Sun Life 2015 Annual Report Download - page 67

Foreign Currency Risk
Foreign currency risk is the result of mismatches in the currency of our assets and liabilities (inclusive of capital), and cash flows. This
risk may arise from a variety of sources such as foreign currency transactions and services, foreign exchange hedging, investments
denominated in foreign currencies, investments in foreign subsidiaries and net income from foreign operations. Changes or volatility in
foreign exchange rates could adversely affect our financial condition and results of operations.
As an international provider of financial services, we operate in a number of countries, with revenues and expenses denominated in
several local currencies. In each country in which we operate, we generally maintain the currency profile of assets to match the
currency of aggregate liabilities and required surplus. This approach provides an operational hedge against disruptions in local
operations caused by currency fluctuations. Foreign exchange derivative contracts such as currency swaps and forwards are used as a
risk management tool to manage the currency exposure in accordance with our asset-liability management policy. As at December 31,
2015 and December 31, 2014, the Company did not have a material foreign currency risk exposure on a functional currency basis.
Changes in exchange rates can, however, affect our net income and surplus when financial results in functional currencies are
translated into Canadian dollars. Net income earned outside of Canada is generally not currency hedged and a weakening in the local
currency of our foreign operations relative to the Canadian dollar can have a negative impact on our net income reported in Canadian
currency. A strengthening in the local currency of our foreign operations relative to the Canadian dollar would have the opposite effect.
Regulatory capital ratios could also be impacted by changes in exchange rates to the extent that changes in available capital and
required capital do not offset.
Additional Cautionary Language and Key Assumptions Related to Sensitivities
Our market risk sensitivities are measures of our estimated change in net income and OCI for changes in interest rates and equity
market price levels described above, based on interest rates, equity market prices and business mix in place as at the respective
calculation dates. These sensitivities are calculated independently for each risk factor, generally assuming that all other risk variables
stay constant. The sensitivities do not take into account indirect effects such as potential impacts on goodwill impairment or valuation
allowances on deferred tax assets. The sensitivities are provided for the consolidated entity and may not be proportional across all
reporting segments. Actual results can differ materially from these estimates for a variety of reasons, including differences in the
pattern or distribution of the market shocks, the interaction between these risk factors, model error, or changes in other assumptions
such as business mix, effective tax rates, policyholder behaviour, currency exchange rates and other market variables relative to those
underlying the calculation of these sensitivities. The extent to which actual results may differ from the indicative ranges will generally
increase with larger capital market movements. Our sensitivities as at December 31, 2014 have been included for comparative
purposes only.
We have also provided measures of our net income sensitivity to instantaneous changes in credit spreads, swap spreads, real estate
price levels and capital sensitivities to changes in interest rates and equity price levels. The real estate sensitivities are non-IFRS
financial measures. For additional information, see Use of Non-IFRS Financial Measures. The cautionary language which appears in
this section is also applicable to the credit spread, swap spread, real estate and MCCSR ratio sensitivities. In particular, these
sensitivities are based on interest rates, credit and swap spreads, equity market and real estate price levels as at the respective
calculation dates and assume that all other risk variables remain constant. Changes in interest rates, credit and swap spreads, equity
market and real estate prices in excess of the ranges illustrated may result in other-than-proportionate impacts.
As these market risk sensitivities reflect an instantaneous impact on net income, OCI and Sun Life Assurance’s MCCSR ratio, they do
not include impacts over time such as the effect on fee income in our asset management businesses.
The sensitivities reflect the composition of our assets and liabilities as at December 31, 2015 and December 31, 2014, respectively.
Changes in these positions due to new sales or maturities, asset purchases/sales or other management actions could result in
material changes to these reported sensitivities. In particular, these sensitivities reflect the expected impact of hedging activities based
on the hedge programs in place as at the December 31 calculation dates. The actual impact of these hedging activities can differ
materially from that assumed in the determination of these indicative sensitivities due to ongoing hedge re-balancing activities,
changes in the scale or scope of hedging activities, changes in the cost or general availability of hedging instruments, basis risk
(i.e., the risk that hedges do not exactly replicate the underlying portfolio experience), model risk and other operational risks in the
ongoing management of the hedge programs or the potential failure of hedge counterparties to perform in accordance with
expectations.
The sensitivities are based on methods and assumptions in effect as at December 31, 2015 and December 31, 2014, as applicable.
Changes in the regulatory environment, accounting or actuarial valuation methods, models, or assumptions after those dates could
result in material changes to these reported sensitivities. Changes in interest rates and equity market prices in excess of the ranges
illustrated may result in other than proportionate impacts.
Our hedging programs may themselves expose us to other risks, including basis risk (i.e., the risk that hedges do not exactly replicate
the underlying portfolio experience), derivative counterparty credit risk, and increased levels of liquidity risk, model risk and other
operational risks. These factors may adversely impact the net effectiveness, costs, and financial viability of maintaining these hedging
programs and therefore adversely impact our profitability and financial position. While our hedging programs are intended to mitigate
these effects (e.g., hedge counterparty credit risk is managed by maintaining broad diversification, dealing primarily with highly rated
counterparties, and transacting through ISDA agreements that generally include applicable credit support annexes), residual risk,
potential reported earnings and capital volatility remain.
For the reasons outlined above, our sensitivities should only be viewed as directional estimates of the underlying sensitivities of each
factor under these specialized assumptions, and should not be viewed as predictors of our future net income, OCI, and capital
sensitivities. Given the nature of these calculations, we cannot provide assurance that actual impact will be consistent with the
estimates provided.
Management’s Discussion and Analysis Sun Life Financial Inc. Annual Report 2015 65