Basel II, Pillar 3 Disclosure for Sun Life Financial Trust Inc.

Transcription

1 Basel II, Pillar 3 Disclosure for Sun Life Financial Trust Inc. Introduction Basel II is an international framework on capital that applies to deposit taking institutions in many countries, including Canada. The framework is intended to strengthen the capital adequacy of financial institutions through measurement and monitoring of risk sensitive capital requirements. The Basel II Framework is made up of three pillars: Pillar 1 establishes rules for the calculation of minimum capital for credit, market and operational risk (capital adequacy requirements). Pillar 2 is an internal discipline to evaluate the adequacy of the regulatory capital requirement under Pillar 1 and other nonpillar 1 risks. This pillar requires a supervisory review to assess the robustness of the regulated entity s internal assessment (supervisory review) by the Office of the Superintendent of Financial Institutions (OSFI). Pillar 3 complements the other pillars and affects market discipline through public disclosure. Expanded disclosure about capital and risk enables interested parties to better understand the risk profile of individual deposit taking institution and to make comparisons (market discipline). Capital Structure and Adequacy Amount & types of Tier 1 capital: The regulatory capital position of Sun Life Financial Trust Inc., referred to as the Company or SLFT was as follows: Regulatory capital Tier 1 and Total Common stock $88,561 $88,561 Contributed surplus 38,050 38,050 Accumulated deficit 4,647 (2,732) Accumulated other comprehensive income 2,842 1,101 Total Tier 1 and Total capital $134,100 $124,980 Riskweighted assets for Credit risk $736,433 $649,657 Operational risk 31,750 26,300 Total riskweighted assets $768,183 $675,957 Regulatory ratios Tier 1 and Total 17.46% 18.49% Assets to capital multiple All common stock is made up of common shares with no par value. The Company has no additional forms of capital. Life s brighter under the sun Sun Life Financial Trust Inc. is a member of the Sun Life Financial group of companies. Sun Life Assurance Company of Canada is a member of the Sun Life Financial group of companies. Sun Life Assurance Company of Canada, 2015.

2 Approach to assessing capital: Under the Company s capital risk policy and OSFI guidelines, it is required to annually assess the adequacy of current and projected capital resources under expected and stressed conditions, through a process called the Internal Capital Adequacy Assessment Process. This involves evaluating the Company s strategy, financial plan and risk appetite; assessing the effectiveness of its risk and capital management practices (including Board and management oversight); subjecting the Company s plans and /or actual results to a range of stress tests; and concluding on capital adequacy (including a review and challenge). Risk Management Objectives and Policies The Company is governed by the enterprisewide risk management policies of its parent, Sun Life Assurance Company of Canada (SLAC), subject to the Company s risk management framework. In addition, there are policies that are specific to the operations of the Company. The Company also has its own portfolio policies and parameters which include specific risk management limits by asset class. These specific risk management limits include credit risk, liquidity risk, interest rate risk, and currency risk. The role of the Board of Directors and Management in risk management Risk management responsibilities of the Board of Directors (the Board ) and management are specified in the corporate governance framework of the Company, and are summarized below. Board of Directors: The Board approves Company specific policies ensuring appropriate risk management is in place. The Board monitors the activities of the Company on a quarterly basis. The Board approves the appointment of all officers to the Company. The Board delegates authority for managing the key risk areas to appropriate personnel. The Audit & Conduct Review Committee of SLAC performs the functions of an audit committee for SLFT, as permitted under the Trust and Loans Company Act. Management: Management implements risk management policies as approved by the Board. Management is responsible for identifying risks and estimating their likelihood of occurrence and impact on the Company s ability to achieve its business objectives. Management establishes policies, procedures and controls to ensure appropriate approval processes, mitigation of risks, complete and accurate accounting, safeguarding of assets, and segregation of duties for transaction processing. Management establishes management reporting information systems in order to manage the Company s operations and periodically reviews reporting mechanisms to ensure that systems and processes operate as designed. Management of the Company reports quarterly to the Board on the internal control practices in place to provide reasonable assurance the financial and reporting information generated within the Company is accurate and reliable and that prescribed policies, procedures, laws and regulations are complied with throughout the Company. Internal Audit: An internal audit function is responsible for assessing the adequacy of and adherence to the systems of internal control. The results of internal audit s reviews are reported to management and the Audit & Conduct Review Committee of SLAC regularly throughout the year. Alignment of operations with SLAC: The Company s operations are highly integrated with those of SLAC to maximize the efficiency of operations and the ability to maintain consistent management information systems and internal controls. The alignment of operations is evident in the Asset Liability Management and Investment departments. These departments manage the Company s investment risks. 2

3 Investment risk: The Company manages its investments in accordance with its risk management framework and policies approved by the Board that establish aggregate limits and constraints for credit, interest rate, liquidity, and currency risks. Liquidity risk: The Company generally maintains a conservative liquidity position and employs a wide range of liquidity risk management practices and controls, which are described below: Liquidity is managed in accordance with the Company s liquidity policies and guidelines. Stress testing of the Company s liquidity is performed by comparing liquidity coverage ratios under one month, three month and one year stress scenarios to Company policy thresholds approved by management and the Board. Cash management and asset liability management programs support the Company s ability to maintain its financial position by ensuring that sufficient cashflow and liquid assets are available to cover potential funding requirements. The Company invests in various types of assets with a view of matching them to the Company s liabilities of various durations. Target capital levels exceed regulatory minimums. The Company actively manages and monitors its capital and asset levels, and the diversification and credit quality of its investments. The Company maintains liquidity contingency plans for the management of liquidity in the event of a liquidity crisis. Reporting is submitted to the Board quarterly for oversight and monitoring. Currency risk: Foreign exchange derivative contracts such as currency swaps and forwards are used as risk management tools to manage the currency exposure in accordance with the Company s assetliability risk management policy. Market risk: The Company is exempt from the application of market risk according to Basel II, as the value of the Company s trading book does not exceed 10% of total assets, nor does it exceed $10 billion. Credit risk: The Company s Investment and Credit Risk Policy defines the acceptable risk profile for the investment portfolio and requirements for adequate diversification of assets, including by investment type, security type industry and borrower. Limits are set relative to the capital base of the Company and overall investment objectives. SLAC s investment policy framework and governance defines required approval authority at various management levels for new loans and refinancing which are commensurate with the credit risk involved. Individuals involved in loan management have the appropriate level of experience and expertise. Portfolio performance with respect to credit risk is monitored closely by management and the Board. Detailed reports are provided to the Board on a quarterly basis. Loans are monitored on an ongoing basis. The portfolio is stratified using a risk rating system. 3

4 Gross credit risk exposures: Carrying Value Fair Value Carrying Value Fair Value Balance Sheet Assets Cash and cash equivalents $1,381 $1,381 $13,484 $13,484 $3,095 $3,095 $1,639 $1,639 Shortterm securities Debt Securities Provincial/Municipal government Foreign government Mortgage and loans Residential mortgages insured Residential mortgages uninsured Commercial mortgages uninsured Loans interest rate contracts foreign exchange contracts equity contracts 52,432 89,436 24,718 5, ,045 4,335 29, , , ,259 52,432 89,436 24,718 5, ,045 4,365 30, , , ,259 35,457 4, ,983 16,377 5, ,070 4,365 30, , , ,457 4, ,983 16,377 5, ,070 9,658 56, , ,075 5 Other Assets 15,880 15,880 14,126 14,126 $1,287,248 $1,304,061 $1,221,671 $1,229, Geographic distribution of mortgage exposures: Province 2014 % of mortgages 2013 % of mortgages Ontario 35.4% 39.5% Alberta 18.3% 22.6% British Columbia 34.3% 23.2% Quebec 10.1% 9.4% Rest of Canada 2.0% 5.3% 4

5 Maturity breakdown: On Demand Within 1 Year 2014 Term to Maturity 1 to 5 Years Over 5 Years No Specific Maturity Cash and cash equivalents $ 3,095 $ 1,381 $ $ $ $ 1,381 3,095 Total $ 3,095 $ 1,381 $ $ $ $ 4,476 Shortterm securities $ $ 52,432 $ $ $ $ 52,432 $ Total $ $ 52,432 $ $ $ $ 52,432 Debt securities Provincial/Municipal gov t Foreign government $ $ 21,358 7, ,585 $ 68,078 17,697 5, ,104 $ 34,356 $ Total $ 89,436 24,718 5, ,045 Total $ $ 145,964 $ 325,982 $ 34,356 $ $ 506,302 Mortgages and loans Residential mortgages insured Residential mortgages uninsured Commercial mortgages uninsured Loans $ $ 3,143 8,476 57,656 84,015 $ 1,192 21,406 83, ,338 $ 31,909 $ $ 4,335 29, , ,262 Total $ $ 153,290 $ 521,660 $ 31,909 $ $ 706,859 Interest rate contracts $ $ $ 40 $ $ $ 40 Foreign exchange contracts Equity contracts 1,259 1,259 Total $ $ 1,259 $ 40 $ $ $ 1,299 Other Assets $ $ $ $ $ 15,880 $ 15,880 Total Assets $ 3,095 $ 354,326 $ 847,682 $ 66,265 $ 15,880 $ 1,287,248 5

6 Maturity breakdown cont d: On Demand Within 1 Year 2013 Term to Maturity 1 to 5 Years Over 5 Years No Specific Maturity Cash and cash equivalents $ 1,639 $ 13,484 $ $ $ $ 13,484 1,639 Total $ 1,639 $ 13,484 $ $ $ $ 15,123 Shortterm securities $ $ 35,457 $ $ $ $ 35,457 4,983 4,983 Total $ $ 40,440 $ $ $ $ 40,440 Debt securities Provincial/Municipal gov t Foreign government $ $ 27,572 5, ,147 $ 77,411 11,343 5, ,935 $ 4,988 $ Total $ 104,983 16,377 5, ,070 Total $ $ 140,753 $ 245,844 $ 4,988 $ $ 391,585 Mortgages and loans Residential mortgages insured Residential mortgages uninsured Commercial mortgages uninsured Loans $ $ ,867 32, ,507 $ 9,189 35, , ,950 $ 25,153 $ $ 9,426 56, , ,610 Total $ $ 174,778 $ 559,722 $ 25,153 $ $ 759,653 Interest rate contracts $ $ $ 5 $ $ $ 5 Foreign exchange contracts Equity contracts Total $ $ 16 $ 728 $ $ $ 744 Other Assets $ $ $ $ $ 14,126 $ 14,126 Total Assets $ 1,639 $ 369,471 $ 806,294 $ 30,141 $ 14,126 $ 1,221,671 6

7 Impaired Assets: Financial assets are assessed for impairment on a quarterly basis. Financial assets are impaired and impairment losses are incurred if there is objective evidence of impairment as a result of one or more loss events and that event has an impact on the estimated future cash flows that can be reliably estimated. Objective evidence of impairment for debt securities generally includes significant financial difficulty of the issuer, including actual or anticipated bankruptcy or defaults and delinquency in payments of interest or principal or disappearance of an active market for that asset. Objective evidence of impairment for mortgages and loans generally includes instances where there is no longer reasonable assurance over the timely collection of the full amount of principal and interest. Mortgages and loans are individually evaluated for impairment in establishing the allowance for credit losses. However, the full extent of impairment present in the portfolio of mortgages and loans cannot be identified solely by reference to individual loans. When the credit quality of groups of loans to borrowers operating in particular sectors has deteriorated, additional impairment that cannot be identified on a loanbyloan basis is estimated collectively for the group. Mortgages and loans are classified as impaired when there is no longer reasonable assurance of the timely collection of the full amount of principal and interest. When mortgages and loans are classified as impaired, allowances for credit losses are established to adjust the carrying value of these assets to their net recoverable amount. The allowance for credit losses is estimated using the present value of the estimated future cash flows discounted at the asset s original effective interest rate or the fair value of the collateral, whichever is higher. If no objective evidence of impairment exists for an individual mortgage or loan, the Company groups all mortgages and loans together and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an individual allowance has been recognized are not included in a collective assessment of impairment. The Company periodically reviews the methods utilized in assessing the collective allowance, giving due consideration to changes in economic and market conditions, and interest rates. The Company has invested assets with allowances for credit losses as follows: Gross Invested Assets Allowances for Losses Net Invested Assets Gross Invested Assets Allowances for Losses Net Invested Assets Cash and cash equivalents 4,476 4,476 15,123 15,123 Shortterm securities 52,432 52,432 40,440 40,440 Debt securities 506, , , ,585 loans 531, , , ,610 Residential Mortgages 34, ,217 66, ,944 Commercial Mortgages 141, , , ,009 $ 1,270,900 $ 831 $ 1,270,069 $ 1,207,922 $ 1,121 $ 1,206,801 7

8 Changes in the allowances are as follows: Specific Collective Total Specific Collective Total Balance, beginning of the year $ $ 1,121 $ 1,121 $ 790 $ 983 $ 1,773 Recoveries Writeoffs (12) (12) (653) (653) Change in allowance 12 (293) (281) (137) 94 (43) Balance, end of year $ $ 831 $ 831 $ $ 1,121 $ 1,121 Changes in impaired loans are as follows: Balance, beginning of the year $ $ 1,646 (Decrease) increase in impaired loans during the year (1,646) Balance, end of year $ $ Geographic location Alberta $ $ 931 Ontario 590 British Columbia 125 Total $ $ 1,646 Counterparty Credit Risk: Counterparty credit risk arises from overthecounter ( OTC ) derivatives and securities financing transactions. It is the risk that the counterparty to a transaction may default before completing the satisfactory settlement of the transaction. An economic loss occurs if the transaction or portfolio of transactions with the counterparty has a positive economic value at the time of default. In the instance of a credit rating downgrade applicable to the counterparty on our derivatives, the Company must hold more capital to address the increased risk. The notional principal amount of derivative instruments represents an amount to which a rate or price is applied in order to calculate the exchange of cash flows. The notional principal amounts by remaining term to maturity are disclosed below: Derivative Type Within 3 months 3 months to 1 year 1 to 5 years Over 5 years Interest rate contracts $ 5,000 $ 4,092 $ 5,400 $ $ 14,492 $ 9,588 Foreign exchange contracts 19,698 7,473 57,939 85,110 36,482 Equity swap contracts 10,584 10,584 10,584 Total $ 24,698 $ 22,149 $ 63,339 $ $ 110,186 $ 56,654 Credit exposure: Current credit risk exposure represents the current replacement cost of all outstanding derivative contracts with a positive value. Credit equivalent amount represents the current credit risk exposure plus an estimate of the impact that future changes in interest and foreign currency rates and other indices would have based upon a formula prescribed by OSFI. Riskweighted balance represents the credit equivalent amount weighted according to the credit worthiness of the counterparty as prescribed by OSFI. Total Total 8

9 The following provides a summary of the Company s derivative portfolio and related credit exposure: Credit Risk Notional Principal Current Credit Risk Exposure Credit Equivalent Amount Risk Weighted Balance Notional Principal Current Credit Risk Exposure Credit Equivalent Amount Risk Weighted Balance Interest rate contracts $ 14,492 $ 40 $ 67 $ 33 $ 9,588 $ 5 $ 53 $ 27 Foreign exchange contracts 85,110 3,169 1,585 36, , Equity swap contracts 10,584 1,259 1, , , Total by Maturity $ 110,186 $ 1,299 $ 5,130 $ 2,565 $ 56,654 $ 744 $ 2,953 $ 1,476 Operational Risk Approach for Operational Risk: The Company follows the Basic Indicator Approach for operational risk. The approach requires the Company to hold capital for operational risk equal to the average over the previous three years of a fixed percentage of positive gross income. Interest rate risk Interest rate risk is defined as the risk that a movement in interest rates will have an adverse effect on the financial condition of the Company. The Company manages the impact of interest rate changes within selfimposed limits established after careful analysis in order to keep disinvestment and reinvestment losses within acceptable limits. The primary approach for managing interest rate risk is management of the duration gap of assets and liabilities. Duration analysis measures the sensitivity of assets, liabilities and offbalance sheet instruments to changes in interest rates. Increase/decline in earnings or economic value: As at December 31, 2014, an immediate 1% increase in interest rates across the yield curve would have resulted in a decrease of $1,129 in the Company s income before income taxes (2013 $1,027). An immediate and parallel decrease in interest rates of 1% would have resulted in an increase of $1,165 in the Company s income before income taxes (2013 $1,064). Remuneration Governance structure over remuneration rests with the parent SLAC. SLFT has no employees and pays no remuneration to staff or directors; instead it is charged an administrative fee by the parent that would include, in part, compensation costs. In 2014, there were fourteen officers and directors with authority and responsibility for planning, directing, and controlling the activities of the Company, in addition to their responsibilities for SLAC. The aggregate fees charged by SLAC for the services performed for the Company is estimated to be less than $1,000 (2013 less than $1,000). Life s brighter under the sun Sun Life Financial Trust Inc. is a member of the Sun Life Financial group of companies. Sun Life Assurance Company of Canada is a member of the Sun Life Financial group of companies. Sun Life Assurance Company of Canada,