Sun Life 2015 Annual Report Download - page 55

The notional amount of derivatives increased a further $2.0 billion due to the conversion of foreign currency notional balances into
Canadian dollars.
The net fair value of derivatives was a net liability of $1,512 million as at December 31, 2015, compared to a net asset of $236 million
as at December 31, 2014. The decrease in net fair value was due primarily to the impact of the weakening of the Canadian dollar
against the U.S. dollar on foreign exchange contracts.
As the regulator of the Canadian insurance industry, OSFI provides guidelines to quantify the use of derivatives. The credit equivalent
amount, a measure used to approximate the potential credit exposure, is determined as the replacement cost of the derivative
contracts having a positive fair value plus an amount representing the potential future credit exposure.
The risk-weighted credit equivalent amount is a measure used to determine the amount of capital necessary to support derivative
transactions for certain Canadian regulatory purposes. It is determined by weighting the credit equivalent amount according to the
nature of the derivative and the creditworthiness of the counterparties.
As at December 31, 2015, the credit equivalent amounts for foreign exchange contracts, interest rate contracts, and equity and other
contracts were $375 million, $206 million and $26 million, respectively. The corresponding risk-weighted credit equivalent amounts
were $3.6 million, $2.7 million and $0.2 million, respectively.
Additional detail on our derivative portfolio by derivative type is provided in Note 6.A.iv to our 2015 Annual Consolidated Financial
Statements.
Impaired Assets
The invested asset values and ratios presented in this section are based on the carrying value of the respective asset categories.
Carrying values for FVTPL and AFS invested assets are generally equal to fair value.
Financial assets that are classified as FVTPL, which represented 45.7% of our invested assets as at December 31, 2015, do not have
allowances for losses since changes in the fair value of these assets are recorded to income and the assets are recorded at fair value
on our Consolidated Statements of Financial Position. In the event of default, if the amounts recovered are insufficient to satisfy the
related insurance contract liability cash flows that the assets are intended to support, credit exposure may be greater than the carrying
value of the asset.
In the absence of objective evidence of impairment, impairment losses are not recognized on AFS debt securities, equity securities and
other invested assets. If the amortized cost of these assets is greater than their fair values, unrealized losses are recognized in OCI.
Unrealized losses may be due to interest rate fluctuations or depressed fair values in sectors which have experienced strong negative
market performance. The fair value of AFS securities in an unrealized loss position amounted to $6.0 billion and the associated
unrealized losses amounted to $0.26 billion as at December 31, 2015, and $3.2 billion and $0.04 billion, respectively, as at
December 31, 2014. The gross unrealized losses for FVTPL and AFS debt securities were $1.1 billion and $0.22 billion as at
December 31, 2015, respectively, compared to $0.22 billion and $0.04 billion as at December 31, 2014, respectively. The increase in
gross unrealized losses was largely due to the impact of rising interest rates, including credit spreads, primarily in the U.S. during the
year.
Impaired mortgages and loans, net of allowance for losses, amounted to $95 million as at December 31, 2015, compared to $101
million as at December 31, 2014 for these assets.
Asset Default Provision
We make provisions for possible future credit events in the determination of our insurance contract liabilities. The amount of the
provision for asset default included in insurance contract liabilities is based on possible reductions in future investment yields that vary
by factors such as type of asset, asset credit quality (rating), duration and country of origin. To the extent that an asset is written off, or
disposed of, any amounts that were set aside in our insurance contract liabilities for possible future asset defaults in respect of that
asset are released.
Our asset default provision as at December 31, 2015 was $2,077 million for losses related to possible future credit events for fixed
income assets currently held by the Company that support our insurance contract liabilities. This represents 2.3% of the fixed income
assets supporting insurance contract liabilities reported on our Consolidated Statements of Financial Position as at December 31,
2015.
Our asset default provision as at December 31, 2015 was $161 million higher than the provision as at December 31, 2014, primarily
due to the weakening of the Canadian dollar and increases in the provision for assets purchased net of dispositions, partially offset by
the release of provisions on fixed income assets supporting our insurance contract liabilities.
Management’s Discussion and Analysis Sun Life Financial Inc. Annual Report 2015 53