Sun Life 2010 Annual Report Download - page 102

We use derivative instruments to manage risks related to interest rate, equity market 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, where appropriate,
the use of derivative instruments. Models and techniques are used by us to measure the continuing effectiveness of our risk
management strategies.
6.A Credit risk
6.A.i Maximum exposure to credit risk
Our maximum credit exposure related to financial instruments is summarized in the following table. Maximum credit exposure is the
carrying value of the asset net of any allowances for losses.
2010 2009
Cash, cash equivalents and short-term securities $ 8,487 $ 11,868
Held-for-trading bonds(1) 54,753 51,634
Available-for-sale bonds 10,752 9,673
Mortgages 13,021 13,776
Corporate loans 6,490 5,673
Derivative assets(2) 1,629 1,382
Other financial assets(3) 2,267 2,078
Total balance sheet maximum credit exposure $ 97,399 $ 96,084
Off-balance sheet items
Loan commitments(4) $ 666 $ 446
Guarantees 31 45
Total off-balance sheet items $ 697 $ 491
(1) In addition to the carrying value, credit exposure 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.
(2) The positive market value 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 contracts with a positive fair value.
(3) Other financial assets include accounts receivable and investment income due and accrued as shown in Note 8.
(4) Loan commitments include commitments to extend credit under commercial and residential mortgage loans and private bonds. Private bond commitments contain provisions
that allow for withdrawal of the commitment if there is a deterioration in the credit quality of the borrower.
Collateral held and other credit enhancements
During the normal course of business, we invest in financial assets secured by real estate properties, pools of financial assets, third-
party financial guarantees, credit insurance and other arrangements. In the case of derivatives, collateral is collected from the
counterparty to manage the credit exposure according to the Credit Support Annex (“CSA”), which forms part of the International
Swaps and Derivatives Association’s (“ISDA”) Master Agreement. It is our common practice to execute a CSA in conjunction with an
ISDA Master Agreement.
As at December 31, 2010, we held collateral assets with a fair value of $928 ($568 as at December 31, 2009) under certain derivative
contracts and we are usually permitted to sell or re-pledge this collateral. We have not sold or re-pledged any collateral. The assets
pledged are primarily cash, US Treasuries, and other government securities. The terms and conditions related to the use of the
collateral are consistent with industry practice.
6.A.ii Concentration risk
The shaded text and tables in the Investment section of the MD&A represent part of our disclosure on Concentration Risk. 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.
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. The financial
instrument issuers 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 any associated group of issuers. Exceptions exist for investments in securities which are issued
or guaranteed by the Government of Canada, United States or United Kingdom and issuers for which the Board has granted specific
approval. Mortgage loans 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 mortgage and corporate loans are diversified by type and location and, for mortgage loans, by
borrower.
98 Sun Life Financial Inc. Annual Report 2010 Notes to the Consolidated Financial Statements