Sun Life 2010 Annual Report Download - page 94

5. Financial investments and related net investment income (loss)
We invest primarily in bonds, mortgages, stocks and real estate. The accounting policy for each type of financial investment is
described in Note 1.
5.A Fair value of financial investments
The carrying values and fair values of our invested assets as at December 31 are shown in the following table.
2010 2009
Carrying
Value
Fair
Value
Yield
%
Carrying
Value
Fair
Value
Yield
%
Assets
Bonds – held-for-trading $ 54,753 $ 54,753 5.45 $ 51,634 $ 51,634 5.72
Bonds – available-for-sale 10,752 10,752 4.50 9,673 9,673 5.10
Mortgages and corporate loans 19,511 20,430 5.29 19,449 19,941 5.27
Stocks – held-for-trading 4,424 4,424 2.42 4,331 4,331 2.41
Stocks – available-for-sale 808 809 2.90 635 649 4.34
Real estate 4,919 5,125 8.07 4,877 5,124 9.01
Policy loans and other invested assets(1) 3,525 3,525 5.51 3,503 3,503 6.02
Cash, cash equivalents and short-term securities 8,487 8,487 n/a 11,868 11,868 n/a
Derivative assets 1,629 1,629 n/a 1,382 1,382 n/a
Other invested assets – held-for-trading 419 419 n/a 425 425 n/a
Other invested assets – available-for-sale 454 492 n/a 452 484 n/a
Total invested assets $ 109,681 $ 110,845 4.88 $ 108,229 $ 109,014 4.89
(1) Policy loans have a carrying value and fair value of $3,279 ($3,303 in 2009).
The preceding table includes only derivative financial instruments that have a positive fair value and are, therefore, recorded as assets
in our Consolidated Balance Sheets. Derivative liabilities with a fair value of $700 ($1,257 in 2009) are also reported in our
Consolidated Balance Sheets.
5.A.i Fair value methodologies and assumptions
The fair value of publicly traded fixed maturity and equity securities is determined using quoted market bid prices in active markets that
are readily and regularly obtainable, when available. When quoted prices in active markets are not available, the determination of fair
value is based on market standard valuation methodologies, which include matrix pricing, consensus pricing from various broker
dealers that are typically the market makers, discounted cash flows, 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, issuer spreads, reported trades of identical or similar instruments and prepayment speeds. Prices
obtained from independent pricing services are validated through back-testing to trade data, comparison to observable market inputs or
other economic indicators, and other qualitative analysis to ensure that the fair value is reasonable. For securities in which fair value
that is based solely on non-binding broker quotes that cannot be validated to observable market data, we typically consider the fair
value to be based on unobservable market inputs, due to a general lack of transparency in the process that the brokers use to develop
the prices. Stocks that do not have a quoted market price on an active market and are designated as available-for-sale are reported at
cost and are not material to our Consolidated Financial Statements.
The fair value of non-publicly traded bonds is determined using a discounted cash flow approach that includes provisions for credit risk,
liquidity premium, and the expected maturities of the securities. The valuation techniques used are primarily based on observable
market prices or rates.
The fair value of derivative financial instruments depends upon the type of derivative, and is determined primarily using observable
market inputs. Fair value of exchange-traded futures is based on the quoted market prices, while fair value of interest rate and cross-
currency swaps and forward contracts is determined by discounting expected future cash flows using current market interest and
exchange rates for similar instruments. Fair value of common stock index swaps and options is determined using the value of
underlying securities or indices and option pricing models using index prices, projected dividends and volatility surfaces.
The fair value of over-the-counter (“OTC”) derivative financial instruments also includes credit valuation adjustments to reflect the risk
of default for both the derivative counterparty and ourselves. These valuation adjustments take into account the creditworthiness of the
counterparties and us, as well as the impact of contractual factors designed to reduce our credit exposure such as collateral. Inputs
into determining the appropriate credit valuation adjustment 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.
90 Sun Life Financial Inc. Annual Report 2010 Notes to the Consolidated Financial Statements