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derivative contracts with highly rated counterparties. In limited circumstances, we will enter into transactions with lower rated
counterparties if credit enhancement features are included. As at December 31, 2010, we held assets of $459 ($476 in 2009), pledged
as collateral for derivative contracts. The assets pledged are cash, cash equivalents and short-term securities.
The following tables show the derivative financial instruments with a positive fair value as at December 31 split by counterparty credit
rating.
2010
Gross Positive
Replacement Cost(1)
Impact of Master
Netting Agreements(2)
Net Replacement
Cost(3)
Over-the-counter contracts:
AA $ 746 $ (133) $ 613
A850 (168) 682
Exchange-traded 33 (4) 29
Total $ 1,629 $ (305) $ 1,324
2009
Gross Positive
Replacement Cost(1)
Impact of Master
Netting Agreements(2)
Net Replacement
Cost(3)
Over-the-counter contracts:
AA $ 599 $ (166) $ 433
A 749 (388) 361
Exchange-traded 34 (7) 27
Total $ 1,382 $ (561) $ 821
(1) 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 contracts with a
positive fair value.
(2) The credit risk associated with derivative assets subject to master netting arrangements is reduced by derivative liabilities due to the same counterparty in the event of default.
Our overall exposure to credit risk reduced through master netting arrangements may change substantially following the reporting date as the exposure is affected by each
transaction subject to the arrangement.
(3) Gross positive replacement cost after netting agreements.
Mortgages and corporate loans past due or impaired
The shaded text and tables in the Investment and Risk Management sections of the MD&A represent part of our disclosure on
mortgages and corporate loans past due or impaired. Therefore, these text and tables represent an integral part of our Consolidated
Financial Statements for the years ended December 31, 2010 and December 31, 2009.
Impaired mortgages and corporate loans of $8 as at December 31, 2010 ($9 of impaired mortgages as at December 31, 2009) do not
have an allowance for losses because, at a minimum, either the fair value of the collateral or the expected future cash flows exceed the
carrying value of the mortgage or loan.
The weighted average investment in impaired mortgages and corporate loans, before allowances for losses, was $420 as at
December 31, 2010 ($222 in 2009). The carrying value of mortgages and corporate loans that were non-income producing for the
preceding 12 months was $108 ($65 in 2009).
Changes in allowances for losses
The changes in the allowances for losses are as follows:
Mortgages
Corporate
Loans Total
Balance, December 31, 2008 $ 13 $ 10 $ 23
Provision for losses 96 21 117
Write-offs, net of recoveries – (21) (21)
Effect of changes in Currency exchange rates and other adjustments (3) – (3)
Balance, December 31, 2009 106 10 116
Provision for losses 104 11 115
Write-offs, net of recoveries (13) – (13)
Effect of changes in Currency exchange rates and other adjustments (9) 7 (2)
Balance, December 31, 2010 $ 188 $ 28 $ 216
Restructured mortgages and corporate loans
Mortgages and corporate loans with a carrying value of $151 had their terms renegotiated during the year ended December 31, 2010
($53 in 2009).
Possession of collateral/foreclosed assets
During 2010, we took possession of the real estate collateral of $22 which we held as security for mortgages ($5 of real estate held as
collateral in 2009). These assets are either retained as real estate investments if they comply with our investment policy standards or
sold.
Notes to the Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2010 101