Sun Life 2010 Annual Report Download - page 61

The primary uses of derivatives in 2010 are summarized in the table below.
Products/Application Uses of Derivative Derivative Used
U.S. universal life contracts and U.K.
unit-linked pension products with
guaranteed annuity rate options
To limit potential financial losses from
significant reductions in asset earned
rates relative to contract guarantees
Swaptions, swaps and spread locks on
interest rates
Interest rate exposure in relation to asset-
liability management
To manage the sensitivity of the
duration gap between assets and
liabilities to interest rate changes
Interest rate swaps and options
U.S. variable annuities, Canadian
segregated funds and reinsurance on
variable annuity guarantees offered by
other insurance companies
To manage the exposure to product
guarantees sensitive to movement in
equity market and interest rate levels
Put and call options on equity indices;
futures on equity indices, government
bonds and interest rates; interest rate
swaps
U.S. fixed index annuities To manage the exposure to product
guarantees related to equity market
performance
Futures and options on equity indices;
swaps and futures on government
bonds
Currency exposure in relation to asset-
liability management
To reduce the sensitivity to currency
fluctuations by matching the value and
cash flows of specific assets
denominated in one currency with the
value and cash flows of the
corresponding liabilities denominated in
another currency
Currency swaps and forwards
In addition to the general policies and monitoring, we use a variety of tools in counterparty risk management. Over-the-counter
derivative transactions are performed under International Swaps and Derivatives Association, Inc. (“ISDA”) Master Agreements. Most
of the ISDAs are accompanied by a Credit Support Annex, which requires daily collateral posting.
The values of our derivative instruments are summarized in the following table. The use of derivatives is measured in terms of notional
amounts, which serve as the basis for calculating payments and are generally not actual amounts that are exchanged.
The total notional amount of derivatives in our portfolio decreased to $43.7 billion as at December 31, 2010, from $47.3 billion at the
end of 2009, primarily due to a decrease in interest rate and equity contracts partially offset by an increase in foreign exchange
contracts. The net fair value increased to $929 million in 2010 from the 2009 year-end amount of $125 million. The change was
primarily due to the unwinding and maturity of some contracts which were in a loss position a year ago, as well as an increase in the
market value of interest rate and foreign exchange contracts resulting from increases in interest rates and the strengthening of the
Canadian dollar relative to foreign currencies.
($ millions) 2010 2009
As at December 31
Net fair value 929 125
Total notional amount 43,717 47,260
Credit equivalent amount 1,231 1,010
Risk-weighted credit equivalent amount 97
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, 2010, the credit equivalent amounts for interest rate contracts, foreign exchange contracts, and equity and other
contracts were $336 million, $803 million and $92 million, respectively. The corresponding risk-weighted credit equivalent amounts
were $2 million, $6 million and $1 million, respectively. Additional details in respect of derivatives are included in Notes 5 and 6 to our
2010 Consolidated Financial Statements.
Impaired Assets
Financial assets that are classified as HFT, which represented 59% of our 2010 invested assets, 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 the balance sheet.
The invested asset values and ratios presented in this section are based on the carrying value of the respective asset categories.
Carrying values for AFS and HFT invested assets are generally equal to fair value. In the event of default, if the amounts recovered are
insufficient to satisfy the related actuarial liability cash flows that the assets are intended to support, credit exposure may be greater
than the carrying value of the asset.
Net impaired assets for mortgages and corporate loans, net of allowances, amounted to $425 million as at December 31, 2010,
$256 million higher than the December 31, 2009 level for these assets.
Management’s Discussion and Analysis Sun Life Financial Inc. Annual Report 2010 57