OSFI with Guideline A-2 repealed.
The Company’s regulated subsidiaries must comply with the capital adequacy requirements imposed in the jurisdictions in which they
operate. In certain jurisdictions, the payment of dividends from our subsidiaries is subject to maintaining capital levels exceeding
regulatory targets and/or receiving regulatory approval. We maintained capital levels above minimum local requirements as at
December 31, 2015 and December 31, 2014.
Our principal operating life insurance subsidiary in Canada, Sun Life Assurance, is also subject to the MCCSR capital rules. We expect
to maintain an MCCSR ratio for Sun Life Assurance at or above 200%. With an MCCSR ratio of 240% as at December 31, 2015, Sun
Life Assurance’s capital ratio is well above OSFI’s supervisory target ratio of 150% and regulatory minimum ratio of 120%. In the U.S.,
Sun Life Assurance operates through a branch which is subject to U.S. regulatory supervision and it exceeded the levels under which
regulatory action would be required as at December 31, 2015 and December 31, 2014. In the U.S., we use captive reinsurance
arrangements to provide efficient financing of U.S. statutory reserve requirements in excess of those required under IFRS. Under one
such arrangement, the funding of these reserve requirements is supported by a guarantee from SLF Inc.
Our capital base consists mainly of common shareholders’ equity, participating policyholders’ equity, preferred shareholders’ equity
and certain other capital securities that qualify as regulatory capital. For regulatory reporting purposes, there are further adjustments
including goodwill, non-life investments, and others as prescribed by OSFI to the total capital figure presented in the table below.
As at December 31, 2015 2014
Equity:
Participating policyholders’ equity $ 168 $ 141
Preferred shareholders’ equity 2,257 2,257
Common shareholders’ equity 18,993 16,474
Total equity included in capital 21,418 18,872
Less: Unrealized gains (losses) on available-for-sale debt securities and cash flow hedges 56 346
Equity after adjustments 21,362 18,526
Other capital securities:
Subordinated debt 2,492 2,168
Innovative capital instruments(1) 697 697
Total capital $ 24,551 $ 21,391
(1) Innovative capital instruments are SLEECS issued by the SL Capital Trusts (Note 14). The SL Capital Trusts are not consolidated by us.
The significant changes in capital are included in Notes 14, 15, and 16.
156 Sun Life Financial Inc. Annual Report 2015 Notes to Consolidated Financial Statements