Sun Life 2015 Annual Report Download - page 85

Changes to the starting point for interest rates, equity market prices and business mix will result in different estimated sensitivities.
Additional information regarding equity and interest rate sensitivities, including key assumptions, can be found in the Risk Management
section of this MD&A under the heading Market Risk Sensitivities. The following table summarizes the impact these sensitivities would
have on our net income.
Critical Accounting Estimate Sensitivity 2015 2014
($ millions, after-tax)
Interest Rates 100 basis point parallel decrease in interest rates across the entire yield
curve (300) (400)
50 basis point parallel decrease in interest rates across the entire yield
curve (100) (100)
50 basis point parallel increase in interest rates across the entire yield
curve 50 50
100 basis point parallel increase in interest rates across the entire yield
curve 50 100
Equity Markets 25% decrease across all equity markets (350) (250)
10% decrease across all equity markets (100) (50)
10% increase across all equity markets 100 50
25% increase across all equity markets 300 150
1% reduction in assumed future equity and real estate returns (420) (380)
Mortality 2% increase in the best estimate assumption for insurance products –
where higher mortality would be financially adverse (35) (30)
2% decrease in the best estimate assumption for annuity products –
where lower mortality would be financially adverse (115) (105)
Morbidity 5% adverse change in the best estimate assumption (140) (150)
Policy Termination Rates 10% decrease in the termination rate – where fewer terminations would
be financially adverse (245) (240)
10% increase in the termination rate – where more terminations would be
financially adverse (120) (100)
Operating Expenses and Inflation 5% increase in unit maintenance expenses (180) (155)
Fair Value of Financial Assets and Liabilities
Debt securities, equity securities and certain other invested assets are designated as FVTPL or AFS and are recorded at fair value in
our Consolidated Statements of Financial Position. Changes in fair value of assets designated as FVTPL, and realized gains and
losses on sale of FVTPL assets are recorded in income. Changes in fair value of AFS assets are recorded in OCI. For foreign currency
translation, exchange differences calculated on the amortized cost of AFS debt securities are recognized in income and other changes
in carrying amount are recognized in OCI. The exchange differences from the translation of AFS equity securities and other invested
assets are recognized in OCI. Net impairment losses and realized gains and losses on sale of AFS assets are reclassified from OCI to
income.
The fair value of government and corporate debt securities is determined using quoted prices in active markets for identical or similar
securities. When quoted prices in active markets are not available, fair value is determined using market standard valuation
methodologies, which include discounted cash flow analysis, consensus pricing from various broker dealers that are typically the
market makers, or other similar techniques. The assumptions and valuation inputs in applying these market standard valuation
methodologies are determined primarily using observable market inputs, which include, but are not limited to, benchmark yields,
reported trades of identical or similar instruments, broker-dealer quotes, issuer spreads, bid prices, and reference data including market
research publications. In limited circumstances, non-binding broker quotes are used.
The fair value of asset-backed securities is determined using quoted prices in active markets for identical or similar securities, when
available, or valuation methodologies and valuation inputs similar to those used for government and corporate debt securities.
Additional valuation inputs include structural characteristics of the securities, and the underlying collateral performance, such as
prepayment speeds and delinquencies. Expected prepayment speeds are based primarily on those previously experienced in the
market at projected future interest rate levels. In instances where there is a lack of sufficient observable market data to value the
securities, non-binding broker quotes are used.
The fair value of equity securities is determined using quoted prices in active markets for identical securities or similar securities. When
quoted prices in active markets are not available, fair value is determined using equity valuation models, which include discounted cash
flow analysis and other techniques that involve benchmark comparison. Valuation inputs primarily include projected future operating
cash flows and earnings, dividends, market discount rates, and earnings multiples of comparable companies.
Mortgages and loans are generally carried at amortized cost. The fair value of mortgages and loans, for disclosure purposes, is
determined by discounting the expected future cash flows using a current market interest rate applicable to financial instruments with a
similar yield, credit quality and maturity characteristics. Valuation inputs typically include benchmark yields and risk-adjusted spreads
from current lending activities or loan issuances. The risk-adjusted spreads are determined based on the borrower’s credit and liquidity,
as well as term and other loan-specific features. Long-term mortgages and loans are generally categorized in Level 3 of the fair value
hierarchy. The significant unobservable input is a portion of these risk adjusted spreads at or beyond the 20 year point for mortgages
and at or beyond the 10 year point for loans.
Derivative financial instruments are recorded at fair value with changes in fair value recorded in income unless the derivative is part of
a qualifying hedging relationship for accounting purposes. The fair value of derivative financial instruments depends upon derivative
types. The fair value of exchange-traded futures and options is determined using quoted prices in active markets, while the fair value of
Management’s Discussion and Analysis Sun Life Financial Inc. Annual Report 2015 83