Sun Life 2015 Annual Report Download - page 62

A sustained low interest rate environment may adversely impact our earnings, regulatory capital requirements and our ability to
implement our business strategy and plans in several ways, including:
• Lower sales of certain protection and wealth products, which can in turn pressure our operating expense levels;
• Shifts in the expected pattern of redemptions (surrenders) on existing policies;
• Higher hedging costs;
• Higher new business strain reflecting lower new business profitability;
• Reduced return on new fixed income asset purchases;
• The impact of changes in actuarial assumptions driven by capital market movements;
• Impairment of goodwill; and
• Additional valuation allowances against our deferred tax assets.
Market Risk Sensitivities
We utilize a variety of methods and measures to quantify our market risk exposures. These include duration management, key rate
duration techniques, convexity measures, cash flow gap analysis, scenario testing, and sensitivity testing of earnings and regulatory
capital ratios versus risk appetite limits which are calibrated to our risk appetite.
Our earnings are affected by the determination of policyholder obligations under our annuity and insurance contracts. These amounts
are determined 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 and swap spreads and other factors over the life of our products. Differences
between our actual experience and our best estimate assumptions are reflected in our Annual Consolidated Financial Statements.
Refer to the section of this MD&A under the heading Additional Cautionary Language and Key Assumptions Related to Sensitivities
for important additional information regarding these estimates.
The market value of our investments in fixed income and equity securities fluctuates based on movements in interest rates and equity
markets. The market value of fixed income assets designated as AFS that are held primarily in our surplus segment increases
(decreases) with declining (rising) interest rates. The market value of equities designated as AFS and held primarily in our surplus
segment increases (decreases) with rising (declining) equity markets. Changes in the market value of AFS assets flow through OCI
and are only recognized in net income when realized upon sale, or when considered impaired. The amount of realized gains (losses)
recorded in net income in any period is equal to the unrealized gains (losses) or OCI position at the start of the period plus the change
in market value during the current period up to the point of sale for those securities that were sold during the period. The sale or
impairment of AFS assets held in surplus can therefore have the effect of modifying our net income sensitivity.
We realized $39 million (pre-tax) in net gains on the sale of AFS assets during the fourth quarter of 2015 and $228 million (pre-tax) in
2015 ($49 million pre-tax in the fourth quarter of 2014 and $202 million pre-tax in 2014). The net unrealized gains or OCI position on
AFS fixed income and equity assets were $53 million and $197 million, respectively, after-tax as at December 31, 2015 ($340 million
and $208 million, respectively, after-tax as at December 31, 2014).
60 Sun Life Financial Inc. Annual Report 2015 Management’s Discussion and Analysis