Sun Life 2010 Annual Report Download - page 58

Our bond portfolio as at December 31, 2010, included $4.2 billion of asset-backed securities reported at fair value, representing
approximately 6% of the bond portfolio, or 4% of our total invested assets. This was unchanged from the level reported as at
December 31, 2009. While the credit quality of our asset-backed securities deteriorated in 2010, previously established reserves based
on the lifetime expected losses of these assets mitigated substantially all of the changes in the asset quality of the portfolio.
Asset-backed securities 2010 2009
($ millions)
Amortized
cost
Fair
value
BBB and
higher
Amortized
cost
Fair
value
BBB and
higher
Commercial mortgage-backed securities 1,962 1,870 87.1% 2,219 1,772 92.9%
Residential mortgage-backed securities
Agency 654 685 100.0% 735 768 100.0%
Non-agency 1,000 731 65.4% 1,318 886 80.2%
Collateralized debt obligations 183 135 26.1% 243 169 34.9%
Other* 873 759 83.0% 729 571 80.6%
Total 4,672 4,180 82.7% 5,244 4,166 87.5%
* Other includes sub-prime, a portion of the Company’s exposure to Alternative –A (“Alt-A”) and other asset-backed securities.
We determine impairments on asset-backed securities by using discounted cash flow models that consider losses under current and
expected economic conditions, and a set of assumed default rates and loss-given-default expectations for the underlying collateral
pools. Assumptions used include macroeconomic factors, such as commercial and residential property values and unemployment
rates. Assumed default rates and loss-given-default expectations for the underlying collateral pool are assessed on a security-by-
security basis based on factors such as the seasoning and geography of the underlying assets, whether the underlying assets are fixed
or adjustable rate loans and the likelihood of refinancing at reset dates. If the cash flow modelling projects an economic loss and we
believe the loss is more likely than not to occur, an impairment is recorded.
Due to the complexity of these securities, different sets of assumptions regarding economic conditions and the performance of the
underlying collateral pools can fall into a reasonable range but lead to significantly different loss estimates. Our asset-backed portfolio
is highly sensitive to fluctuations in macroeconomic factors, assumed default rates for the underlying collateral pool and loss-given-
default expectations. In addition, our asset-backed portfolio has exposure to lower-rated securities that are highly leveraged, with
relatively small amounts of subordination available below our securities to absorb losses in the underlying collateral pool. For these
securities, if a relatively small percentage of the underlying collateral pool defaults, we may lose all of our principal investment in the
security.
Further write downs of our asset-backed securities may result from continued deterioration in economic factors, such as property
values and unemployment rates, or changes in the assumed default rate of the collateral pool or loss-given-default expectations. In
addition, foreclosure proceedings and the sale of foreclosed homes have been delayed at certain U.S. financial institutions. It is difficult
to estimate the impact of these delays, but they could have an adverse impact on our residential mortgage-backed portfolio depending
on their magnitude.
As at December 31, 2010, we had indirect exposure to residential sub-prime and Alternative-A (“Alt-A”) loans of $132 million and
$100 million, respectively, together representing approximately 0.2% of our total invested assets. Of these investments, 89% either
were issued before 2006 or have an “AAA” rating. Alt-A loans generally are residential loans made to borrowers with credit profiles that
are stronger than sub-prime but weaker than prime.
Mortgages and Corporate Loans
As at December 31, 2010, our mortgage portfolio consisted mainly of commercial mortgages with a carrying value of $12.8 billion,
spread across approximately 3,800 loans, an amount consistent with the December 31, 2009 level. Commercial mortgages include
retail, office, multi-family, industrial and land properties. Our commercial portfolio has a weighted average loan-to-value of
approximately 60%. While we generally require a maximum loan-to-value ratio of 75%, we may invest in mortgages with a higher loan-
to-value ratio in Canada if the mortgage is insured. The estimated weighted average debt service coverage is 1.6 times, consistent with
prior year-end levels. The Canada Mortgage and Housing Corporation insures 23% of the Canadian commercial mortgage portfolio. As
at December 31, 2010, the mix of the mortgage portfolio was 81% non-residential and 19% residential, and approximately 43% of
mortgage loans will mature by December 31, 2015.
54 Sun Life Financial Inc. Annual Report 2010 Management’s Discussion and Analysis