EX-99.2 5 d287687dex992.htm EX-99.2 EX-99.2
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EXHIBIT 99.2

CONSOLIDATED

FINANCIAL STATEMENTS

AND NOTES

 

 

FINANCIAL REPORTING RESPONSIBILITIES      89   
CONSOLIDATED FINANCIAL STATEMENTS      90   
Consolidated Statements of Operations      90   
Consolidated Statements of Comprehensive Income (Loss)      91   
Consolidated Statements of Financial Position      92   
Consolidated Statements of Changes in Equity      93   
Consolidated Statements of Cash Flows      94   
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS      95   
Significant Accounting Policies      Note   1      95   
Changes in Accounting Policies      Note   2      103   
Acquisitions      Note   3      105   
Segmented Information      Note   4      106   
Total Invested Assets and Related Net Investment Income      Note   5      109   
Financial Instrument Risk Management      Note   6      116   
Insurance Risk Management      Note   7      127   
Other Assets      Note   8      130   
Goodwill and Intangible Assets      Note   9      130   
Insurance Contract Liabilities and Investment Contract Liabilities      Note 10      133   
Reinsurance      Note 11      138   
Other Liabilities      Note 12      140   
Senior Debentures and Innovative Capital Instruments      Note 13      141   
Subordinated Debt      Note 14      143   
Share Capital      Note 15      143   
Interests in Other Entities      Note 16      145   
Fee Income      Note 17      147   
Operating Expenses      Note 18      147   
Share-Based Payments      Note 19      148   
Income Taxes      Note 20      150   
Capital Management      Note 21      152   
Segregated Funds      Note 22      153   
Commitments, Guarantees and Contingencies      Note 23      154   
Related Party Transactions      Note 24      156   
Pension Plans and Other Post-Retirement Benefits      Note 25      156   
Earnings (Loss) Per Share      Note 26      160   
Accumulated Other Comprehensive Income (Loss) and Non-Controlling Interests       Note 27      160   
APPOINTED ACTUARY’S REPORT      162   
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM      163   

 

88    Sun Life Financial Inc.    Annual Report 2016   Consolidated Financial Statements  


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Financial Reporting Responsibilities

 

 

Management is responsible for preparing the Consolidated Financial Statements. This responsibility includes selecting appropriate accounting policies and making estimates and other judgments consistent with International Financial Reporting Standards. The financial information presented elsewhere in the annual report to shareholders is consistent with these Consolidated Financial Statements.

The Board of Directors (“Board”) oversees management’s responsibilities for financial reporting. An Audit & Conduct Review Committee of non-management directors is appointed by the Board to review the Consolidated Financial Statements and report to the Board prior to their approval of the Consolidated Financial Statements for issuance to shareholders. Other key responsibilities of the Audit & Conduct Review Committee include reviewing the Company’s existing internal control procedures and planned revisions to those procedures, and advising the Board on auditing matters and financial reporting issues.

Management is also responsible for maintaining systems of internal control that provide reasonable assurance that financial information is reliable, that all financial transactions are properly authorized, that assets are safeguarded, and that Sun Life Financial Inc. and its subsidiaries, collectively referred to as “the Company”, adhere to legislative and regulatory requirements. These systems include the communication of policies and the Company’s Code of Business Conduct throughout the organization. Internal controls are reviewed and evaluated by the Company’s internal auditors.

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting, as of December 31, 2016, based on the framework and criteria established in Internal Control Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2016.

The Audit & Conduct Review Committee also conducts such review and inquiry of management and the internal and external auditors as it deems necessary towards establishing that the Company is employing appropriate systems of internal control, is adhering to legislative and regulatory requirements and is applying the Company’s Code of Business Conduct. Both the internal and external auditors and the Company’s Appointed Actuary have full and unrestricted access to the Audit & Conduct Review Committee with and without the presence of management.

The Office of the Superintendent of Financial Institutions, Canada conducts periodic examinations of the Company. These examinations are designed to evaluate compliance with provisions of the Insurance Companies Act (Canada) and to ensure that the interests of policyholders, depositors, and the public are safeguarded. The Company’s foreign operations and foreign subsidiaries are examined by regulators in their local jurisdictions.

The Company’s Appointed Actuary, who is a member of management, is appointed by the Board to discharge the various actuarial responsibilities required under the Insurance Companies Act (Canada), and conducts the valuation of the Company’s actuarial liabilities. The role of the Appointed Actuary is described in more detail in Note 10. The report of the Appointed Actuary accompanies these Consolidated Financial Statements.

The Company’s external auditor, Deloitte LLP, Independent Registered Public Accounting Firm, has audited the Company’s internal control over financial reporting as of December 31, 2016, in addition to auditing the Company’s Consolidated Financial Statements for the years ended December 31, 2016 and December 31, 2015. Its reports to the Board and shareholders express unqualified opinions and accompany these Consolidated Financial Statements. Deloitte LLP meets separately with both management and the Audit & Conduct Review Committee to discuss the results of its audit.

 

LOGO   LOGO
Dean A. Connor   Colm J. Freyne, FCPA, FCA
President and Chief Executive Officer   Executive Vice-President and Chief Financial Officer

Toronto, Ontario, Canada

February 15, 2017

 

  Consolidated Financial Statements   Sun Life Financial Inc.    Annual Report 2016    89


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CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

For the years ended December 31, (in millions of Canadian dollars except for per share amounts)    2016      2015  

Revenue

     

Premiums

     

Gross

   $     19,427       $     16,824   

Less: Ceded

     4,379         6,429   

Net premiums

     15,048         10,395   

Net investment income (loss):

     

Interest and other investment income (Note 5)

     5,489         5,288   

Fair value and foreign currency changes on assets and liabilities (Note 5)

     2,233         (1,961

Net gains (losses) on available-for-sale assets

     223         228   

Net investment income (loss)

     7,945         3,555   

Fee income (Note 17)

     5,580         5,324   

Total revenue

     28,573         19,274   

Benefits and expenses

     

Gross claims and benefits paid (Note 10)

     15,210         14,086   

Increase (decrease) in insurance contract liabilities (Note 10)

     5,391         1,261   

Decrease (increase) in reinsurance assets (Note 10)

     133         (505

Increase (decrease) in investment contract liabilities (Note 10)

     (13      (29

Reinsurance expenses (recoveries) (Note 11)

     (4,313      (6,146

Commissions

     2,372         2,100   

Net transfer to (from) segregated funds (Note 22)

     (307      (43

Operating expenses (Note 18)

     6,000         5,037   

Premium taxes

     339         292   

Interest expense

     316         322
  

Total benefits and expenses

     25,128         16,375   

Income (loss) before income taxes

     3,445         2,899   

Less: Income tax expense (benefit) (Note 20)

     619         599   

Total net income (loss)

     2,826         2,300   

Less: Net income (loss) attributable to participating policyholders and non-controlling interests

     245         15   

Shareholders’ net income (loss)

     2,581         2,285   

Less: Preferred shareholders’ dividends

     96         100   

Common shareholders’ net income (loss)

   $ 2,485       $ 2,185   
     

Average exchange rates during the reporting periods:

     

U.S. dollars

     1.33         1.28   

U.K. pounds

     1.80         1.95   

Earnings (loss) per share (Note 26)

     

Basic earnings (loss) per share

   $ 4.05       $ 3.57   

Diluted earnings (loss) per share

   $ 4.03       $ 3.55   

Dividends per common share

   $ 1.62       $ 1.51   

The attached notes form part of these Consolidated Financial Statements.

 

90    Sun Life Financial Inc.    Annual Report 2016   Consolidated Financial Statements  


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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

For the years ended December 31, (in millions of Canadian dollars)   2016      2015  

Total net income (loss)

  $     2,826       $     2,300   

Other comprehensive income (loss), net of taxes:

    

Items that may be reclassified subsequently to income:

    

Change in unrealized foreign currency translation gains (losses):

    

Unrealized gains (losses) before net investment hedges

    (636      1,634   

Unrealized gains (losses) on net investment hedges

            (32

Change in unrealized gains (losses) on available-for-sale assets:

    

Unrealized gains (losses)

    117         (174

Reclassifications to net income (loss)

    (131      (124

Change in unrealized gains (losses) on cash flow hedges:

    

Unrealized gains (losses)

    5         3   

Reclassifications to net income (loss)

    (14      (6

Share of other comprehensive income (loss) in joint ventures and associates:

    

Unrealized gains (losses)

    (68      55   

Reclassifications to net income (loss) upon change in control (Note 3)

    (8        

Total items that may be reclassified subsequently to income

    (735      1,356   

Items that will not be reclassified subsequently to income:

    

Remeasurement of defined benefit plans

    (73      (49

Total items that will not be reclassified subsequently to income

    (73      (49

Total other comprehensive income (loss)

    (808      1,307   

Total comprehensive income (loss)

    2,018         3,607   

Less: Participating policyholders’ and non-controlling interests’ comprehensive income (loss)

    243         27   

Shareholders’ comprehensive income (loss)

  $ 1,775       $ 3,580   

INCOME TAXES INCLUDED IN OTHER COMPREHENSIVE INCOME (LOSS)

 

 

For the years ended December 31, (in millions of Canadian dollars)   2016      2015  

Income tax benefit (expense):

    

Items that may be reclassified subsequently to income:

    

Unrealized foreign currency translation gains / losses, including net investment hedges

  $ 1       $ (18

Unrealized gains / losses on available-for-sale assets

    (58      61   

Reclassifications to net income for available-for-sale assets

    48         54   

Unrealized gains / losses on cash flow hedges

    (6      (1

Reclassifications to net income for cash flow hedges

    5         2   

Total items that may be reclassified subsequently to income

    (10      98   

Items that will not be reclassified subsequently to income:

    

Remeasurement of defined benefit plans

    32         12   

Total items that will not be reclassified subsequently to income

    32         12   

Total income tax benefit (expense) included in other comprehensive income (loss)

  $          22       $        110   

The attached notes form part of these Consolidated Financial Statements.

 

  Consolidated Financial Statements   Sun Life Financial Inc.    Annual Report 2016    91


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CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

 

As at December 31, (in millions of Canadian dollars)    2016      2015  

Assets

     

Cash, cash equivalents and short-term securities (Note 5)

   $ 8,642       $ 8,983   

Debt securities (Notes 5 and 6)

     71,887         69,896   

Equity securities (Notes 5 and 6)

     5,774         5,313   

Mortgages and loans (Notes 5 and 6)

     40,775         39,103   

Derivative assets (Notes 5 and 6)

     1,608         1,866   

Other invested assets (Note 5)

     3,931         3,111   

Policy loans (Note 5)

     3,141         3,151   

Investment properties (Note 5)

     6,592         6,540   

Invested assets

         142,350             137,963   

Other assets (Note 8)

     5,109         4,567   

Reinsurance assets (Notes 10 and 11)

     5,144         5,386   

Deferred tax assets (Note 20)

     1,448         1,372   

Intangible assets (Note 9)

     1,703         1,479   

Goodwill (Note 9)

     5,317         4,646   

Total general fund assets

     161,071         155,413   

Investments for account of segregated fund holders (Note 22)

     97,167         91,440   

Total assets

   $ 258,238       $ 246,853   

Liabilities and equity

     

Liabilities

     

Insurance contract liabilities (Note 10)

   $ 115,057       $ 110,227   

Investment contract liabilities (Note 10)

     2,913         2,913   

Derivative liabilities (Notes 5 and 6)

     2,512         3,378   

Deferred tax liabilities (Note 20)

     687         405   

Other liabilities (Note 12)

     12,399         12,332   

Senior debentures (Note 13)

     1,299         2,248   

Subordinated debt (Note 14)

     3,836         2,492   

Total general fund liabilities

     138,703         133,995   

Insurance contracts for account of segregated fund holders (Note 22)

     90,388         83,670   

Investment contracts for account of segregated fund holders (Note 22)

     6,779         7,770   

Total liabilities

   $ 235,870       $ 225,435   

Equity

     

Issued share capital and contributed surplus

   $ 10,943       $ 10,900   

Shareholders’ retained earnings and accumulated other comprehensive income

     11,013         10,350   

Total shareholders’ equity

     21,956         21,250   

Participating policyholders’ equity

     412         168   

Total equity

   $ 22,368       $ 21,418   

Total liabilities and equity

   $ 258,238       $ 246,853   

Exchange rates at the end of the reporting periods:

     

U.S. dollars

     1.34         1.38   

U.K. pounds

     1.66         2.04   

The attached notes form part of these Consolidated Financial Statements.

Approved on behalf of the Board of Directors on February 15, 2017.

 

LOGO   LOGO
Dean A. Connor   William D. Anderson

President and Chief Executive Officer

  Director

 

92    Sun Life Financial Inc.    Annual Report 2016   Consolidated Financial Statements  


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CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

 

For the years ended December 31, (in millions of Canadian dollars)   2016     2015  

Shareholders:

   

Preferred shares (Note 15)

   

Balance, beginning and end of year

  $ 2,257      $ 2,257   

Common shares (Note 15)

   

Balance, beginning of year

    8,567        8,465   

Stock options exercised

    47        54   

Common shares purchased for cancellation

           (74

Issued under dividend reinvestment and share purchase plan

           88   

Issued as consideration for business acquisition (Note 3)

           34   

Balance, end of year

    8,614        8,567   

Contributed surplus

   

Balance, beginning of year

    76        83   

Share-based payments

    4        3   

Stock options exercised

    (8     (10

Balance, end of year

    72        76   

Retained earnings

   

Balance, beginning of year

    7,891        6,762   

Net income (loss)

    2,581        2,285   

Dividends on common shares

    (986     (918

Dividends on preferred shares

    (96     (100

Common shares purchased for cancellation (Note 15)

           (138

Transactions with non-controlling interests (Note 3)

    (30       

Balance, end of year

    9,360        7,891   

Accumulated other comprehensive income (loss), net of taxes (Note 27)

   

Balance, beginning of year

  $ 2,459      $ 1,164   

Total other comprehensive income (loss) for the year

    (806     1,295   

Balance, end of year

    1,653        2,459   

Total shareholders’ equity, end of year

  $ 21,956      $ 21,250   

Participating policyholders:

   

Balance, beginning of year

  $ 168      $ 141   

Net income (loss)

    246        15   

Total other comprehensive income (loss) for the year (Note 27)

    (2     12   

Total participating policyholders’ equity, end of year

  $ 412      $ 168   

Total equity

  $     22,368      $     21,418   

The attached notes form part of these Consolidated Financial Statements.

 

  Consolidated Financial Statements   Sun Life Financial Inc.    Annual Report 2016    93


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CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

For the years ended December 31, (in millions of Canadian dollars)   2016     2015  

Cash flows provided by (used in) operating activities

   

Income (loss) before income taxes

  $ 3,445      $ 2,899   

Add: Interest expense related to financing activities

    269        297   

Operating items not affecting cash:

   

Increase (decrease) in insurance and investment contract liabilities

    5,494        1,232   

(Increase) decrease in reinsurance assets

    83        (595

Unrealized (gains) losses on invested assets

    (1,677     3,833   

Other non-cash items

    208        (1,652

Operating cash items:

   

Deferred acquisition costs

    (33     (60

Realized (gains) losses on assets

    (1,220     (812

Sales, maturities and repayments of invested assets

    47,115        46,306   

Purchases of invested assets

    (49,786     (46,661

Change in policy loans

    (44     (62

Income taxes received (paid)

    (310     (453

Mortgage securitization (Note 5)

    474        364   

Other cash items

    (350     (175

Net cash provided by (used in) operating activities

    3,668        4,461   

Cash flows provided by (used in) investing activities

   

Net (purchase) sale of property and equipment

    (131     (106

Investment in and transactions with joint ventures and associates (Note 16)

    (366     (3

Dividends received from joint ventures and associates (Note 16)

    20        32   

Acquisitions, net of cash and cash equivalents acquired (Note 3)(1)

    (1,316     (578

Other investing activities

    (100     (68

Net cash provided by (used in) investing activities

    (1,893     (723

Cash flows provided by (used in) financing activities

   

Increase in (repayment of) borrowed funds

    (610     589   

Issuance of subordinated debt, net of issuance costs (Note 14)

    1,343        497   

Redemption of senior debentures and subordinated debt (Notes 13 and 14)

    (950     (806

Issuance of common shares on exercise of stock options

    39        44   

Transactions with non-controlling interests (Note 3)

    (46       

Common shares purchased for cancellation (Note 15)

           (212

Dividends paid on common and preferred shares

    (1,074     (921

Interest expense paid

    (245     (297

Net cash provided by (used in) financing activities

    (1,543     (1,106

Changes due to fluctuations in exchange rates

    (235     516   

Increase (decrease) in cash and cash equivalents

    (3     3,148   

Net cash and cash equivalents, beginning of year

    6,512        3,364   

Net cash and cash equivalents, end of year

    6,509        6,512   

Short-term securities, end of year

    1,944        2,305   

Net cash, cash equivalents and short-term securities, end of year (Note 5)

  $        8,453      $         8,817   

 

(1) Consists of total cash consideration paid of $1,379 ($638 in 2015), less cash and cash equivalents acquired of $63 ($60 in 2015).

The attached notes form part of these Consolidated Financial Statements.

 

94    Sun Life Financial Inc.    Annual Report 2016   Consolidated Financial Statements  


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Notes to the Consolidated Financial Statements

 

 

(Amounts in millions of Canadian dollars except for per share amounts and where otherwise stated. All amounts stated in U.S. dollars are in millions.)

1. Significant Accounting Policies

 

 

Description of Business

Sun Life Financial Inc. (“SLF Inc.”) is a publicly traded company domiciled in Canada and is the holding company of Sun Life Assurance Company of Canada (“Sun Life Assurance”). Both companies are incorporated under the Insurance Companies Act (Canada), and are regulated by the Office of the Superintendent of Financial Institutions, Canada (“OSFI”). SLF Inc. and its subsidiaries are collectively referred to as “us”, “our”, “ours”, “we”, “the Enterprise”, or “the Company”. We are an internationally diversified financial services organization providing savings, retirement, and pension products, and life and health insurance to individuals and groups through our operations in Canada, the United States (“U.S.”), Asia, and the United Kingdom (“U.K.”). We also operate mutual fund and investment management businesses, primarily in Canada, the U.S., and Asia.

Statement of Compliance

We prepared our Consolidated Financial Statements in accordance with International Financial Reporting Standards (“IFRS”) as issued and adopted by the International Accounting Standards Board (“IASB”). Our accounting policies have been applied consistently within our Consolidated Financial Statements.

Basis of Presentation

Our Consolidated Statements of Financial Position are presented in the order of liquidity and each statement of financial position line item includes both current and non-current balances, as applicable.

We have defined our reportable segments and the amounts disclosed for those segments based on our management structure and the manner in which our internal financial reporting is conducted. Transactions between segments are executed and priced on an arm’s-length basis in a manner similar to transactions with third parties.

The significant accounting policies used in the preparation of our Consolidated Financial Statements are summarized below and are applied consistently by us.

Estimates, Assumptions and Judgments

The application of our accounting policies requires estimates, assumptions and judgments as they relate to matters that are inherently uncertain. We have established procedures to ensure that our accounting policies are applied consistently and that the processes for changing methodologies for determining estimates are controlled and occur in an appropriate and systematic manner.

Use of Estimates and Assumptions

The preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect the application of our policies and the reported amounts of assets, liabilities, revenue and expenses. Key sources of estimation uncertainty include the measurement of insurance contract liabilities and investment contract liabilities, determination of fair value, impairment of financial instruments, determination and impairment of goodwill and intangible assets, and determination of provisions and liabilities for pension plans, other post-retirement benefits, and income taxes. Actual results may differ from our estimates thereby impacting our Consolidated Financial Statements. Information on our use of estimates and assumptions are discussed in this Note.

Judgments

In preparation of these Consolidated Financial Statements, we use judgments to select assumptions and determine estimates as described above. We also use judgment when applying accounting policies and when determining the classification of insurance contracts, investment contracts and service contracts; the substance of whether our relationship with a structured entity, subsidiary, joint venture or associate constitutes control, joint control or significant influence; functional currencies; contingencies; acquisitions; and the determination of fair value of share-based payments.

 

  Notes to Consolidated Financial Statements   Sun Life Financial Inc.    Annual Report 2016    95


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Significant estimates and judgments have been made in the following areas and are discussed as noted:

 

Insurance contract and investment contract assumptions and measurement

  Note 1 Insurance Contract Liabilities and Investment Contract Liabilities
  Note 10 Insurance Contract Liabilities and Investment Contract Liabilities

Determination of fair value

  Note 1 Basis of Consolidation
  Note 1 Determination of Fair Value
  Note 3 Acquisitions
  Note 5 Total Invested Assets and Related Net Investment Income

Impairment of financial instruments

  Note 1 Financial Assets Excluding Derivative Financial Instruments
  Note 6 Financial Instrument Risk Management
Income taxes   Note 1 Income Taxes
  Note 20 Income Taxes

Pension plans

  Note 1 Pension Plans and Other Post-Retirement Benefits
  Note 25 Pension Plans and Other Post-Retirement Benefits

Goodwill and intangible asset on acquisition and impairment

  Note 1 Goodwill
  Note 1 Intangible Assets
  Note 3 Acquisitions
  Note 9 Goodwill and Intangible Assets
Determination of control for purpose of consolidation   Note 1 Basis of Consolidation
  Note 16 Interests in Other Entities
Share-based payments   Note 19 Share-Based Payments

Basis of Consolidation

Our Consolidated Financial Statements include the results of operations and the financial position of subsidiaries, which includes structured entities controlled by us, after intercompany balances and transactions have been eliminated. Subsidiaries are fully consolidated from the date we obtain control, and deconsolidated on the date control ceases. The acquisition method is used to account for the acquisition of a subsidiary from an unrelated party at the date that control is obtained, with the difference between the consideration transferred and the fair value of the subsidiary’s net identifiable assets acquired recorded as goodwill. Judgment is required to determine fair value of the net identifiable assets acquired in a business combination.

We control an entity when we have power over an entity, exposure to or rights to variable returns from our involvement with an entity, and the ability to affect our returns through our power over an entity. Power exists when we have rights that give us the ability to direct the relevant activities, which are those activities that could significantly affect the entity’s returns. Power can be obtained through voting rights or other contractual arrangements. Judgment is required to determine the relevant activities and which party has power over these activities. When we have power over and variable returns from an entity, including an investment fund that we manage, we also apply significant judgment in determining whether we are acting as a principal or agent. To make this determination, we consider factors such as how much discretion we have regarding the management of the investment fund and the magnitude and extent of variability associated with our interests in the fund. If we determine we are the principal rather than the agent, we would consolidate the assets and liabilities of the fund. Interests held by external parties in investment funds that we consolidate are recorded as third-party interest in consolidated investment funds in Other liabilities. If we lose control of an entity, the assets and liabilities of that entity are derecognized from our Consolidated Statements of Financial Position at the date at which control is lost and any investment retained is re-measured to fair value.

A joint venture exists when SLF Inc., or one of its subsidiaries, has joint control of a joint arrangement and has rights to the net assets of the arrangement. Joint control is the contractually agreed sharing of control and exists only when the decisions about the relevant activities require the unanimous consent of the parties sharing control. Associates are entities over which SLF Inc. or its subsidiaries are able to exercise significant influence. Significant influence is the power to participate in the financial and operating policy decisions of an investee but not have control or joint control over those decisions. Significant influence is generally presumed to exist when SLF Inc. or its subsidiaries hold greater than 20% of the voting power of the investee but does not have control or joint control. The equity method is used to account for our interests in joint ventures and associates. A joint operation exists when SLF Inc., or one of its subsidiaries, has joint control of an arrangement that gives it rights to the assets and obligations for the liabilities of the operation, rather than the net assets of the arrangement. For joint operations, we record our share of the assets, liabilities, revenue and expenses of the joint operation. Judgment is required to determine whether contractual arrangements between multiple parties results in control, joint control or significant influence, with consideration of the relevant activities of the entity, voting rights, representation on boards of directors and other decision-making factors. Judgment is also required to determine if a joint arrangement is a joint venture or joint operation, with consideration of our rights and obligations and the structure and legal form of the arrangement.

Determination of Fair Value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is measured using the assumptions that market participants would use when pricing an asset or liability. We determine fair value by using quoted prices in active markets for identical or similar assets or liabilities. When quoted prices in active markets are not available, fair value is determined using valuation techniques that maximize the use of observable inputs. When observable valuation inputs are not available, significant judgment is required to determine fair value by assessing the valuation techniques and valuation inputs. The use of alternative valuation techniques or valuation inputs may result in a different fair value. A description of the fair value methodologies, assumptions, valuation techniques, and valuation inputs by type of asset is included in Note 5.

 

96    Sun Life Financial Inc.    Annual Report 2016   Notes to Consolidated Financial Statements  


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Foreign Currency Translation

Translation of Transactions in Foreign Currencies

The financial results of SLF Inc. and its subsidiaries, joint ventures and associates are prepared in the currency in which they conduct their ordinary course of business, which is referred to as functional currency. Transactions occurring in currencies other than the functional currency are translated to the functional currency using the spot exchange rates at the dates of the transactions.

Monetary assets and liabilities in foreign currencies are translated to the functional currency at the exchange rate at the statement of financial position date. Non-monetary assets and liabilities in foreign currencies that are held at fair value are translated using the exchange rate at the statement of financial position date, while non-monetary assets and liabilities that are measured at historical cost are translated using the exchange rate at the date of the transaction.

The resulting exchange differences from the translation of monetary items and non-monetary items held at fair value, with changes in fair value recorded to income, are recognized in our Consolidated Statements of Operations. For monetary assets classified as available-for-sale (“AFS”), translation differences calculated on amortized cost are recognized in our Consolidated Statements of Operations and other changes in carrying amount are recognized in other comprehensive income (“OCI”). The exchange differences from the translation of non-monetary items classified as AFS are recognized in OCI.

Translation to the Presentation Currency

In preparing our Consolidated Financial Statements, the financial statements of foreign operations are translated from their respective functional currencies to Canadian dollars, our presentation currency. Assets and liabilities are translated at the closing exchange rate at the statement of financial position date, and income and expenses are translated using the average exchange rates. The accumulated gains or losses arising from translation of functional currencies to the presentation currency, net of the effect of any hedges, are included as a separate component of OCI within equity. Upon disposal of a foreign operation that includes loss of control, significant influence or joint control, the cumulative exchange gain or loss related to that foreign operation is recognized in income.

Invested Assets

Financial Assets Excluding Derivative Financial Instruments

Financial assets include cash, cash equivalents and short-term securities, debt securities, equity securities, mortgages and loans, financial assets included in other invested assets and policy loans. Financial assets are designated as financial assets at fair value through profit or loss (“FVTPL”) or AFS assets, or are classified as loans and receivables at initial recognition.

The following table summarizes the financial assets included in our Consolidated Statements of Financial Position and the asset classifications applicable to these assets:

 

Cash, cash equivalents and short-term securities

   FVTPL

Debt securities

   FVTPL and AFS

Equity securities

   FVTPL and AFS

Mortgages and loans

   Loans and receivables

Other invested assets

   FVTPL and AFS

Policy loans

   Loans and receivables

Mortgages and loans include mortgages, loans and debt securities not quoted in an active market. Financial assets included in Other invested assets include investments in limited partnerships, segregated funds and mutual funds. Cash equivalents are highly liquid instruments with a term to maturity of three months or less, while short-term securities have a term to maturity exceeding three months but less than one year. Policy loans are fully secured by the policy values on which the loans are made. The accounting for each asset classification is described in the following sections.

i) Initial Recognition and Subsequent Measurement

Generally, debt securities, equity securities and other invested assets supporting our insurance contract liabilities or investment contract liabilities measured at fair value are designated as FVTPL, while debt securities, equity securities and other invested assets not supporting our insurance contract liabilities or that are supporting investment contract liabilities measured at amortized cost are designated as AFS. Mortgages and loans and policy loans are classified as loans and receivables. Financial assets are recognized in the Consolidated Statements of Financial Position on their trade dates, which are the dates that we commit to purchase or sell the assets. Originated mortgages and loans are recognized in the Consolidated Statements of Financial Position on their funding dates.

Financial Assets at Fair Value Through Profit or Loss

Financial assets at FVTPL include financial assets that are held for trading (“HFT”), as well as financial assets that have been designated as FVTPL at initial recognition. A financial asset is classified as HFT if it is acquired principally for the purpose of selling in the near term. A financial asset can be designated as FVTPL if it eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on them on different bases; or if a group of financial assets, financial liabilities or both, is managed and its performance is evaluated on a fair value basis. Cash equivalents and short-term securities have been classified as HFT.

Debt securities, equity securities and other invested assets supporting insurance contract liabilities or investment contract liabilities measured at fair value have been designated as FVTPL. This designation has been made to eliminate or significantly reduce the measurement inconsistency that would arise due to the measurement of the insurance contract or investment contract liabilities, which are based on the carrying value of the assets supporting those liabilities. Because the carrying value of insurance contract liabilities is determined by reference to the assets supporting those liabilities, changes in the insurance contract liabilities generally offset changes in the fair value of debt securities classified as FVTPL, except for changes that are due to impairment. The majority of equity securities and other invested assets classified as FVTPL are held to support products where investment returns are passed through to policyholders and therefore, changes in the fair value of those assets are significantly offset by changes in insurance contract liabilities.

 

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Financial assets classified as FVTPL are recorded at fair value in our Consolidated Statements of Financial Position and transaction costs are expensed immediately. Changes in fair value as well as realized gains and losses on sale are recorded in Fair value and foreign currency changes on assets and liabilities in our Consolidated Statements of Operations. Interest income earned and dividends received are recorded in Interest and other investment income in our Consolidated Statements of Operations.

Available-for-Sale Financial Assets

Financial assets classified as AFS are recorded at fair value in our Consolidated Statements of Financial Position and transaction costs are capitalized on initial recognition. Transaction costs for debt securities are recognized in income using the effective interest method, while transaction costs for equity securities and other invested assets are recognized in income when the asset is derecognized. Changes in fair value are recorded to unrealized gains and losses in OCI. For foreign currency translation, exchange differences calculated on the amortized cost of AFS debt securities are recognized in income and exchange differences calculated on 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. Interest income earned and dividends received are recorded in Interest and other investment income in our Consolidated Statements of Operations. Net impairment losses and realized gains and losses on the sale of assets classified as AFS are reclassified from accumulated OCI to Net gains (losses) on available-for-sale assets in our Consolidated Statements of Operations.

Loans and Receivables

Loans and receivables are generally carried at amortized cost using the effective interest method. Transaction costs for mortgages and loans are capitalized on initial recognition and are recognized in income using the effective interest method. Realized gains and losses on the sale of mortgages and loans, interest income earned, and fee income are recorded in Interest and other investment income in our Consolidated Statements of Operations.

ii) Derecognition

Financial assets are derecognized when our rights to contractual cash flows expire, when we transfer substantially all our risks and rewards of ownership, or when we no longer retain control.

iii) Impairment

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 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 financial asset. Objective evidence of impairment for an investment in an equity instrument or other invested asset also includes, but is not limited to, the financial condition and near-term prospects of the issuer, including information about significant changes with adverse effects that have taken place in the technological, market, economic, or legal environment in which the issuer operates that may indicate that the carrying amount will not be recovered, and a significant or prolonged decline in the fair value of an equity instrument or other invested asset below its cost. Management exercises considerable judgment in assessing for objective evidence of impairment. Due to the inherent risks and uncertainties in our evaluation of assets or groups of assets for objective evidence of impairment, the actual impairment amount and the timing of the recognition of impairment may differ from management assessment. The impairment assessment process is discussed in Note 6.

Financial Assets at Fair Value Through Profit or Loss

Since financial assets classified as FVTPL are carried at fair value with changes in fair value recorded to income, any reduction in value of the assets due to impairment is already reflected in income. However, the impairment of assets classified as FVTPL, generally impacts the change in insurance contract liabilities due to the impact of asset impairment on future cash flows.

Available-for-Sale Financial Assets

When there is objective evidence that a financial asset classified as AFS is impaired, the loss in accumulated OCI is reclassified to Net gains (losses) on available-for-sale assets in our Consolidated Statements of Operations. Following impairment loss recognition, a debt security continues to be carried at fair value with changes in fair value recorded in OCI, and it is assessed quarterly for further impairment loss or reversal. Subsequent losses on an impaired equity security or other invested asset, including losses relating to foreign currency changes, are reclassified from OCI to income in subsequent reporting periods until the asset is derecognized. Once an impairment loss on a debt security classified as AFS is recorded to income, any reversal of impairment loss through income occurs only when the recovery in fair value is objectively related to an event occurring after the impairment was recognized. Impairment losses on an equity security or other invested asset classified as AFS are not reversed through income.

Loans and Receivables

If an impairment loss on an individual mortgage or loan has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. For collateralized financial assets, the present value of the estimated future cash flows reflects the cash flows that may result from foreclosure less costs to sell, whether or not foreclosure is probable. If no evidence of impairment exists for an individually assessed mortgage or loan, it is included in a group of loans with similar credit risk characteristics and collectively assessed for impairment.

When an impairment loss has been incurred, the carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in income. If the impairment loss subsequently decreases and the decrease can be related objectively to an event occurring after the initial impairment charge was recognized, the previous impairment charge is reversed by adjusting the allowance account and the reversal is recognized in income. Interest income is recognized on impaired mortgages and loans using the effective interest rate method and it is based on the estimated future cash flows used to measure the impairment loss. Changes in the allowance account, other than write-offs net of recoveries, are charged against Interest and other investment income in our Consolidated Statements of Operations. Write-offs, net of recoveries, are deducted from the allowance account when there is no realistic prospect of recovery, which is typically not before derecognition of the asset through foreclosure or sale.

 

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Collateral

Cash received (pledged) as collateral is recognized (derecognized) in our Consolidated Statements of Financial Position with corresponding amounts recognized in Other liabilities (Other assets), respectively. All other types of assets received (pledged) as collateral are not recognized (derecognized) in our Consolidated Statements of Financial Position.

Derivative Financial Instruments

All derivative financial instruments are recorded at fair value in our Consolidated Statements of Financial Position. Derivatives with a positive fair value are recorded as Derivative assets while derivatives with a negative fair value are recorded as Derivative liabilities.

The accounting for the changes in fair value of a derivative instrument depends on whether or not it is designated as a hedging instrument for accounting purposes. Changes in fair value of derivatives that are not designated as hedging instruments for accounting purposes, which are defined as derivative investments, and embedded derivatives that are bifurcated are recorded in Fair value and foreign currency changes on assets and liabilities in our Consolidated Statements of Operations. Income earned or paid on these derivatives is recorded in Interest and other investment income in our Consolidated Statements of Operations. Hedge accounting is applied to certain derivatives to reduce income statement volatility. When certain qualification criteria are met, hedge accounting recognizes the offsetting effects of hedging instruments and hedged items in income or defers the effective portion of changes in fair value of hedging instruments in OCI until there is a recognition event, such as the occurrence of a forecasted transaction or the disposal of an investment in a foreign operation. All hedging relationships are documented at inception and hedge effectiveness is assessed on a quarterly basis.

Fair Value Hedges

Certain interest rate swaps and foreign currency forwards are designated as fair value hedges of the interest rate or foreign exchange rate risks associated with AFS assets. Changes in fair value of the derivatives are recorded in Interest and other investment income in our Consolidated Statements of Operations. The change in fair value of the AFS assets related to the hedged risk is reclassified from OCI to income. As a result, ineffectiveness, if any, is recognized in income to the extent that changes in fair value of the derivatives and AFS assets do not offset. Interest income earned and paid on the AFS assets and swaps in the fair value hedging relationships are recorded in Interest and other investment income in our Consolidated Statements of Operations.

Cash Flow Hedges

Certain equity and foreign currency forwards are designated as cash flow hedges for anticipated payments of awards under certain share-based payment plans and for anticipated foreign currency purchases of foreign operations. Changes in the fair value of derivatives for the effective portion of the hedge are recognized in OCI, while the ineffective portion of the hedge and any items excluded from hedge assessment, such as the spot-to-forward differential, are recognized in Interest and other investment income in our Consolidated Statements of Operations. A portion of the amount recognized in OCI related to the equity forwards is reclassified to income as a component of operating expenses as the liabilities for the share-based payment awards are accrued over the vesting period. A portion of the amounts recognized in OCI related to the foreign currency forwards would be reclassified to income upon disposal or impairment of the foreign operations. All amounts recognized in, or reclassified from, OCI are net of related taxes.

Net Investment Hedges

Foreign currency denominated liabilities are designated as net investment hedges to reduce foreign exchange fluctuations associated with certain net investments in funding of foreign subsidiaries. Changes in fair value of these instruments are recorded to foreign exchange gains and losses in OCI, offsetting the respective foreign currency translation gains or losses arising from the underlying net investments in foreign subsidiaries. All amounts recorded to, or from, OCI are net of related taxes. If the hedging relationship is terminated, amounts deferred in accumulated OCI continue to be deferred until there is a disposal or partial disposal of our net investment in the hedged foreign operation.

Embedded Derivatives

An embedded derivative is a component of a host contract that modifies the cash flows of the host contract in a manner similar to a derivative, according to a specified interest rate, financial instrument price, foreign exchange rate, underlying index or other variable. We are required to separate embedded derivatives from the host contract, if an embedded derivative has economic and risk characteristics that are not closely related to the host contract, meets the definition of a derivative, and the combined contract is not measured at fair value with changes recognized in income. If an embedded derivative is bifurcated for accounting purposes from the host contract, it will be accounted for as a derivative. For further details on embedded derivatives in insurance contracts, see the Insurance Contract Liabilities accounting policy in this Note.

Investment Properties

Investment properties are real estate held to earn rental income, for capital appreciation, or both. Properties held to earn rental income or for capital appreciation that have an insignificant portion that is owner-occupied are classified as investment properties. Properties that do not meet these criteria are classified as property and equipment, included in Other assets as described below. Expenditures related to ongoing maintenance of properties incurred subsequent to acquisition are expensed. Investment properties are initially recognized at cost in our Consolidated Statements of Financial Position. Various costs incurred associated with the acquisition of an investment property are either capitalized or expensed depending on whether or not the acquisition is considered a business combination. Investment properties are subsequently measured at fair value with changes in value recorded to Fair value and foreign currency changes on assets and liabilities in our Consolidated Statements of Operations.

When the use of a property changes from owner-occupied to investment property, any gain arising on the remeasurement of the property to fair value at the date of transfer is recognized in our Consolidated Statements of Operations to the extent that it reverses a previous impairment loss. Any remaining increase is recognized in OCI.

Other Invested Assets – Non-Financial Assets

Other invested assets also include non-financial assets such as investments in joint ventures and associates, which are accounted for using the equity method. Investments in joint ventures and associates are initially recorded at cost. The investment in joint ventures and associates is increased by our share of capital contributions and for purchases of additional interests and is reduced by

 

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distributions received. In addition, subsequent adjustments to the investment are made for our share of net income or loss and our share of OCI. Our share of net income is recorded in Interest and other investment income in our Consolidated Statements of Operations and our share of OCI is recorded in our Consolidated Statements of Comprehensive Income (Loss). Impairment losses on equity method investments are recognized when events or changes in circumstances indicate that they are impaired. The impairment loss recognized is the difference between the carrying amount and the recoverable amount.

Other Assets

Other assets which are measured at amortized cost, include accounts receivable and investment income due and accrued, deferred acquisition costs, and property and equipment. Deferred acquisition costs arising from service contracts or from service components of investment contracts are amortized over the expected life of the contracts based on the future expected fees. Owner-occupied properties are amortized to their residual value over 25 to 49 years. Furniture, computers, and other office equipment, and leasehold improvements are amortized to their residual value over 2 to 20 years.

Reinsurance Assets

In the normal course of business, we use reinsurance to limit exposure to large losses. We have a retention policy that requires that such arrangements be placed with well-established, highly-rated reinsurers. Reinsurance assets are measured consistently with the amounts associated with the underlying insurance contracts and in accordance with the terms of each reinsurance contract. Amounts due to or from reinsurers with respect to premiums received or paid claims are included in Other assets and Other liabilities in the Consolidated Statements of Financial Position. Premiums for reinsurance ceded are presented as premiums ceded in the Consolidated Statements of Operations. Reinsurance expenses (recoveries), as presented in our Consolidated Statements of Operations, represent reinsurance expenses and expense recoveries resulting from reinsurance agreements.

Reinsurance assets are subject to impairment testing. If impaired, the carrying value is reduced, and an impairment loss is recognized in Reinsurance expenses (recoveries) in our Consolidated Statements of Operations. Impairment occurs when objective evidence exists (as a result of an event) after the initial recognition of the reinsurance asset indicating that not all amounts due under the terms of the contract will be received, and the impairment can be reliably measured.

Reinsurance assumed is accounted for as an insurance, investment or service contract depending on the underlying nature of the agreement and if it meets the definition of an insurance, investment or service contract. For the accounting for these types of contracts, see the respective policy section in this Note.

Intangible Assets

Intangible assets consist of finite life and indefinite life intangible assets. Finite life intangible assets are amortized on a straight-line basis over varying periods of up to 40 years, and are charged through operating expenses. The useful lives of finite life intangible assets are reviewed annually, and the amortization is adjusted as necessary. Indefinite life intangibles are not amortized, and are assessed for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. Impairment is assessed by comparing the carrying values of the indefinite life intangible assets to their recoverable amounts. If the carrying values of the indefinite life intangibles exceed their recoverable amounts, these assets are considered impaired, and a charge for impairment is recognized in our Consolidated Statements of Operations. The recoverable amount of intangible assets is determined using various valuation models, which require management to make certain judgments and assumptions that could affect the estimates of the recoverable amount.

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable tangible and intangible assets of the acquired businesses. It is carried at original cost less any impairment subsequently incurred. Goodwill is assessed for impairment annually or more frequently if events or circumstances occur that may result in the recoverable amount of a cash generating unit (“CGU”) or a group of CGUs falling below its carrying value. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of cash inflows from other groups of assets. We exercise significant judgment in determining our CGUs. The factors considered in determining our CGUs include product cash inflows, product distribution, target markets, and how management monitors and evaluates the operations.

The goodwill balances are allocated to either individual or groups of CGUs that are expected to benefit from the synergies of the business combination. Goodwill impairment is quantified by comparing a CGU’s or a group of CGU’s carrying value to its recoverable amount, which is the higher of fair value less costs of disposal and value in use. Impairment losses are recognized immediately and may not be reversed in future periods. Significant judgment is involved in estimating the model inputs used to determine the recoverable amount of our CGUs or group of CGUs, including those for discount rates, capital, the value of new business, expenses, cash flow projections, and market multiples, due to the uncertainty and the forward-looking nature of these inputs. The assumptions may differ from the actual experience, and estimates may change from period to period based on future events or revisions of assumptions. These key assumptions are discussed in Note 9.

Insurance Contract Liabilities

Insurance contracts are contracts under which we accept significant insurance risk from a policyholder by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. The presence of significant insurance risk in individual contracts is assessed by reviewing books of contracts with homogeneous risk features. Judgment is required to determine the classification of a contract as an insurance contract, investment contract or a service contract.

As discussed in the Segregated Funds section of this Note, certain insurance contracts under which the policyholder bears the risks associated with the underlying investments are classified as Insurance contracts for account of segregated fund holders in our Consolidated Statements of Financial Position.

Insurance contract liabilities, including policy benefits payable and provisions for policyholder dividends, are determined in accordance with Canadian accepted actuarial practice and any requirements of OSFI. As confirmed by guidance provided by the Canadian Institute of Actuaries (“CIA”), the current Canadian Asset Liability Method (“CALM”) of valuation of insurance contract liabilities satisfies the IFRS 4 Insurance Contracts (“IFRS 4”) requirements for eligibility for use under IFRS. Under CALM, liabilities are set equal to the statement of financial position value of the assets required to support them.

 

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Some insurance contracts contain discretionary participation features (“DPF”), whereby the policyholder has the right to receive potentially significant additional benefits based on the actual investments and other experience on a block of similar contracts. IFRS allows the non-guaranteed, or participating, elements of such contracts to be classified as either a liability or as equity, depending on the nature of our obligation to the policyholder. The contracts issued by us contain constructive obligations to the policyholder with respect to the DPF of the contracts. We have therefore elected to classify these features as a liability, consistent with accounting treatment under CALM, and in accordance with guidance provided by the CIA.

Derivatives embedded in insurance contracts are treated as separate derivatives and measured at fair value with changes in fair value recognized in income, except when the embedded derivative itself meets the definition of an insurance contract under IFRS, or when the risks and characteristics are closely related to those of the host contracts or when the derivative is the policyholder’s option to surrender an insurance contract for a fixed amount or an amount based on a fixed amount and an interest rate. The derivatives that have not been separated are accounted for as insurance contract liabilities.

Significant judgment is required in determining our liabilities for insurance contracts including the assumptions required for their determination. Application of different assumptions may result in different measurement of the insurance contract liabilities. Actual experience may differ from assumptions, and estimates may change from period to period based on future events or revisions of assumptions. Key assumptions and considerations in choosing assumptions are discussed in Note 10 and sensitivities are discussed in Note 7.

Financial Liabilities

Investment Contract Liabilities

Contracts issued by us that do not transfer significant insurance risk, but do transfer financial risk from the policyholder to us, are financial liabilities and are accounted for as investment contracts. Service components of investment contracts are treated as service contracts. For further details on how service components of investment contracts are treated, see the Service Contracts accounting policy in this Note.

Liabilities for investment contracts without DPF are measured at FVTPL or amortized cost. Contracts recorded at FVTPL are measured at fair value at inception and each subsequent reporting period. Contracts recorded at amortized cost are initially recognized at fair value, less transaction costs directly attributable to the issue of the contract. These liabilities are derecognized when the obligation of the contract is discharged, cancelled or expired. At each subsequent period, the contracts are measured at amortized cost using the effective interest method. Changes in fair value of investment contract liabilities recorded at FVTPL and amortization on contracts recorded at amortized cost are recorded as an Increase (decrease) in investment contract liabilities in our Consolidated Statements of Operations. Deposits collected from and payments made to contract holders are recorded as an increase and decrease in Investment contract liabilities in our Consolidated Statements of Financial Position.

As discussed in the Segregated Funds section of this Note, certain investment contracts under which the policyholder bears the risks associated with the underlying investments are classified as Investment contracts for account of segregated fund holders in the Consolidated Statements of Financial Position. The accounting for Investment contracts that contain DPF is described in the Insurance Contract Liabilities section of this Note.

Other Liabilities

Other liabilities, which are measured at amortized cost, include accounts payable, repurchase agreements, accrued expenses and taxes, senior financing and provisions. Liabilities for provisions, other than insurance contract liabilities and investment contract liabilities, are recognized for present legal or constructive obligations as a result of a past event if it is probable that they will result in an outflow of economic resources and the amount can be reliably estimated. The amounts recognized for these provisions are the best estimates of the expenditures required to settle the present obligations or to transfer them to a third-party at the statement of financial position date, considering all the inherent risks and uncertainties, as well as the time value of money. These provisions are reviewed as relevant facts and circumstances change.

Senior Debentures and Subordinated Debt

Senior debentures and subordinated debt liabilities are recorded at amortized cost using the effective interest method. Transaction costs are recorded as part of the liability and are recognized in income using the effective interest method. These liabilities are derecognized when the obligation of the contract is discharged, cancelled or expired.

Service Contracts

Contracts issued by us that do not transfer significant insurance risk and do not transfer financial risk from the policyholder to us are classified as service contracts. Service components of investment contracts are also accounted for as service contracts. Fee income earned from these contracts is described in the Premium and Fee Income Recognition accounting policy section of this Note. Deferred acquisition costs are described under the Other Assets accounting policy section of this Note. Where the cost of meeting the obligations of the contract exceed the economic benefits expected to be received under it, a provision is recognized in Other liabilities.

Segregated Funds

Segregated funds are products for which we issue a contract where the benefit amount is directly linked to the fair value of the investments held in the particular segregated fund. Although the underlying assets are registered in our name and the segregated fund contract holder has no direct access to the specific assets, the contractual arrangements are such that the segregated fund policyholder bears the risks and rewards of the fund’s investment performance. In addition, certain contracts include guarantees from us. We derive fee income from segregated funds, which is included in Fee income in our Consolidated Statements of Operations. Policyholder transfers between general funds and segregated funds are included in Net transfer to (from) segregated funds in our Consolidated Statements of Operations. Deposits to segregated funds are reported as increases in segregated funds liabilities and are not reported as revenues in our Consolidated Statements of Operations.

 

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Investments for Account of Segregated Fund Holders

Investments for account of segregated fund holders are recorded separately from the Total general fund assets in our Consolidated Statements of Financial Position and are carried at fair value. Fair values are determined using quoted market values or, where quoted market values are not available, estimated fair values as determined by us.

Insurance Contracts for Account of Segregated Fund Holders

Insurance contracts for account of segregated fund holders are recorded separately from the Total general fund liabilities in our Consolidated Statements of Financial Position. Insurance contracts under which the segregated fund holders bear the risks associated with the underlying investments are classified as insurance contracts for account of segregated fund holders. The liabilities reported as insurance contracts for account of segregated fund holders are measured at the aggregate of the policyholder account balances. Changes in the fair value of the invested assets of the segregated funds are recorded in net realized and unrealized gains (losses) within the segregated fund and are not recorded in our Consolidated Statements of Operations.

Other assets and liabilities associated with these insurance contracts, such as origination costs and the liabilities associated with guarantees provided by us, are included in general fund liabilities in Insurance contract liabilities in our Consolidated Statements of Financial Position.

Investment Contracts for Account of Segregated Fund Holders

Investment contracts for account of segregated fund holders are recorded separately from the Total general fund liabilities in our Consolidated Statements of Financial Position. Investment contracts under which the segregated fund holders bear the risks associated with the underlying investments are classified as investment contracts for account of segregated fund holders. The liabilities reported as investment contracts for account of segregated fund holders are measured at the aggregate of the policyholder account balances.

Other liabilities associated with these investment contracts, such as onerous contract provisions required for service components, are included in general fund liabilities in Investment contract liabilities in our Consolidated Statements of Financial Position.

Income Taxes

Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. Deferred income tax is provided using the liability method on temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Current and deferred income tax relating to items recognized, in the current or previous period, in OCI or directly in equity is accordingly recognized in OCI or equity and not in our Consolidated Statements of Operations. Interest and penalties payable to taxation authorities are recorded in Operating expenses in our Consolidated Statements of Operations.

Deferred income tax assets and liabilities are calculated based on income tax rates and laws that are expected to apply when the liability is settled or the asset is realized, which are normally those enacted or considered substantively enacted at our Consolidated Statements of Financial Position dates. Deferred income tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses to the extent that it is probable that future taxable profit will be available against which these assets can be utilized. At each reporting period, we assess all available evidence, both positive and negative, to determine the amount of deferred income tax assets to be recognized. The recognition of deferred income tax assets requires estimates and significant judgment about future events, such as projections of future taxable profits, based on the information available at the reporting date.

The determination of the required provision for current and deferred income taxes requires that we interpret tax legislation in the jurisdictions in which we operate. For each reporting period, our income tax provision reflects our best estimate, based on the information available at the reporting date, of tax positions that are under audit or appeal by relevant tax authorities. To the extent that our estimate of tax positions or the timing of realization of deferred income tax assets or liabilities are not as expected, the provision for income taxes may increase or decrease in the future to reflect the actual experience.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, joint ventures and associates, except where we control the timing of the reversal of the temporary difference and it is apparent that the temporary difference will not reverse in the foreseeable future. No deferred income tax asset or liability is recognized in relation to temporary differences that arise from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, did not affect either the accounting profit or taxable profit or loss. Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities, the deferred income taxes relate to the same taxable entity and the same taxation authority and we intend either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

In determining the impact of taxes, we are required to comply with Canadian accepted actuarial practice and IFRS. CALM requires that all projected cash flows associated with insurance contract liabilities, including income taxes, be included in the determination of insurance contract liabilities. The insurance contract liabilities are therefore determined including all policy-related income tax effects on a discounted basis, and then adjusted for any related deferred income tax assets and liabilities held in accordance with IFRS. The net result of this adjustment is to leave the discounting effect of the deferred income taxes associated with temporary differences on policy-related tax items in the insurance contract liabilities.

Pension Plans and Other Post-Retirement Benefits

For defined benefit plans, the present value of the defined benefit obligation is calculated by independent actuaries using the projected unit credit method, and actuarial assumptions that represent best estimates of future variables that will affect the ultimate cost of these obligations. The discount rate used is based on market yields of high-quality corporate bonds that are denominated in the same currency in which the benefits will be paid, and that have terms to maturity approximating the terms of obligations. Plan assets are measured at fair value and are held in separate trustee administered funds. The difference between the fair value of the plan assets and the present value of the defined benefit obligation is recognized on the Consolidated Statements of Financial Position as an asset or liability.

 

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Costs charged to our Consolidated Statements of Operations include current service cost, any past service costs, any gains or losses from curtailments or settlements, and interest on the net defined benefit liability (asset). Remeasurement of the net defined benefit liability (asset), which includes the impact of changes to the actuarial assumption underlying the liability calculations, liability experience gains or losses, the difference between the return on plan assets and the amount included in the interest on the net defined benefit liability (asset), is reflected immediately in OCI. The calculation of the defined benefit expenses and obligations requires judgment as the recognition is dependent on various actuarial assumptions such as discount rates, health care cost trend rates and projected compensation increases. These key assumptions are discussed in Note 25.

Dividends

Dividends payable to holders of shares of SLF Inc. are recognized in the period in which they are authorized or approved. Dividends that have been reinvested in additional common shares under the Dividend Reinvestment and Share Purchase Plan (“DRIP”) are also reflected as dividends within retained earnings. Where SLF Inc. has issued common shares from treasury under the DRIP, the additional shares have been reflected in common shares.

Premium and Fee Income Recognition

Gross premiums for all types of insurance contracts excluding segregated fund contracts are generally recognized as revenue when due.

Fee income includes fund management and other asset-based fees, commissions from intermediary activities, and fees on service contracts and is recognized when services are rendered.

Share-Based Payments

Stock options of SLF Inc. granted to employees are accounted for as equity-settled share-based payment transactions. The total compensation expense for stock options is computed based on the fair value of the stock option at the date of grant and the estimated number of options expected to vest at the end of the vesting period. The expense is recognized over the vesting period as compensation expense in Operating expenses in our Consolidated Statements of Operations, with an offset to contributed surplus in our Consolidated Statements of Changes in Equity. When options are exercised, new common shares are issued, contributed surplus is reversed and the common shares issued are credited to common shares in our Consolidated Statements of Changes in Equity.

Other share-based payment plans based on the value of SLF Inc.‘s common shares are accounted for as cash-settled share-based payment transactions. The total liabilities for these plans are computed based on the estimated number of awards expected to vest at the end of the vesting period. The liabilities are recomputed at the end of each reporting period and are measured at the fair value of the award at that reporting date. The liabilities are accrued and expensed on a straight-line basis over the vesting periods. The liabilities are settled in cash at the end of the vesting period.

Share-based payment awards within MFS Investment Management (“MFS”) which are based on their own shares, are accounted for as cash-settled share-based payment awards. The vested and unvested awards, as well as the shares that have been issued under these plans, are recognized as liabilities because the subsidiary has a practice of purchasing the issued shares from employees after a specified holding period. The total liabilities for these plans are computed based on the estimated number of awards expected to vest at the end of the vesting period. The liabilities are accrued over the vesting period and are measured at fair value at each reporting period with the change in fair value recognized as compensation expense in Operating expenses in our Consolidated Statements of Operations. The liabilities are settled in cash when the shares are purchased from the employees.

Basic and Diluted Earnings Per Share (“EPS”)

Basic EPS is calculated by dividing the common shareholders’ net income by the weighted average number of common shares issued and outstanding.

Diluted EPS adjusts common shareholders’ net income and the weighted average number of common shares for the effects of all dilutive potential common shares under the assumption that convertible instruments are converted and that outstanding options are exercised. Diluted EPS is calculated by dividing the adjusted common shareholders’ net income by the adjusted weighted average number of common shares outstanding. For convertible instruments, common shareholders’ net income is increased by the after-tax expense on the convertible instrument while the weighted average common shares are increased by the number of common shares that would be issued at conversion. For stock options, it is assumed that the proceeds from the exercise of options whose exercise price is less than the average market price of common shares during the period are used to repurchase common shares at the average market price for the period. The difference between the number of common shares issued for the exercise of the dilutive options and the number of common shares that would have been repurchased at the average market price of the common shares during the period is adjusted to the weighted average number of common shares outstanding.

2. Changes in Accounting Policies

 

 

2.A New and Amended International Financial Reporting Standards Adopted in 2016

In December 2014, the IASB issued Disclosure Initiative (Amendments to IAS 1). The amendments to IAS 1 Presentation of Financial Statements are designed to encourage entities to use professional judgment to determine what information to disclose in the financial statements and accompanying notes by clarifying the guidance on materiality, presentation, and note structure. These amendments are effective for annual periods beginning on or after January 1, 2016. Certain disclosures in our Consolidated Financial Statements were revised, including combining Property and equipment into Other assets. Prior year comparatives have been changed to conform with current year presentation. The amendments also require separate disclosure of the share of the other comprehensive income of joint ventures and associates, which is presented in our Consolidated Statements of Comprehensive Income (Loss) adopted retrospectively.

 

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The following amendments are also effective for annual periods beginning on or after January 1, 2016, and did not have a material impact on our Consolidated Financial Statements.

In May 2014, the IASB issued Accounting for Acquisitions of Interests in Joint Operations, which amends IFRS 11 Joint Arrangements. These amendments applied prospectively, provide guidance on the accounting for an acquisition of an interest in a joint operation when the operation constitutes a business.

In May 2014, the IASB issued Clarification of Acceptable Methods of Depreciation and Amortization, which amends IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets. These amendments applied prospectively, clarify that, in general, revenue based methods of depreciation or amortization of property, plant and equipment and intangible assets should not be used.

In September 2014, the IASB issued Annual Improvements to IFRSs 2012-2014 Cycle, which includes minor amendments to various IFRSs, with some amendments applied prospectively and others applied retrospectively.

In December 2014, the IASB issued Investment Entities: Applying the Consolidation Exception, which amends IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities, and IAS 28 Investment in Associates and Joint Ventures. The amendments clarify certain accounting requirements related to investment entities. The amendments applied retrospectively, include permitting a non-investment entity to retain the fair value accounting applied by its investment entity joint venture or associate when applying the equity method of accounting.

2.B New and Amended International Financial Reporting Standards to be Adopted in 2017

The following amended IFRS were issued by the IASB and are expected to be adopted by us in 2017.

In January 2016, the IASB issued narrow-scope amendments to IAS 12 Income Taxes. The amendments clarify how to account for deferred tax assets related to unrealized losses on debt instruments measured at fair value. The amendments are effective for annual periods beginning on or after January 1, 2017. The amendments are to be applied retrospectively, with certain relief available upon transition. We do not expect the adoption of these amendments to have a material impact on our Consolidated Financial Statements.

In January 2016, the IASB issued Disclosure Initiative (Amendments to IAS 7), which amends IAS 7 Statement of Cash Flows. The amendments require entities to provide disclosure that enables users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. The amendments are effective for annual periods beginning on or after January 1, 2017, to be applied prospectively. We do not expect the adoption of these amendments to have a material impact on our Consolidated Financial Statements.

In December 2016, the IASB issued Annual Improvements to IFRSs 2014-2016 Cycle, which includes a minor amendment to IFRS 12 Disclosure of Interests in Other Entities that is effective for annual periods beginning on or after January 1, 2017. The amendment provides clarification guidance to the scope of IFRS 12. We do not expect the adoption of this amendment to have a material impact on our Consolidated Financial Statements.

2.C New and Amended International Financial Reporting Standards to be Adopted in 2018 or Later

The following new standards were issued by the IASB and are expected to be adopted by us in 2018 or later.    

In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (“IFRS 15”), which replaces IAS 11 Construction Contracts, IAS 18 Revenue and various interpretations. IFRS 15 establishes principles about the nature, amount, timing, and uncertainty of revenue arising from contracts with customers. IFRS 15 requires entities to recognize revenue to reflect the transfer of goods or services to customers measured at the amounts an entity expects to be entitled to in exchange for those goods or services. In September 2015, the IASB deferred the effective date of IFRS 15 from January 1, 2017 to annual periods beginning on or after January 1, 2018. IFRS 15 is to be applied retrospectively, or on a modified retrospective basis. Insurance and investment contracts are not in the scope of this standard. In April 2016, the IASB issued Clarifications to IFRS 15 Revenue from Contracts with Customers, which provides additional guidance and relief on transition of IFRS 15. These amendments are effective for annual periods beginning on or after January 1, 2018. We are currently assessing the impact that IFRS 15, along with these amendments, will have on our Consolidated Financial Statements.

In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments (“IFRS 9”), which replaces IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”). IFRS 9 includes guidance on the classification and measurement of financial instruments, impairment of financial assets, and hedge accounting. Financial asset classification is based on the cash flow characteristics and the business model in which an asset is held. The classification determines how a financial instrument is accounted for and measured. IFRS 9 also introduces an impairment model for financial instruments not measured at fair value through profit or loss that requires recognition of expected losses at initial recognition of a financial instrument and the recognition of full lifetime expected losses if certain criteria are met. In addition, a new model for hedge accounting was introduced to achieve better alignment with risk management activities. In September 2016, the IASB issued amendments to IFRS 4, to allow insurance entities whose predominant activities are to issue contracts within the scope of IFRS 4, an optional temporary exemption from applying IFRS 9 until 2021 (the “deferral approach”). We qualify and we will elect the deferral approach permitted under the amendments. Consequently, we will continue to apply IAS 39, the existing financial instrument standard until 2021.

In January 2016, the IASB issued IFRS 16 Leases (“IFRS 16”), which replaces IAS 17 Leases, and related interpretations. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. For lessees, IFRS 16 removes the classification of leases as either operating or financing and requires that all leases be recognized on the statement of financial position, with certain exemptions that include leases of 12 months or less. The accounting for lessors is substantially unchanged. The standard is effective for annual periods beginning on or after January 1, 2019, to be applied retrospectively, or on a modified retrospective basis. We are currently assessing the impact the adoption of this standard will have on our Consolidated Financial Statements.

In June 2016, the IASB issued Classification and Measurement of Share-based Payment Transactions, which amends IFRS 2 Share-based Payment, which clarifies how to account for certain types of share-based payment transactions, such as the effects of vesting

 

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and non-vesting conditions on the measurement of cash-settled share-based payments. These amendments are effective for annual periods beginning on or after January 1, 2018, and are applicable to awards granted on or after that date and to unvested and vested but unexercised awards outstanding at that date. The amendments are to be applied prospectively, with retrospective application permitted. We are currently assessing the impact the adoption of these amendments will have on our Consolidated Financial Statements.

In December 2016, the IASB issued Annual Improvements to IFRSs 2014-2016 Cycle, which includes minor amendments to various IFRSs. These amendments are effective for annual periods beginning on or after January 1, 2018. We are currently assessing the impact the adoption of these amendments will have on our Consolidated Financial Statements.

In December 2016, the IASB issued Transfers of Investment Property (Amendments to IAS 40). The amendments to IAS 40 Investment Property clarify that an entity shall transfer property to, or from, investment property when, and only when, there is evidence of a change in use. The amendments are effective for annual periods beginning on or after January 1, 2018. We are currently assessing the impact the adoption of these amendments will have on our Consolidated Financial Statements.

In December 2016, the IASB issued IFRIC 22 Foreign Currency Transactions and Advance Consideration, which was developed by the IFRS Interpretations Committee. IFRIC 22 clarifies that for purposes of determining the exchange rate in transactions which include the receipt or payment of advance consideration in a foreign currency, the date of the transaction is the date of initial recognition of the non-monetary prepayment asset or deferred income liability. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. We are currently assessing the impact that IFRIC 22 will have on our Consolidated Financial Statements.

3. Acquisitions

 

 

Acquisitions Completed in 2016

Acquisition in Sun Life Financial United States

On March 1, 2016, we completed the purchase of the U.S. Employee Benefits business of Assurant, Inc. (“Assurant EB”) for total consideration of $1,264 which consisted of a ceding commission and a payment for the acquisition of direct subsidiaries. The purchase price includes contingent consideration of $21 that was paid in the third quarter. The acquisition was effected through reinsurance agreements and the direct purchase of 100% of the voting shares of certain legal entities. The results and the net assets acquired, including goodwill, are recorded in our Sun Life Financial United States (“SLF U.S.”) reportable segment in Note 4. The acquisition adds new capabilities and increases the size and scale of this business segment.

During the fourth quarter of 2016, the Company finalized its review of acquired insurance contract liabilities and related deferred taxes. As a result of this review, the fair value of net identifiable assets acquired that were disclosed in the September 30, 2016 consolidated interim financial statements increased by $35 and goodwill decreased by a commensurate amount.

The components of the fair value of net identifiable assets recognized from this acquisition consist of the following:

 

As at March 1, 2016       

Fair value of consideration transferred

  $         1,264   

Fair value of net identifiable assets acquired:

 

Assets acquired:

 

Invested assets

  $ 2,345 (1) 

Other assets

    156   

Deferred tax assets

    186   

Intangible assets

    270 (2) 

Total assets acquired

  $ 2,957   

Liabilities assumed:

 

Insurance contract liabilities

  $ 2,248   

Other liabilities assumed

    105   

Total liabilities assumed

  $ 2,353   

Fair value of net identifiable assets acquired

  $ 604   

Goodwill

  $ 660 (3) 

 

(1) Includes cash and cash equivalents of $53, debt securities of $1,828, mortgages and loans of $376, and equity securities of $88.
(2) The acquired intangible assets are finite life intangible assets that consist of client relationship intangible assets of $180 and distribution intangible assets of $90 that will be amortized on a straight-line basis over 15 years.
(3) The goodwill represents the excess of the purchase price over the fair value of net assets and includes the benefit of synergies and future business and other economic benefits arising from this transaction of which $318 is deductible for tax purposes.

Acquisitions in Sun Life Financial Asia

During the year, we acquired full ownership of our joint venture insurance company in Vietnam, PVI Sun Life Insurance Company Limited (“PVI Sun Life”). On January 7, 2016, we increased our ownership interest in PVI Sun Life, from 49% to 75% by acquiring from PVI Holdings an additional 26% of PVI Sun Life’s charter capital for cash consideration of $49. As a result, we obtained control and re-measured our existing ownership interest in PVI Sun Life at fair value on the acquisition date, resulting in the recognition of a one-time, non-cash gain of $31 recorded in Interest and other investment income in our Consolidated Statements of Operations. This gain consists of $23 related to the difference between the fair value and carrying value of our 49% interest in PVI Sun Life under the equity method of accounting and $8 related to reclassification of cumulative translation difference from accumulated other

 

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comprehensive income to net income. The fair value of net identifiable assets includes cash and cash equivalents of $2 and intangible assets of $6. Goodwill arising from this transaction was $51, which primarily reflects expectations of future business. Non-controlling interests arising from acquisition were $18, which were recognized as its proportionate share of the fair value of the net identifiable assets. In connection with this acquisition, we also entered into an agreement that allows PVI Holdings to sell all of its remaining charter capital in PVI Sun Life to us within a 10-year period, which was recognized as Transaction with non-controlling interests in our Consolidated Statements of Changes in Equity. On November 9, 2016, we acquired the remaining 25% of non-controlling interests from PVI Holdings for cash consideration of $46 and renamed PVI Sun Life to Sun Life Vietnam Insurance Company Limited. As the acquisition of non-controlling interests was accounted for as an equity transaction, the difference between consideration transferred and the reduction of non-controlling interests was recognized directly in shareholders’ equity. Refer to Note 27.B for changes to non-controlling interests during 2016.

On July 1, 2016, we increased our investment in our joint venture in Indonesia, PT CIMB Sun Life from 49% to 100% and simultaneously entered into an extended bancassurance agreement with PT Bank CIMB Niaga to strengthen our distribution capabilities for total consideration of approximately $76, consisting of $54 initial cash consideration and estimated contingent consideration of $22, of which $12 was paid in the fourth quarter and the remaining amount to be paid over the next 2 years. As a result of this transaction, we obtained control and re-measured our existing ownership interest in PT CIMB Sun Life at fair value on the acquisition date, resulting in the recognition of a one-time, non-cash gain of $6 recorded in Interest and other investment income in our Consolidated Statements of Operations, which relates to the difference between the fair value and carrying value of our 49% interest in PT CIMB Sun Life under the equity method of accounting. The fair value of net identifiable assets includes cash and cash equivalents of $8, distribution intangible assets of $67 and a net deferred tax liability of $17. The acquired intangible asset is subject to amortization on a straight-line basis. Goodwill arising from this transaction was $45, which primarily reflects expectations of future business and expense synergies.

The results and the net assets acquired, including goodwill, from these acquisitions are recorded in our Sun Life Financial Asia (“SLF Asia”) reportable segment in Note 4.

Acquisitions Completed in 2015

Acquisitions in SLF Asset Management

On September 1, 2015, we completed the acquisition of the Bentall Kennedy group of companies (“Bentall Kennedy”) for cash consideration of $557. Bentall Kennedy is a real estate investment manager operating in Canada and the U.S. and provides specialized real estate investment management and real estate services, including property management and leasing. The acquired business complements our expertise in asset-liability management, fixed income, and alternative asset classes by extending our real estate and mortgage investment capabilities. The fair value of the net identifiable assets acquired was $392, which included intangible assets of $475 and a net deferred tax liability of $83. The acquired intangible assets included finite life intangible assets of $125 and indefinite life intangible assets of $350. The finite life intangible assets relate to client relationships which are subject to amortization on a straight-line basis over their projected economic lives of 20 years. The indefinite life intangible assets relate to fund management contracts and will not be amortized. We recognized goodwill of $165 as a result of this transaction.

On July 31, 2015, we completed the acquisition of all of the shares of Prime Advisors, Inc. (“Prime Advisors”) for cash consideration of $76. The acquired business increased our capacity for liability-driven investing as Prime Advisors specializes in customized fixed income portfolios, primarily for U.S. insurance companies. The fair value of the net identifiable assets acquired in the transaction was $23, which included a client relationship intangible asset of $16 that is subject to amortization on a straight-line basis over its projected economic life of 15 years. We recognized goodwill of $53 as a result of this transaction.

On April 2, 2015, we completed the acquisition of all the shares of Ryan Labs Asset Management Inc., previously Ryan Labs, Inc., (“Ryan Labs”), a New York-based asset manager for $46. The acquired business increased our capacity for liability-driven investing and total return fixed income strategies in the U.S. The purchase price consisted of SLF Inc. common shares valued at $34, cash of $5, and estimated contingent consideration of $7 to be paid in SLF Inc. common shares if certain future performance targets are achieved. The fair value of the net identifiable assets acquired in the transaction was $9, which included an intangible asset of $11 and a related deferred tax liability of $5. The acquired intangible asset consists of client relationships which are subject to amortization on a straight-line basis over its projected economic life of 15 years. We recognized goodwill of $37 as a result of this transaction.

Goodwill arising from these transactions includes the benefit of synergies, future business and other economic benefits.

4. Segmented Information

 

 

We have five reportable segments: Sun Life Financial Canada (“SLF Canada”), SLF U.S., Sun Life Financial Asset Management (“SLF Asset Management”), SLF Asia, and Corporate.

In the third quarter of 2015, we renamed our MFS segment to SLF Asset Management to reflect our asset management acquisitions that were completed in 2015. This segment includes the operations of MFS, previously reported as the MFS segment, and the operations of Sun Life Investment Management (“SLIM”) which were added to this segment in the third quarter of 2015. SLIM consists of the results of acquisitions completed in 2015, as described in Note 3, and Sun Life Institutional Investments (Canada) Inc.

These reportable segments operate in the financial services industry and reflect our management structure and internal financial reporting. Corporate includes the results of our U.K. business unit and our Corporate Support operations, which include run-off reinsurance operations as well as investment income, expenses, capital, and other items not allocated to our other business groups.

Revenues from our reportable segments are derived principally from life and health insurance, investment management and annuities, and mutual funds. Revenues not attributed to the strategic business units are derived primarily from Corporate investments and earnings on capital. Transactions between segments are executed and priced on an arm’s-length basis in a manner similar to transactions with third parties.

 

 

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The expenses in each business segment may include costs or services directly incurred or provided on their behalf at the enterprise level. For other costs not directly attributable to one of our business segments, we use a management reporting framework that uses assumptions, judgments, and methodologies for allocating overhead costs, and indirect expenses to our business segments.

Intersegment transactions consist primarily of internal financing agreements which are measured at fair values prevailing when the arrangements are negotiated. Intersegment investment income consists primarily of interest paid by SLF U.S. to Corporate. Intersegment fee income is primarily asset management fees paid by SLF Canada and Corporate to SLF Asset Management, and product distribution fees paid by SLF Asset Management to SLF U.S. Intersegment transactions are presented in the Consolidation adjustments column in the following tables.

Management considers its external clients to be individuals and corporations. We are not reliant on any individual client as none are individually significant to our operations.

Results by segment for the years ended December 31, are as follows:

 

     SLF
Canada
    SLF U.S.     SLF Asset
Management
    SLF
Asia
    Corporate      Consolidation
adjustments
     Total  

2016

               

Gross premiums:

               

Annuities

  $ 2,585      $ 11      $      $      $ 28       $       $ 2,624   

Life insurance

    4,107        2,734                     1,954        99                 8,894   

Health insurance

    4,368        3,507               17        17                 7,909   

Total gross premiums

        11,060        6,252               1,971        144                 19,427   

Less: ceded premiums

    3,671        565               117        26                 4,379   

Net investment income (loss)

    3,751        2,109        (3     761        1,428         (101      7,945   

Fee income

    1,026        228        3,932        341        131         (78      5,580   

Total revenue

    12,166        8,024        3,929        2,956        1,677         (179      28,573   

Less:

               

Total benefits and expenses

    10,797        7,450        2,807        2,581        1,672         (179      25,128   

Income tax expense (benefit)

    208        61        393        51        (94              619   

Total net income (loss)

  $ 1,161      $ 513      $ 729      $ 324      $ 99       $       $ 2,826   

2015

               

Gross premiums:

               

Annuities

  $ 2,715      $ 143      $      $      $ 30       $       $ 2,888   

Life insurance

    3,783        2,382               1,195        102                 7,462   

Health insurance

    4,105        2,333               16        20                 6,474   

Total gross premiums

    10,603        4,858               1,211        152                 16,824   

Less: ceded premiums

    5,582        627               40        180                 6,429   

Net investment income (loss)

    2,527        812        4        52        223         (63      3,555   

Fee income

    998        210        3,727        306        157         (74      5,324   

Total revenue

    8,546        5,253        3,731        1,529        352         (137      19,274   

Less:

               

Total benefits and expenses

        7,530              4,830            2,616        1,170        366         (137      16,375   

Income tax expense (benefit)

    177        90        424        48                (140              599   

Total net income (loss)

  $ 839      $ 333      $ 691      $ 311      $ 126       $           –       $         2,300   

 

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Assets and liabilities by segment are as follows:

 

     SLF
Canada
    SLF U.S.     SLF Asset
Management
   

SLF

Asia

    Corporate     Consolidation
adjustments
     Total  

As at December 31, 2016

              

Total general fund assets

  $     82,456      $     45,066      $     4,277      $     15,103      $     14,341      $     (172    $   161,071   

Investments for account of segregated fund holders

  $ 79,964      $ 1,269      $      $ 4,605      $ 11,329      $       $ 97,167   

Total general fund liabilities

  $ 74,278      $ 40,356      $ 2,384      $ 10,866      $ 10,991      $ (172    $ 138,703   

As at December 31, 2015

              

Total general fund assets

  $ 78,109      $ 42,890      $ 4,341      $ 13,551      $ 16,690      $ (168    $ 155,413   

Investments for account of segregated fund holders

  $ 72,633      $ 1,379      $      $ 4,278      $ 13,150      $       $ 91,440   

Total general fund liabilities

  $ 70,437      $ 38,843      $ 2,566      $ 9,816      $ 12,501      $ (168    $ 133,995   

The revenue and assets of our reportable segments differ from geographic segments primarily due to the geographic segmenting of our SLF Asset Management and Corporate segments.

The following table shows revenue by country for SLF Asset Management and Corporate:

 

     SLF Asset Management     Corporate  
For the years ended December 31,   2016     2015     2016      2015  

Revenue:

        

United States

  $ 3,791      $ 3,680      $ 170       $ (20

United Kingdom

                  1,412         322   

Canada(1)

    138        51        74         49   

Other countries

                  21         1   

Total revenue

  $       3,929      $       3,731      $       1,677       $       352   

 

(1) Consists of the Canadian operations of Bentall Kennedy.

The following table shows total assets by country for SLF Asset Management and Corporate:

 

     SLF Asset Management     Corporate  
As at December 31,   2016     2015     2016      2015  

Total general fund assets:

        

United States

  $        3,745      $ 3,871      $ 2,356       $ 2,682   

United Kingdom

                  8,731         10,361   

Canada(1)

    532        470        3,116         3,503   

Other countries

                  138         144   

Total general fund assets

  $ 4,277      $        4,341      $ 14,341       $ 16,690   

Investment for account of segregated fund holders:

        

United Kingdom

  $      $      $ 11,329       $ 13,150   

Total investment for account of segregated fund holders

  $      $      $       11,329       $       13,150   

 

(1) Consists of the Canadian operations of Bentall Kennedy.

 

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5. Total Invested Assets and Related Net Investment Income

 

 

5.A Fair Value of Invested Assets

5.A.i Carrying Value and Fair Value of Financial Assets

The carrying values and fair values of our financial assets are shown in the following table:

 

As at   December 31, 2016     December 31, 2015  
     Carrying
value
   

Fair

value

    Carrying
value
   

Fair

value

 

Assets

       

Cash, cash equivalents and short-term securities

  $ 8,642      $ 8,642      $ 8,983      $ 8,983   

Debt securities – fair value through profit or loss

    59,466        59,466        56,785        56,785   

Debt securities – available-for-sale

    12,421        12,421        13,111        13,111   

Equity securities – fair value through profit or loss

    5,016        5,016        4,426        4,426   

Equity securities – available-for-sale

    758        758        887        887   

Mortgages and loans

    40,775        43,104        39,103        41,849   

Derivative assets

    1,608        1,608        1,866        1,866   

Other invested assets – fair value through profit or loss(1)

    2,041        2,041        1,811        1,811   

Other invested assets – available-for-sale(1)

    623        623        327        327   

Policy loans

    3,141        3,141        3,151        3,151   

Total financial assets(2)

  $     134,491      $     136,820      $     130,450      $     133,196   

 

(1) Other invested assets (FVTPL and AFS) include our investments in segregated funds, mutual funds, and limited partnerships.
(2) Invested assets on our Consolidated Statements of Financial Position of $142,350 ($137,963 as at December 31, 2015) includes Total financial assets in this table, Investment properties of $6,592 ($6,540 as at December 31, 2015), and Other invested assets – non-financial assets of $1,267 ($973 as at December 31, 2015).

Derivative liabilities with a fair value of $2,512 ($3,378 as at December 31, 2015) are also included on the Consolidated Statements of Financial Position.

Our mortgages and loans are generally carried at amortized cost. The fair value of mortgages and loans, for disclosure purposes, is determined based on the methodology and assumptions described in Note 5.A.ii. As at December 31, 2016, $38,350 and $4,754 are categorized in Level 2 and Level 3, respectively, of the fair value hierarchy, described in this Note ($37,294 and $4,555 as at December 31, 2015).

Policy loans are carried at their unpaid principal balances. The fair value of policy loans, for disclosure purposes, is approximated by their carrying value, as policy loans are fully secured by policy values on which the loans are made and are categorized in Level 2 of the fair value hierarchy.

5.A.ii Fair Value Methodologies and Assumptions

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.

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.

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 over-the-counter (“OTC”) derivatives is determined using pricing models, such as discounted cash flow analysis or other market standard valuation techniques, with primarily observable market inputs. Valuation inputs used to price OTC derivatives may include swap interest rate curves, foreign exchange spot and forward rates,

 

  Notes to Consolidated Financial Statements   Sun Life Financial Inc.    Annual Report 2016    109


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index prices, the value of underlying securities, projected dividends, volatility surfaces, and in limited circumstances, counterparty quotes. The fair value of OTC derivative financial instruments also includes credit valuation adjustments to reflect the credit risk of both the derivative counterparty and ourselves as well as the impact of contractual factors designed to reduce our credit exposure, such as collateral and legal rights of offset under master netting agreements. Inputs into determining the appropriate credit valuation adjustments are typically obtained from publicly available information and include credit default swap spreads when available, credit spreads derived from specific bond yields, or published cumulative default experience data adjusted for current trends when credit default swap spreads are not available.

The fair value of other invested assets 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.

The fair value of investment properties is generally determined using property valuation models that are based on expected capitalization rates and models that discount expected future net cash flows at current market interest rates reflective of the characteristics, location, and market of each property. Expected future net cash flows include contractual and projected cash flows and forecasted operating expenses, and take into account interest, rental, and occupancy rates derived from market surveys. The estimates of future cash inflows in addition to expected rental income from current leases, include projected income from future leases based on significant assumptions that are consistent with current market conditions. The future rental rates are estimated based on the location, type, and quality of the properties, and take into account market data and projections at the valuation date. The fair values are typically compared to market-based information for reasonability, including recent transactions involving comparable assets. The methodologies and inputs used in these models are in accordance with real estate industry valuation standards. Valuations are prepared externally or internally by professionally accredited real estate appraisers.

The fair value of short-term securities is approximated by their carrying amount, adjusted for credit risk where appropriate.

The fair value of investments for account of segregated fund holders is determined using quoted prices in active markets or independent valuation information provided by investment managers. The fair value of direct investments within investments for account of segregated fund holders, such as short-term securities and government and corporate debt securities, is determined according to valuation methodologies and inputs described above in the respective asset type sections.

The methodologies and assumptions for determining the fair values of investment contract liabilities are included in Note 10.B.

5.A.iii Fair Value Hierarchy

We categorize our assets and liabilities carried at fair value, based on the priority of the inputs to the valuation techniques used to measure fair value, into a three-level fair value hierarchy as follows:

Level 1:    Fair value is based on the unadjusted quoted prices for identical assets or liabilities in an active market. The types of assets and liabilities classified as Level 1 generally include cash and cash equivalents, certain U.S. government and agency securities, exchange-traded equity securities, and certain segregated and mutual fund units held for account of segregated fund holders.

Level 2:    Fair value is based on quoted prices for similar assets or liabilities traded in active markets, or prices from valuation techniques that use significant observable inputs, or inputs that are derived principally from or corroborated with observable market data through correlation or other means. The types of assets and liabilities classified as Level 2 generally include Canadian federal, provincial and municipal government, other foreign government and corporate debt securities, certain asset-backed securities, OTC derivatives, and certain segregated and mutual fund units held for account of segregated fund holders.

Level 3:    Fair value is based on valuation techniques that require one or more significant inputs that are not based on observable market inputs. These unobservable inputs reflect our expectations about the assumptions market participants would use in pricing the asset or liability. The types of assets and liabilities classified as Level 3 generally include certain corporate bonds, certain other invested assets, and investment properties.

 

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Our assets and liabilities that are carried at fair value on a recurring basis by hierarchy level are as follows:

 

As at   December 31, 2016     December 31, 2015  
     Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  

Assets

               

Cash, cash equivalents and short-term securities

  $ 7,742      $ 900      $      $ 8,642      $ 8,233      $ 750      $      $ 8,983   

Debt securities – fair value through profit or loss

    1,136        57,888        442        59,466        1,205        55,053        527        56,785   

Debt securities – available-for-sale

    610        11,620        191        12,421        430        12,576        105        13,111   

Equity securities – fair value through profit or loss

    2,863        2,009        144        5,016        2,562        1,694        170        4,426   

Equity securities – available-for-sale

    584        167        7        758        709        178               887   

Derivative assets

    34        1,574               1,608        30        1,836               1,866   

Other invested assets

    925        195        1,544        2,664        888        144        1,106        2,138   

Investment properties

                  6,592        6,592                      6,540        6,540   

Total invested assets measured at fair value

  $ 13,894      $ 74,353      $ 8,920      $ 97,167      $ 14,057      $ 72,231      $ 8,448      $ 94,736   

Investments for account of segregated fund holders

  $ 26,435      $ 69,867      $ 865      $ 97,167      $ 27,714      $ 62,961      $ 765      $ 91,440   

Total assets measured at fair value

  $     40,329      $     144,220      $     9,785      $     194,334      $     41,771      $     135,192      $     9,213      $     186,176   

Liabilities

               

Investment contract liabilities

  $      $      $ 3      $ 3      $      $      $ 4      $ 4   

Derivative liabilities

    7        2,505               2,512        8        3,370               3,378   

Total liabilities measured at fair value

  $ 7      $ 2,505      $ 3      $ 2,515      $ 8      $ 3,370      $ 4      $ 3,382   

Debt securities – fair value through profit or loss consist of the following:

 

As at   December 31, 2016     December 31, 2015  
     Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  

Canadian federal government

  $      $ 3,101      $ 16      $ 3,117      $      $ 2,342      $ 41      $ 2,383   

Canadian provincial and municipal government

           11,414        38        11,452               10,516        39        10,555   

U.S. government and agency

    1,136        56        6        1,198        1,205        59        8        1,272   

Other foreign government

           5,568        10        5,578               5,883        33        5,916   

Corporate

           34,166        287        34,453               33,325        343        33,668   

Asset-backed securities:

               

Commercial mortgage-backed securities

           1,697        49        1,746               1,516        1        1,517   

Residential mortgage-backed securities

           1,482               1,482               1,052        8        1,060   

Collateralized debt obligations

           47        29        76               34        28        62   

Other

           357        7        364               326        26        352   

Total debt securities – fair value through profit or loss

  $        1,136      $       57,888      $        442      $       59,466      $       1,205      $       55,053      $        527      $       56,785   

Debt securities – available-for-sale consist of the following:

 

As at   December 31, 2016     December 31, 2015  
     Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  

Canadian federal government

  $      $ 1,654      $      $ 1,654      $      $ 1,637      $      $ 1,637   

Canadian provincial and municipal government

           1,148               1,148               836               836   

U.S. government and agency

    610        82               692        430                      430   

Other foreign government

           766               766               737        1        738   

Corporate

           5,796        87        5,883               7,463        63        7,526   

Asset-backed securities:

               

Commercial mortgage-backed securities

           888               888               940               940   

Residential mortgage-backed securities

           501               501               308               308   

Collateralized debt obligations

           239        67        306               221               221   

Other

           546        37        583               434        41        475   

Total debt securities – available-for-sale

  $          610      $       11,620      $        191      $       12,421      $          430      $       12,576      $        105      $       13,111   

During 2016 and 2015, we did not have any significant transfers between Level 1 and Level 2.

 

  Notes to Consolidated Financial Statements   Sun Life Financial Inc.    Annual Report 2016    111


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The following table provides a reconciliation of the beginning and ending balances for assets that are categorized in Level 3:

 

For the year ended   Debt
securities –
fair value
through profit
or loss
   

Debt
securities –
available-for-

sale

    Equity
securities –
fair value
through
profit or loss
   

Equity

securities –
available-for-

sale

    Other
invested
assets
    Investment
properties
    Total invested
assets
measured at
fair value
    Investments
for account of
segregated
fund holders
    Total assets
measured at
fair value
 

December 31, 2016

                 

Beginning balance

  $ 527      $ 105      $ 170      $      $ 1,106      $ 6,540      $ 8,448      $ 765      $ 9,213   

Included in net income(1)(3)(5)

    (3     1        (15            7        70        60        24        84   

Included in OCI(3)

                                (11            (11            (11

Purchases

    239        175        74        7        615        404        1,514        247        1,761   

Sales

    (30     (3     (1            (175     (346     (555     (66     (621

Settlements

    (64     (50     (46                          (160     (1     (161

Transfers into Level 3(2)

    82        6                                    88               88   

Transfers (out) of Level 3(2)

        (298     (40     (37                          (375     (10     (385

Foreign currency translation(4)

    (11     (3     (1            2        (76     (89     (94     (183

Ending balance

  $ 442      $     191      $     144      $     7      $     1,544      $     6,592      $     8,920      $     865      $     9,785   

Gains (losses) included in earnings relating to instruments still held at the reporting date(1)

  $ (5   $      $ (15   $      $ 7      $ 90      $ 77      $ 20      $ 97   

December 31, 2015

                 

Beginning balance

  $ 891      $ 280      $ 125      $      $ 788      $ 6,108      $ 8,192      $ 530      $ 8,722   

Included in net income(1)(3)(5)

    (14     (1     14               77        97        173        67        240   

Included in OCI(3)

           (1                   (11            (12            (12

Purchases

    248        263        46               370        386        1,313        199        1,512   

Sales

    (35     (3     (2            (128     (367     (535     (88     (623

Settlements

    (95     (15     (28                          (138     (1     (139

Transfers into Level 3(2)

    134        8                                    142               142   

Transfers (out) of Level 3(2)

    (665     (432                                 (1,097     (9     (1,106

Foreign currency translation(4)

    63        6        15               10        316        410        67        477   

Ending balance

  $ 527      $ 105      $ 170      $      $ 1,106      $ 6,540      $ 8,448      $ 765      $ 9,213   

Gains (losses) included in earnings relating to instruments still held at the reporting date(1)

  $ (37   $ (1   $ 14      $      $ 80      $ 219      $ 275      $ 79      $ 354   

 

(1) Included in Net investment income (loss) for Total invested assets measured at fair value in our Consolidated Statements of Operations.
(2) Transfers into Level 3 occur when the inputs used to price the assets and liabilities lack observable market data, and as a result, no longer meet the Level 1 or 2 definitions at the reporting date. Transfers out of Level 3 occur when the pricing inputs become more transparent and satisfy the Level 1 or 2 criteria and are primarily the result of observable market data being available at the reporting date, thus removing the requirement to rely on inputs that lack observability.
(3) Total gains and losses in net income (loss) and OCI are calculated assuming transfers into or out of Level 3 occur at the beginning of the period. For an asset or liability that transfers into Level 3 during the reporting period, the entire change in fair value for the period is included in the table above. For transfers out of Level 3 during the reporting period, the change in fair value for the period is excluded from the table above.
(4) Foreign currency translation relates to the foreign exchange impact of translating Level 3 assets and liabilities of foreign subsidiaries from their functional currencies to Canadian dollars.
(5) Investment properties included in net income is comprised of fair value changes on investment properties of $126 ($150 in 2015) net of amortization of leasing commissions and tenant inducements of $56 ($53 in 2015).

Unobservable Inputs and Sensitivity for Level 3 Assets

Our assets categorized in Level 3 of the fair value hierarchy are primarily Investment properties, Debt securities, and Other invested assets.

The fair value of Investment properties is determined by using the discounted cash flows methodology as described in Note 5.A.ii. The key unobservable inputs used in the valuation of investment properties as at December 31, 2016 include the following:

 

 

Estimated rental value: The estimated rental value is based on contractual rent and other local market lease transactions net of reimbursable operating expenses. An increase (decrease) in the estimated rental value would result in a higher (lower) fair value. The estimated rental value varies depending on the property types, which include retail, office, and industrial properties. The estimated rental value (in dollars, per square foot, per annum) ranges from $12.00 to $65.00 for retail and office properties and from $3.00 to $11.00 for industrial properties.

 

Rental growth rate: The rental growth rate is typically estimated based on expected market behaviour, which is influenced by the type of property and geographic region of the property. An increase (decrease) in the rental growth rate would result in a higher (lower) fair value. The rental growth rate (per annum) ranges from 0.0% to 3.0%.

 

Long-term vacancy rate: The long-term vacancy rate is typically estimated based on expected market behaviour, which is influenced by the type of property and geographic region of the property. An increase (decrease) in the long-term vacancy rate would result in a lower (higher) fair value. The long-term vacancy rate ranges from 2.0% to 10.0%.

 

Discount rate: The discount rate is derived from market activity across various property types and geographic regions and is a reflection of the expected rate of return to be realized on the investment over the next 10 years. An increase (decrease) in the discount rate would result in a lower (higher) fair value. The discount rate ranges from 5.0% to 11.0%.

 

Terminal capitalization rate: The terminal capitalization rate is derived from market activity across various property types and geographic regions and is a reflection of the expected rate of return to be realized on the investment over the remainder of its life after the 10-year period. An increase (decrease) in the terminal capitalization rate would result in a lower (higher) fair value. The terminal capitalization rate ranges from 4.5% to 10.0%.

Changes in the estimated rental value are positively correlated with changes in the rental growth rate. Changes in the estimated rental value are negatively correlated with changes in the long-term vacancy rate, the discount rate, and the terminal capitalization rate.

Our Debt securities categorized in Level 3, which are included in Debt securities – FVTPL and Debt securities – AFS in the Level 3 roll forward table, consist primarily of corporate bonds. The fair value of these corporate bonds is generally determined using broker quotes

 

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that cannot be corroborated with observable market transactions. Significant unobservable inputs for these corporate bonds would include issuer spreads, which are comprised of credit, liquidity, and other security-specific features of the bonds. An increase (decrease) in these issuer spreads would result in a lower (higher) fair value. Due to the unobservable nature of these broker quotes, we do not assess whether applying reasonably possible alternative assumptions would have an impact on the fair value of the Level 3 corporate bonds. The majority of our debt securities categorized in Level 3 are FVTPL assets supporting insurance contract liabilities. Changes in the fair value of these assets supporting insurance contract liabilities are largely offset by changes in the corresponding insurance contract liabilities under CALM. As a result, though using reasonably possible alternative assumptions may have an impact on the fair value of the Level 3 debt securities, it would not have a significant impact on our Consolidated Financial Statements.

The Other invested assets categorized in Level 3, which are included in Other invested assets – FVTPL and Other invested assets – AFS in the Level 3 roll forward table, consists primarily of limited partnership investments. The fair value of our limited partnership investments are based on net asset value (“NAV”) provided by management of the limited partnership investments. Based on the unobservable nature of these NAVs, we do not assess whether applying reasonably possible alternative assumptions would have an impact on the fair value of the Level 3 limited partnership investments.

Valuation Process for Level 3 Assets

Our assets categorized in Level 3 of the fair value hierarchy are primarily Investment properties, Debt securities, and limited partnership investments included in Other invested assets. Our valuation processes for these assets are as follows:

The fair value of Investment properties are based on the results of appraisals performed annually and reviewed quarterly for material changes. The valuation methodology used to determine the fair value is in accordance with the standards of the Appraisal Institute of Canada, the U.S., and the U.K. Investment properties are appraised externally at least once every three years. Investment properties not appraised externally in a given year are reviewed by qualified appraisers. A management committee, including investment professionals, reviews the fair value of Investment properties for overall reasonability.

The fair value of Debt securities is generally obtained by external pricing services. We obtain an understanding of inputs and valuation methods used by external pricing services. When fair value cannot be obtained from external pricing services, broker quotes, or internal models subject to detailed review and validation processes are used. The fair value of debt securities is subject to price validation and review procedures to ensure overall reasonability.

The fair value of limited partnership investments, included in Other invested assets, is based on NAV. The financial statements used in calculating the NAV are generally audited annually. We review the NAV of the limited partnership investments and perform analytical and other procedures to ensure the fair value is reasonable.

5.B Interest and Other Investment Income

Interest and other investment income consist of the following:

 

For the years ended December 31,   2016     2015  

Interest income:

   

Cash, cash equivalents and short-term securities

  $ 35      $ 32   

Debt securities – fair value through profit or loss

    2,356        2,280   

Debt securities – available-for-sale

    366        391   

Mortgages and loans

    1,911        1,859   

Derivative investments

    82        73   

Policy loans

    168        167   

Total interest income

    4,918        4,802   

Equity securities – dividends on fair value through profit or loss

    160        123   

Equity securities – dividends on available-for-sale

    12        15   

Investment properties rental income(1)

    629        625   

Investment properties expenses

    (292     (283

Other income

    247        168   

Investment expenses and taxes

    (185     (162

Total interest and other investment income

  $      5,489      $     5,288   

 

(1) Comprised of operating lease rental income.

 

  Notes to Consolidated Financial Statements   Sun Life Financial Inc.    Annual Report 2016    113


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5.C Fair Value and Foreign Currency Changes on Assets and Liabilities

Fair value and foreign currency changes on assets and liabilities recorded to net income consist of the following:

 

For the years ended December 31,   2016     2015  

Fair value change:

   

Cash, cash equivalents and short-term securities

  $ (16   $ 47   

Debt securities

    1,056        (1,177

Equity securities

    512        (244

Derivative investments

    922        (2,098

Other invested assets

    65        76   

Total change in fair value through profit or loss assets and liabilities

  $ 2,539      $ (3,396

Fair value changes on investment properties

    126        150   

Foreign exchange gains (losses)(1)

    (432     1,285   

Fair value and foreign currency changes on assets and liabilities

  $     2,233      $     (1,961

 

(1) Primarily arises from the translation of foreign currency denominated AFS monetary assets and mortgage and loans. Any offsetting amounts arising from foreign currency derivatives are included in the fair value change on derivative investments.

5.D Cash, Cash Equivalents and Short-Term Securities

Cash, cash equivalents and short-term securities presented in our Consolidated Statements of Financial Position and Net cash, cash equivalents and short-term securities presented in our Consolidated Statements of Cash Flows consist of the following:

 

As at December 31,   2016     2015  

Cash

  $      1,841      $     1,856   

Cash equivalents

    4,857        4,822   

Short-term securities

    1,944        2,305   

Cash, cash equivalents and short-term securities

    8,642        8,983   

Less: Bank overdraft, recorded in Other liabilities

    189        166   

Net cash, cash equivalents and short-term securities

  $ 8,453      $ 8,817   

5.E Gross Unrealized Gains and Gross Unrealized Losses on Available-For-Sale Debt and Equity Securities

Gross unrealized gains and gross unrealized losses included in accumulated OCI on AFS debt and equity securities, before the effect of hedge accounting, consist of the following:

 

As at December 31,   2016     2015  
     Amortized
cost
    Gross
unrealized
gains
    Gross
unrealized
(losses)
    Fair value     Amortized
cost
    Gross
unrealized
gains
    Gross
unrealized
(losses)
    Fair value  

Debt securities:

               

Canadian federal government

  $ 1,676      $ 10      $ (32   $ 1,654      $ 1,563      $ 74      $      $ 1,637   

Canadian provincial and municipal government

    1,143        19        (14     1,148        805        33        (2     836   

U.S. government and agency

    714        1        (23     692        432        1        (3     430   

Other foreign government

    683        92        (9     766        675        86        (23     738   

Corporate

    5,662        254        (33     5,883        7,467        223        (164     7,526   

Asset-backed securities:

               

Commercial mortgage-backed securities

    881        17        (10     888        937        16        (13     940   

Residential mortgage-backed securities

    507        3        (9     501        305        5        (2     308   

Collateralized debt obligations

    305        1               306        224               (3     221   

Other

    592        1        (10     583        488        1        (14     475   

Total debt securities

    12,163        398        (140     12,421        12,896        439        (224     13,111   

Equity securities

    594        172        (8     758        675        224        (12     887   

Total AFS debt and equity securities

  $     12,757      $     570      $        (148   $      13,179      $     13,571      $         663      $          (236   $      13,998   

 

114    Sun Life Financial Inc.    Annual Report 2016   Notes to Consolidated Financial Statements  


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5.F Derivative Financial Instruments and Hedging Activities

The fair values of derivative financial instruments by major class of derivatives are as follows:

 

As at December 31,   2016     2015  
     Fair value     Fair value  
     Assets     Liabilities     Assets     Liabilities  

Interest rate contracts

  $ 1,405      $ (579   $ 1,707      $ (437

Foreign exchange contracts

    95        (1,924     71        (2,925

Other contracts

    108        (9     88        (16

Total derivatives

  $       1,608      $     (2,512   $      1,866      $       (3,378

The following table presents the fair values of derivative assets and liabilities categorized by type of hedge for accounting purposes and derivative investments:

 

As at December 31,   2016     2015  
     Total notional
amount
    Fair value     Total notional
amount
    Fair value  
    Assets     Liabilities       Assets     Liabilities  

Derivative investments(1)

  $ 53,477      $ 1,567      $ (2,304   $ 56,747      $ 1,840      $ (3,147

Fair value hedges

    753               (208     862               (230

Cash flow hedges

    120        41               236        26        (1

Total derivatives

  $     54,350      $     1,608        $    (2,512   $     57,845      $     1,866        $    (3,378

 

(1) Derivative investments are derivatives that have not been designated as hedges for accounting purposes.

In 2016, we did not have any net investment hedges. In 2015, we had non-derivative instruments designated as net investment hedges that matured in the fourth quarter of 2015.

Hedge ineffectiveness recognized in Interest and other investment income consists of the following:

 

For the years ended December 31,   2016     2015  

Fair value hedging ineffectiveness:

   

Gains (losses) on the hedged items attributable to the hedged risk

  $     (12   $     1   

Gains (losses) on the hedging derivatives

    12        2   

Net ineffectiveness on fair value hedges

           3   

For cash flow hedges, we did not have any hedge ineffectiveness in 2016 or 2015. We expect to reclassify a gain of $7 from accumulated OCI to net income within the next 12 months that relates to cash flow hedges of anticipated award payments under certain share-based payment plans that are expected to occur in 2017, 2018 and 2019. Cash flow hedges in 2015 also included foreign currency forwards for the foreign currency purchase of a foreign operation that closed in 2016. The reclassification of accumulated OCI to income relating to these foreign currency forwards occurs upon disposal or impairment of the foreign operation.

5.G Transfers of Financial Assets

We enter into transactions, including mortgage securitization, repurchase agreements and securities lending, where we transfer financial assets while retaining the risks and rewards of ownership of the assets. These transferred financial assets are not derecognized and remain on our Consolidated Statements of Financial Position. The carrying value of the transferred assets and the associated liabilities are described in the sections below.

5.G.i Mortgage Securitization

We securitize certain insured fixed rate commercial mortgages through the creation of mortgage-backed securities under the National Housing Act Mortgage-Backed Securities (“NHA MBS”) Program sponsored by the Canada Mortgage and Housing Corporation (“CMHC”). The NHA MBS are then sold to Canada Housing Trust, a government-sponsored security trust that issues securities to third-party investors under the Canadian Mortgage Bond (“CMB”) program. The securitization of these assets does not qualify for derecognition as we have not transferred substantially all of the risks and rewards of ownership. Specifically, we continue to be exposed to pre-payment and interest rate risk associated with these assets. There are no expected credit losses on the securitized mortgages, as the mortgages were already insured by the CMHC prior to securitization. These assets continue to be recognized as Mortgages and loans in our Consolidated Statements of Financial Position. Proceeds from securitization transactions are recognized as secured borrowings and included in Other liabilities in our Consolidated Statements of Financial Position.

Receipts of principal on the securitized mortgages are deposited into a principal reinvestment account (“PRA”) to meet our repayment obligation upon maturity under the CMB program. The assets in the PRA are typically comprised of cash and cash equivalents and certain asset-backed securities. We are exposed to reinvestment risk due to the amortizing nature of the securitized mortgages relative to our repayment obligation for the full principal amount due at maturity. We mitigate this reinvestment risk using interest rate swaps.

The carrying value and fair value of the securitized mortgages as at December 31, 2016 are $1,105 and $1,102, respectively ($654 and $668 as at December 31, 2015). The carrying value and fair value of the associated liabilities as at December 31, 2016 are $1,141 and $1,153, respectively ($667 and $689 as at December 31, 2015). The carrying value of asset-backed securities in the PRA as at December 31, 2016 and 2015 are $40 and $17, respectively. There are no cash and cash equivalents in the PRA as at December 31, 2016 and 2015.

 

  Notes to Consolidated Financial Statements   Sun Life Financial Inc.    Annual Report 2016    115


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The fair value of the secured borrowings from mortgage securitization is based on the methodologies and assumptions for asset-backed securities described in Note 5.A.ii. The fair value of these liabilities is categorized in Level 2 of the fair value hierarchy as at December 31, 2016 and 2015.

5.G.ii Repurchase Agreements

We enter into repurchase agreements for operational funding and liquidity purposes. Repurchase agreements have maturities ranging from 9 to 157 days, averaging 85 days, and bear interest at an average rate of 0.69% as at December 31, 2016 (0.61% as at December 31, 2015). The fair values of the transferred assets and the obligations related to their repurchase, which approximate their carrying values, are $1,789 as at December 31, 2016 ($1,549 as at December 31, 2015). These liabilities are categorized in Level 2 of the fair value hierarchy. Collateral primarily consists of cash and cash equivalents as well as government guaranteed securities. Details on the collateral pledged are included in Note 6.A.ii.

5.G.iii Securities Lending

The Company engages in securities lending to generate additional income. Certain securities from its portfolio are lent to other institutions for short periods. Collateral exceeding the fair value of the securities lent, 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. The fair value of the securities lent is monitored on a daily basis with additional collateral obtained or refunded as the fair values fluctuate. Collateral primarily consists of Canadian federal and provincial government securities and cash and cash equivalents. Certain arrangements allow us to invest the cash collateral received for the securities lent. The carrying values of the securities lent approximate their fair values. The carrying values of the securities lent and the related collateral held are $1,483 and $1,562 as at December 31, 2016 ($1,438 and $1,511 as at December 31, 2015). Of the collateral held, we held cash collateral of $nil and $193 as at December 31, 2016 and 2015, which is recognized on our Consolidated Statements of Financial Position.

6. Financial Instrument Risk Management

 

 

The significant risks related to financial instruments are credit risk, market risk (including equity risk, interest rate and spread risk, and foreign currency risk) and liquidity risk. The following sections describe how we manage these risks.

Some of our financial instruments risk management policies and procedures are described in our Annual Management’s Discussion and Analysis (“MD&A”) for the year ended December 31, 2016. The shaded text and tables in the Risk Management section of the MD&A represent part of our disclosures on credit, market and liquidity risks and include a description of how we measure our risk and our objectives, policies and methodologies for managing these risks. Therefore, the shaded text and tables are an integral part of these Consolidated Financial Statements.

We use derivative instruments to manage market risks related to equity market, interest rate and currency fluctuations and in replication strategies for permissible investments. We do not engage in speculative investment in derivatives. The gap in market sensitivities or exposures between liabilities and supporting assets is monitored and managed within defined tolerance limits, by using derivative instruments, where appropriate. We use models and techniques to measure the effectiveness of our risk management strategies.

6.A Credit Risk

Risk Description

Credit risk is the possibility of loss from amounts owed by our borrowers or financial counterparties. We are subject to credit risk in connection with issuers of securities held in our investment portfolio, debtors, structured securities, reinsurers, counterparties (including derivative, repurchase agreement and securities lending counterparties), other financial institutions and other entities. Losses may occur when a counterparty fails to make timely payments pursuant to the terms of the underlying contractual arrangement or when the counterparty’s credit rating or risk profile otherwise deteriorates. Credit risk can also arise in connection with deterioration in the value of, or ability to realize, any underlying security that may be used as collateral for the debt obligation. Credit risk can occur as a result of broad economic conditions, challenges within specific sectors of the economy, or from issues affecting individual companies. Events that result in defaults, impairments or downgrades of the securities in our investment portfolio would cause the Company to record realized or unrealized losses and may cause an increase in our provisions for asset default, adversely impacting earnings.

Credit Risk Management Governance and Control

We employ a wide range of credit risk management practices and controls, as outlined below:

 

 

Credit risk governance practices are in place, including independent monitoring and review and reporting to senior management and the Risk Review Committee.

 

Risk appetite limits have been established for credit risk.

 

Income and regulatory capital sensitivities are monitored, managed and reported against pre-established risk limits.

 

Comprehensive Investment and Credit Risk Management Policy, guidelines and practices are in place.

 

Specific investment diversification requirements are in place, such as defined investment limits for asset class, geography, and industry.

 

Risk-based credit portfolio, counterparty, and sector exposure limits have been established.

 

Mandatory use of credit quality ratings for portfolio investments has been established and is reviewed regularly.

 

Internal rating decisions for new fixed income investments and ongoing review of existing rating decisions are independently adjudicated by corporate risk management.

 

Comprehensive due diligence processes and ongoing credit analyses are conducted.

 

Regulatory solvency requirements include risk-based capital requirements and are monitored regularly.

 

Comprehensive compliance monitoring practices and procedures including reporting against pre-established investment limits are in place.

 

Reinsurance exposures are monitored to ensure that no single reinsurer represents an undue level of credit risk.

 

116    Sun Life Financial Inc.    Annual Report 2016   Notes to Consolidated Financial Statements  


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Stress-testing techniques, such as Dynamic Capital Adequacy Testing (“DCAT”), are used to measure the effects of large and sustained adverse credit developments.

 

Insurance contract liabilities are established in accordance with Canadian actuarial standards of practice.

 

Internal capital targets are established at an enterprise level to cover all risks and are above minimum regulatory and supervisory levels. Actual capital levels are monitored to ensure they exceed internal targets.

6.A.i Maximum Exposure to Credit Risk

Our maximum credit exposure related to financial instruments as at December 31 is the balance as presented in our Consolidated Statements of Financial Position as we believe that these carrying amounts best represent the maximum exposure to credit risk. The credit exposure for debt securities may be increased to the extent that the amounts recovered from default are insufficient to satisfy the actuarial liability cash flows that the assets are intended to support.

The positive fair value of derivative assets is used to determine the credit risk exposure if the counterparties were to default. The credit risk exposure is the cost of replacing, at current market rates, all derivative contracts with a positive fair value. Additionally, we have credit exposure to items not on the Consolidated Statements of Financial Position as follows:

 

As at December 31,   2016     2015  

Off-balance sheet items:

   

Loan commitments(1)

  $ 1,322      $ 816   

Guarantees

    34        53   

Total off-balance sheet items

  $       1,356      $       869   

 

(1) Loan commitments include commitments to extend credit under commercial and multi-family residential mortgages and private debt securities not quoted in an active market. Commitments on debt securities contain provisions that allow for withdrawal of the commitment if there is deterioration in the credit quality of the borrower.

6.A.ii Right of Offset and Collateral

We invest in financial assets which may be secured by real estate properties, pools of financial assets, third-party financial guarantees, credit insurance, and other arrangements.

For OTC derivatives, collateral is collected from and pledged to counterparties to manage credit exposure according to the Credit Support Annexes (“CSA”), which forms part of the International Swaps and Derivatives Association’s (“ISDA”) master agreements. It is common practice to execute a CSA in conjunction with an ISDA master agreement. Under the ISDA master agreements for OTC derivatives, we have a right of offset in the event of default, insolvency, bankruptcy, or other early termination. In the ordinary course of business, bilateral OTC exposures under these agreements are substantially mitigated through associated collateral agreements with a majority of our counterparties.

For exchange-traded derivatives subject to derivative clearing agreements with the exchanges and clearinghouses, there is no provision for set-off at default. Initial margin is excluded from the table below as it would become part of a pooled settlement process.

For repurchase agreements and reverse repurchase agreements, assets are sold or purchased with a commitment to resell or repurchase at a future date. Additional collateral may be pledged to or collected from counterparties to manage credit exposure according to bilateral repurchase or reverse repurchase agreements. In the event of default by a counterparty, we are entitled to liquidate the assets we hold as collateral to offset against obligations to the same counterparty.

In the case of securities lending, assets are lent with a commitment from the counterparty to return at a future date. Cash or securities are received as collateral from the counterparty. In the event of default by the counterparty, we are entitled to liquidate the assets we hold as collateral to offset against obligations to the same counterparty.

 

  Notes to Consolidated Financial Statements   Sun Life Financial Inc.    Annual Report 2016    117


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We do not offset financial instruments in our Consolidated Statements of Financial Position, as our rights of offset are conditional. The following tables present the effect of conditional netting and similar arrangements. Similar arrangements include global master repurchase agreements, security lending agreements, and any related rights to financial collateral.

 

As at December 31,   2016     2015  
   

Financial
instruments
presented in the
Consolidated
Statements of
Financial
Position(1)

 

    Related amounts not set
off in the Consolidated
Statements of Financial
Position
         

Financial
instruments
presented in the
Consolidated
Statements of
Financial
Position(1)

 

    Related amounts not set
off in the Consolidated
Statements of Financial
Position
       
      Financial
instruments
subject to
master netting
or similar
agreements
    Financial
collateral
(received)
pledged(2)
    Net amount       Financial
instruments
subject to
master netting
or similar
agreements
    Financial
collateral
(received)
pledged(2)
    Net amount  

Financial assets

                                                               

Derivative assets (Note 6.A.v)

  $ 1,608      $ (806   $ (720   $ 82      $ 1,866      $     (900   $ (795   $    171   

Reverse repurchase agreements (Note 8)

                                289        (96     (193       

Total financial assets

  $ 1,608      $     (806   $        (720   $ 82      $ 2,155      $ (996   $ (988   $       171   

Financial liabilities

               

Derivative liabilities

  $ (2,512   $ 806      $ 1,318      $ (388   $ (3,378   $ 900      $     1,809      $     (669

Repurchase agreements (Note 5.G.ii)

    (1,789            1,789               (1,549     96        1,453          

Cash collateral on securities lent (Note 5.G.iii)

                                (193            189        (4

Total financial liabilities

  $     (4,301   $ 806      $ 3,107      $     (388   $     (5,120   $ 996      $ 3,451      $     (673

 

(1) Net amounts of the financial instruments presented in our Consolidated Statements of Financial Position are the same as our gross recognized financial instruments, as we do not offset financial instruments in our Consolidated Statements of Financial Position.
(2) Financial collateral excludes overcollateralization and for exchange-traded derivatives, initial margin. Total financial collateral, including initial margin and overcollateralization, received on derivative assets was $779 ($1,087 as at December 31, 2015), received on reverse repurchase agreements was $nil ($289 as at December 31, 2015), pledged on derivative liabilities was $1,898 ($2,452 as at December 31, 2015), and pledged on repurchase agreements was $1,789 ($1,549 as at December 31, 2015).

6.A.iii Concentration Risk

Concentrations of credit risk arise from exposures to a single debtor, a group of related debtors, or groups of debtors that have similar credit risk characteristics, such as groups of debtors in the same economic or geographic regions or in similar industries. Related issuers may have similar economic characteristics so that their ability to meet contractual obligations may be impacted similarly by changes in the economic or political conditions. We manage this risk by appropriately diversifying our investment portfolio through the use of concentration limits. In particular, we maintain policies which set counterparty exposure limits to manage the credit exposure for investments in any single issuer or to the same underlying credit. Exceptions exist for investments in securities which are issued or guaranteed by the Government of Canada, U.S. or U.K. and issuers for which the Risk Review Committee have granted specific approval. Mortgages are collateralized by the related property, and generally do not exceed 75% of the value of the property at the time the original loan is made. Our mortgages and loans are diversified by type and location and, for mortgages, by borrower. Loans provide diversification benefits (name, industry and geography) and often provide stronger covenants and collateral than public debt securities, thereby providing both better credit protection and potentially higher recoveries in the event of default. The following tables provide details of the debt securities, mortgages, and loans held by issuer country, geographic location and industry sector, where applicable.

The carrying value of debt securities by geographic location is shown in the following table. The geographic location is based on the country of the creditor’s parent.

 

As at December 31,    2016    2015
      Fair value through
profit or loss
  

Available-

for-sale

   Total debt
securities
   Fair value through
profit or loss
  

Available-

for-sale

   Total debt
securities

Canada

   $    22,507    $      3,589    $    26,096    $    20,400    $      3,373    $    23,773

United States

   21,469    5,910    27,379    20,432    6,546    26,978

United Kingdom

   5,621    659    6,280    6,416    662    7,078

Other

   9,869    2,263    12,132    9,537    2,530    12,067

Balance

   $    59,466    $    12,421    $    71,887    $    56,785    $    13,111    $    69,896

 

118    Sun Life Financial Inc.    Annual Report 2016   Notes to Consolidated Financial Statements  


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The carrying value of debt securities by issuer and industry sector is shown in the following table:

 

As at December 31,   2016     2015  
     Fair value
through
profit or loss
    Available-
for-sale
    Total debt
securities
   

Fair value
through

profit or loss

    Available-
for-sale
    Total debt
securities
 

Debt securities issued or guaranteed by:

           

Canadian federal government

  $ 3,117      $ 1,654      $ 4,771      $ 2,383      $ 1,637      $ 4,020   

Canadian provincial and municipal government

    11,452        1,148        12,600        10,555        836        11,391   

U.S. government and agency

    1,198        692        1,890        1,272        430        1,702   

Other foreign government

    5,578        766        6,344        5,916        738        6,654   

Total government issued or guaranteed debt securities

    21,345        4,260        25,605        20,126        3,641        23,767   

Corporate debt securities by industry sector:

           

Financials(1)

    7,757        1,546        9,303        7,867        1,933        9,800   

Utilities and energy

    10,541        1,076        11,617        10,355        1,477        11,832   

Telecommunication services

    1,786        288        2,074        1,859        372        2,231   

Consumer staples and discretionary

    4,718        1,135        5,853        4,475        1,473        5,948   

Industrials

    4,103        708        4,811        3,880        847        4,727   

Real estate(1)

    1,977        324        2,301        2,038        418        2,456   

Other

    3,571        806        4,377        3,194        1,006        4,200   

Total corporate debt securities

  $ 34,453      $ 5,883      $ 40,336      $ 33,668      $ 7,526      $ 41,194   

Asset-backed securities

  $ 3,668      $ 2,278      $ 5,946      $ 2,991      $ 1,944      $ 4,935   

Total debt securities

  $     59,466      $     12,421      $     71,887      $     56,785      $     13,111      $     69,896   

 

(1) Our grouping of debt securities by sector is based on the Global Industry Classification Standard and S&P Dow Jones Indices. During 2016, certain real estate debt securities were moved from the Financials sector to the Real estate sector. 2015 balances have been changed to conform with current year presentation.

The carrying value of mortgages and loans by geographic location