Sun Life 2015 Annual Report Download - page 82

securitization of the residential mortgages with the CMHC does not qualify for derecognition and remains on our Consolidated
Statements of Financial Position. Additional information on this program can be found in Note 5 to our 2015 Annual Consolidated
Financial Statements.
Securities Lending
We lend securities in our investment portfolio to other institutions for short periods to generate additional fee income. We conduct our
program only with well-established, reputable banking institutions that carry a minimum credit rating of “AA”. Collateral, which exceeds
the fair value of the loaned securities, is deposited by the borrower with a lending agent, usually a securities custodian, and maintained
by the lending agent until the underlying security has been returned to us. We monitor the fair value of the loaned securities on a daily
basis with additional collateral obtained or refunded as the fair value fluctuates. Certain arrangements allow us to invest the cash
collateral received for the securities loaned. Loaned securities are recognized in our Consolidated Statements of Financial Position as
Invested Assets. As at December 31, 2015, we loaned securities with a carrying value of $1.4 billion for which the collateral held was
$1.5 billion. This compares to loaned securities of $1.4 billion, with collateral of $1.5 billion as at December 31, 2014.
Commitments, Guarantees, Contingencies and Reinsurance Matters
In the normal course of business, we enter into leasing agreements, outsourcing arrangements and agreements involving indemnities
to third parties. We are also engaged in arbitration proceedings from time to time with certain companies that have contracts to provide
reinsurance to the Company. Information regarding our commitments, guarantees and contingencies are summarized in Note 24 to our
2015 Annual Consolidated Financial Statements. A table summarizing our financial liabilities and contractual obligations can be found
in this MD&A in the section under the heading Risk Management – Liquidity Risk.
Accounting and Control Matters
Critical Accounting Policies and Estimates
Our significant accounting and actuarial policies are described in Notes 1, 2, 3, 5, 6, 7 and 11 of our 2015 Annual Consolidated
Financial Statements. Management must make judgments involving assumptions and estimates, some of which may relate to matters
that are inherently uncertain, under these policies. The estimates described below are considered particularly significant to
understanding our financial performance. As part of our financial control and reporting, judgments involving assumptions and estimates
are reviewed by the independent auditor and by other independent advisors on a periodic basis. Accounting policies requiring
estimates are applied consistently in the determination of our financial results.
Benefits to Policyholders
General
The liabilities for insurance contracts represent the estimated amounts which, together with estimated future premiums and net
investment income, will provide for outstanding claims, estimated future benefits, policyholders’ dividends, taxes (other than income
taxes), and expenses on in-force insurance contracts.
In determining our liabilities for insurance contracts, assumptions must be made about mortality and morbidity rates, lapse and other
policyholder behaviour, interest rates, equity market performance, asset default, inflation, expenses, and other factors over the life of
our products. Most of these assumptions relate to events that are anticipated to occur many years in the future. Assumptions require
significant judgment and regular review and, where appropriate, revision.
We use best estimate assumptions for expected future experience and apply margins for adverse deviations to provide for uncertainty
in the choice of the best estimate assumptions. The amount of insurance contract liabilities related to the application of margins for
adverse deviations to best estimate assumptions is called a provision for adverse deviations.
Best Estimate Assumptions
Best estimate assumptions are intended to be current, neutral estimates of the expected outcome as guided by Canadian actuarial
standards of practice. The choice of best estimate assumptions takes into account current circumstances, past experience data
(Company and/or industry), the relationship of past to expected future experience, anti-selection, the relationship among assumptions,
and other relevant factors. For assumptions on economic matters, the assets supporting the liabilities and the expected policy for
asset-liability management are relevant factors.
Margins for Adverse Deviations
The appropriate level of margin for adverse deviations on an assumption is guided by Canadian actuarial standards of practice. For
most assumptions, the standard range of margins for adverse deviations is 5% to 20% of the best estimate assumption, and the
actuary chooses from within that range based on a number of considerations related to the uncertainty in the determination of the best
estimate assumption. The level of uncertainty, and hence the margin chosen, will vary by assumption and by line of business and other
factors. Considerations that would tend to indicate a choice of margin at the high end of the range include:
• The statistical credibility of the Company’s experience is too low to be the primary source of data for choosing the best estimate
assumption
• Future experience is difficult to estimate
• The cohort of risks lacks homogeneity
• Operational risks adversely impact the ability to estimate the best estimate assumption
• Past experience may not be representative of future experience and the experience may deteriorate
80 Sun Life Financial Inc. Annual Report 2015 Management’s Discussion and Analysis