Sun Life 2015 Annual Report Download - page 64

Credit Spread Sensitivities ($ millions, after-tax)
Net income sensitivity(1)(2) 50 basis point decrease 50 basis point increase
December 31, 2015 $ (100) $ 75
December 31, 2014 $ (100) $ 125
(1) Sensitivities have been rounded to the nearest $25 million.
(2) In most instances, credit spreads are assumed to revert to long-term insurance contract liability assumptions generally over a five-year period.
Swap Spread Sensitivities ($ millions, after-tax)
Net income sensitivity(1) 20 basis point decrease 20 basis point increase
December 31, 2015 $ 50 $ (50)
December 31, 2014 $ 75 $ (75)
(1) Sensitivities have been rounded to the nearest $25 million.
The credit and swap spread sensitivities assume a parallel shift in the indicated spreads across the entire term structure. Variations in
realized spread changes based on different terms to maturity, geographies, asset classes and derivative types, underlying interest rate
movements, and ratings may result in realized sensitivities being significantly different from those provided above. The credit spread
sensitivity estimates exclude any credit spread impact that may arise in connection with asset positions held in segregated funds.
Spread sensitivities are provided for the consolidated entity and may not be proportional across all reporting segments. 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.
Market Risk Management Strategies
Market risk is managed at all stages during the product life cycle including product design and development, ongoing review and
positioning of our suite of products, and ongoing asset-liability management and hedge re-balancing.
We have implemented asset-liability management and hedging programs involving regular monitoring and adjustment of market risk
exposures using assets, derivative instruments and repurchase agreements to maintain market risk exposures within our risk appetite.
The general availability and cost of these hedging instruments may be adversely impacted by a number of factors including changes in
market levels and volatility, and changes in the general market and regulatory environment within which these hedging programs
operate. In addition, these programs may themselves expose us to 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 and implemented to optimize return within our risk appetite limits.
In general, market risk exposure is mitigated by the assets supporting our products. This includes holdings of fixed income assets such
as bonds and mortgages. Derivative instruments may supplement these assets to reduce the risk from cash flow mismatches and
mitigate the market risk associated with liability features and optionality. The following table sets out the use of derivatives across a
number of our products as at December 31, 2015.
Asset-Liability Management Applications for Derivative Usage
The primary uses of derivatives are set out in the table below.
Products/Application Uses of Derivative Derivatives Used
General asset-liability management –
interest rate risk exposure for most
insurance and annuity products
To manage the sensitivity of the
duration gap between assets and
liabilities to interest rate changes
Interest rate swaps, swaptions, floors
and bond futures
Guarantees on insurance and annuity
contracts – minimum interest rate
guarantees, guaranteed surrender values
and guaranteed annuitization options
To limit potential financial losses from
significant reductions in asset earned
rates relative to contract guarantees
Swaptions, floors, interest rate swaps,
futures on interest rates and spread
locks on interest rates
Segregated fund guarantees To manage the exposure of product
guarantees sensitive to movement in
equity market and interest rate levels
Put and call options on equity indices,
futures on equity indices, government
debt securities, interest rate swaps and
futures, and foreign exchange forwards
Currency exposure in relation to asset-
liability management
To reduce the sensitivity to currency
fluctuations by matching the value and
cash flows of specific assets
denominated in one currency with the
value and cash flows of the
corresponding liabilities denominated in
another currency
Currency swaps and forwards
Credit exposure To replicate credit exposures and
enhance investment returns
Credit default swaps
62 Sun Life Financial Inc. Annual Report 2015 Management’s Discussion and Analysis