Sun Life 2012 Annual Report Download - page 111

As at December 31, 2011
Carrying
value
Fair
value
Assets
Cash, cash equivalents and short-term securities $ 8,837 $ 8,837
Debt securities – fair value through profit or loss 51,627 51,627
Debt securities – available-for-sale 11,303 11,303
Equity securities – fair value through profit or loss 3,731 3,731
Equity securities – available-for-sale 839 839
Mortgages and loans 27,755 30,530
Derivative assets 2,632 2,632
Other invested assets – fair value through profit or loss(2) 809 809
Other invested assets – available-for-sale(2) 155 155
Policy loans 3,276 3,276
Total financial assets(1) $ 110,964 $ 113,739
(1) Invested assets on our Consolidated Statements of Financial Position of $116,661 includes total financial assets, Investment properties of $5,313, and other invested
assets – non-financial assets of $384.
(2) Other invested assets (FVTPL and AFS) include our investments in segregated funds, mutual funds and limited partnerships.
Derivative liabilities with a fair value of $594 ($1,059 as at December 31, 2011) are also included on the Consolidated Statements of
Financial Position.
5.A.i Fair Value Methodologies and Assumptions
The fair value of short-term securities is approximated by their carrying amount adjusted for credit risk where appropriate.
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 earning multiples of comparable companies.
The fair value of mortgages and loans, for disclosure purposes only, is determined by discounting the expected future cash flows using
a current market interest rate applicable to financial instruments with 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 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,
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 (“CVA”) 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 CVA 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 involved 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,
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
Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2012 109