Sun Life 2015 Annual Report Download - page 131

Specific market risks and our risk management strategies are discussed below in further detail.
6.B.i Equity Market Risk
Equity market risk is the potential for financial loss arising from declines or volatility in equity market prices. We are exposed to equity
risk from a number of sources. A portion of our exposure to equity market risk arises in connection with benefit guarantees on
segregated fund contracts. These benefit guarantees may be triggered upon death, maturity, withdrawal or annuitization. The cost of
providing for these guarantees is uncertain, and will depend upon a number of factors including general capital market conditions,
underlying fund performance, policyholder behaviour, and mortality experience, which may result in negative impacts on our net
income and capital.
We generate revenue from fee income in our asset management businesses and from certain insurance and annuity contracts where
fees are levied on account balances that are affected directly by equity market levels. Accordingly, we have further exposure to equity
risk as adverse fluctuations in the market value of such assets will 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) in these
businesses, 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 general account liabilities, surplus, and employee
benefit plans. These exposures 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, 2015
Fair value through
profit or loss
Available-
for-sale
Total
equities
Canada $ 2,887 $ 40 $ 2,927
United States 706 634 1,340
United Kingdom 112 5 117
Other 721 208 929
Total equities $ 4,426 $ 887 $ 5,313
As at December 31, 2014
Fair value through
profit or loss
Available-
for-sale
Total
equities
Canada $ 3,016 $ 62 $ 3,078
United States 622 598 1,220
United Kingdom 107 4 111
Other 612 202 814
Total equities $ 4,357 $ 866 $ 5,223
6.B.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.
A 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 our risk appetite 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, potentially forcing us to liquidate 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.
Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2015 129