Sun Life 2010 Annual Report Download - page 137

For those securities where we do not have the intent to sell and it is not more likely than not that we will be required to sell, we employ
a portfolio monitoring process to identify securities that are other-than-temporarily impaired. We have a Credit Committee comprised of
professionals from our investment and accounting functions which meets at least quarterly to review individual issues or issuers that
may be of concern. In determining whether a security is other-than-temporarily impaired, the Credit Committee considers the factors
described below. The process involves a quarterly screening of all impaired securities, with particular attention paid to identify those
securities whose fair value to amortized cost percentages have been less than 80% for an extended period of time. Discrete credit
events, such as a ratings downgrade, are also used to identify securities that may be other-than-temporarily impaired. The securities
identified are then evaluated based on issuer-specific facts and circumstances, such as the issuer’s ability to meet current and future
interest and principal payments, an evaluation of the issuer’s financial position and its near term recovery prospects, difficulties being
experienced by an issuer’s parent or affiliate, and management’s assessment of the outlook for the issuer’s sector. In making these
evaluations, the Credit Committee exercises considerable judgment. Based on this evaluation, issues or issuers are considered for
inclusion on one of our following credit lists:
“Monitor List” – Management has concluded that our amortized cost will be recovered through timely collection of all contractually
specified cash flows, but that changes in issuer-specific facts and circumstances require monitoring on a quarterly basis. No OTTI
charge is recorded in our Consolidated Statements of Operations for unrealized losses on securities related to these issuers.
“Watch List” – Management has concluded that our amortized cost will be recovered through timely collection of all contractually
specified cash flows, but that changes in issuer-specific facts and circumstances require continued monitoring during the quarter.
A security is moved from the Monitor List to the Watch List when changes in issuer-specific facts and circumstances increase the
possibility that a security may become impaired within the next 24 months. No OTTI charge is recorded in our Consolidated Statements
of Operations for unrealized losses on securities related to these issuers.
“Impaired List” – This list includes securities that we have the intent to sell or more likely than not will be required to sell. In addition, it
includes those securities for which management has concluded that our amortized cost will not be recovered due to expected delays or
shortfalls in contractually specified cash flows. For these investments, an OTTI charge is recorded or the security is sold and a realized
loss is recorded as a charge to income. Credit OTTI losses are recorded in our Consolidated Statement of Operations and non-credit
OTTI losses are recorded in other comprehensive income (loss).
Structured securities, typically those rated single A or below, are subject to certain provisions in FASB ASC Topic 325, Investments –
Other, previously issued as EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests
and Beneficial Interests That Continued to Be Held by a Transferor in Securitized Financial Assets. These provisions require us to
periodically update our best estimate of cash flows over the life of the security. In the event that the fair value is less than the carrying
amount and there has been an adverse change in the expected cash flows (as measured by comparing the original expected cash
flows to the current expectation of cash flows, both discounted at the current effective rate), then an impairment charge is recorded to
income. Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third parties,
along with assumptions and judgments about the future performance of the underlying collateral. Losses incurred on the respective
mortgage-backed securities portfolios are based on expected loss models, not incurred loss models. Expected cash flows include
assumptions about key systematic risks (e.g. unemployment rates, housing prices) and loan-specific information (e.g. delinquency
rates, loan-to-value ratio).
There are inherent risks and uncertainties in management’s evaluation of securities for OTTI. These risks and uncertainties include
factors both external and internal to us, such as general economic conditions, an issuer’s financial condition or near-term recovery
prospects, market interest rates, unforeseen events which affect one or more issuers or industry sectors, and portfolio management
parameters, including asset mix, interest rate risk, portfolio diversification, duration matching and greater than expected liquidity needs.
All of these factors could impact management’s evaluation of securities for OTTI.
For securities that are assessed to have incurred a credit loss, the amount of credit loss is calculated based upon the cash flows that
we expect to collect given an assessment of the relevant facts and circumstances for the issuer and specific bond issue. Such factors
include the financial condition, credit quality, and the near-term prospects of the issuer, as well as the issuer’s relative liquidity, among
other factors.
We recorded credit OTTI losses in our Consolidated Statements of Operations totalling $80 for the year ended December 31, 2010
($167 in 2009) for OTTI on our available-for-sale bonds. The credit loss OTTI recorded during the year was concentrated in corporate
bonds. These impairments were driven primarily by adverse financial conditions of the issuers.
The other-than-temporary impairment recognized for the years ended December 31 on available-for-sale bonds:
2010 2009
Total other-than-temporary impairment recognized under Canadian GAAP $12 $46
Total other-than-temporary impairment recognized under U.S. GAAP 101 474
Additional other-than-temporary impairment taken under U.S. GAAP 89 428
Less: non-credit portion of other-than-temporary impairment recognized in OCI 21 308
Additional net impairment losses recognized in the U.S. GAAP Consolidated Statements of Operations $68 $ 120
Notes to the Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2010 133