Sun Life 2012 Annual Report Download - page 129

6.C.i Equity Market Risk
Equity market risk is the potential for financial loss arising from declines and volatility in equity market prices. We are exposed to equity
risk from a number of sources. A significant portion of our exposure to equity risk arises in connection with benefit guarantees on
segregated fund contracts. These benefit guarantees are linked to underlying fund performance and may be triggered upon death,
maturity, withdrawal or annuitization.
We derive a portion of our revenue from fee income generated by our asset management businesses and from certain insurance and
annuity contracts where fee income is levied on account balances that generally move in line with equity market levels. Accordingly,
adverse fluctuations in the market value of such assets would result in corresponding adverse impacts on our revenue and net income.
In addition, declining and volatile equity markets may have a negative impact on sales and redemptions (surrenders) for this business,
and this may result in further adverse impacts on our net income and financial position.
We also have direct exposure to equity markets from the investments supporting other general account liabilities, surplus and
employee benefit plans. These exposures generally fall within our risk-taking philosophy and appetite and are therefore generally not
hedged.
The carrying value of equities by issuer country is shown in the following tables:
As at December 31, 2012
Fair value through
profit or loss
Available-
for-sale
Total
equities
Canada $ 2,918 $ 106 $ 3,024
United States 478 578 1,056
United Kingdom 172 38 210
Other 601 135 736
Total equities $ 4,169 $ 857 $ 5,026
As at December 31, 2011
Fair value through
profit or loss
Available-
for-sale
Total
equities
Canada $ 2,715 $ 100 $ 2,815
United States 458 583 1,041
United Kingdom 174 34 208
Other 384 122 506
Total equities $ 3,731 $ 839 $ 4,570
6.C.ii Embedded Derivatives Risk
An embedded derivative is contained within a host insurance contract if it includes an identifiable condition to modify the cash flows
that are otherwise payable. This section is applicable to those embedded derivatives where we are not required to, and have not
measured (either separately or together with the host contract) the embedded derivative at fair value.
The most significant market risk exposure from embedded derivatives arises in connection with the benefit guarantees on segregated
fund contracts. These benefit guarantees are linked to underlying fund performance and may be triggered upon death, maturity,
withdrawal or annuitization. We have implemented hedging programs to mitigate a portion of this market risk exposure.
We are also exposed to significant interest rate risk from embedded derivatives in certain general account products and segregated
fund contracts, which contain explicit or implicit investment guarantees in the form of minimum crediting rates, guaranteed premium
rates, settlement options and benefit guarantees. If investment returns fall below guaranteed levels, we may be required to increase
liabilities or capital in respect of these contracts. The guarantees attached to these products may be applicable to both past premiums
collected and future premiums not yet received. Segregated fund contracts provide benefit guarantees that are linked to underlying
fund performance and may be triggered upon death, maturity, withdrawal or annuitization. These products are included in our asset-
liability management program and the residual interest rate exposure is managed within risk tolerance limits.
We are also exposed to interest rate risk through guaranteed annuitization options included primarily in retirement contracts and
pension plans. These embedded options give policyholders the right to convert their investment into a pension on a guaranteed basis,
thereby exposing us to declining long-term interest rates as the annuity guarantee rates come into effect. Embedded options on unit-
linked pension contracts give policyholders the right to convert their fund at retirement into pensions on a guaranteed basis, thereby
exposing us to declining interest rates and increasing equity market returns (increasing the size of the fund which is eligible for the
guaranteed conversion basis). Guaranteed annuity options are included in our asset-liability management program and most of the
interest rate and equity exposure is mitigated through hedging.
Significant changes or volatility in interest rates or spreads could have a negative impact on sales of certain insurance and annuity
products, and adversely impact the expected pattern of redemptions (surrenders) on existing policies. Increases in interest rates or
widening spreads may increase the risk that policyholders will surrender their contracts, forcing us to liquidate investment assets at a
loss and accelerate recognition of certain acquisition expenses. While we have established hedging programs in place and our
insurance and annuity products often contain surrender mitigation features, these may not be sufficient to fully offset the adverse
impact of the underlying losses.
Certain annuity and long-term disability contracts contain embedded derivatives as benefits are linked to the Consumer Price Index;
however most of this exposure is hedged through the Company’s ongoing asset-liability management program.
Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2012 127