##### Table of Contents



(SUN LIFE FINANCIAL LOGO)           SUN LIFE FINANCIAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004




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TABLE OF CONTENTS  Financial Reporting ResponsibilitiesConsolidated Statements of OperationsConsolidated Balance SheetsConsolidated Statements of EquityConsolidated Statements of Cash FlowsConsolidated Statements of Changes in Segregated Funds Net AssetsNotes to the Consolidated Financial StatementsAppointed Actuarys Report    Table of Contents  FINANCIAL REPORTING
RESPONSIBILITIES 
 Financial Reporting Responsibilities Management is responsible for preparing the consolidated financial statements. This
responsibility includes selecting appropriate accounting policies and making estimates and other
judgements consistent with Canadian generally accepted accounting principles. It also includes
ensuring the use of appropriate accounting policies and estimates in the disclosure of the
information which was prepared following accounting principles generally accepted in the United
States of America. The financial information presented elsewhere in the annual report to
shareholders is consistent with these statements. The Board of Directors (Board) oversees managements responsibilities for financial reporting. An
Audit and Conduct Review Committee of non-management directors is appointed by the Board to review the consolidated
financial statements and report to the directors prior to their approval of the consolidated
financial statements for issuance to shareholders. Management is also responsible for maintaining systems of internal control that provide reasonable
assurance that financial information is reliable, that all financial transactions are properly
authorized, that assets are safeguarded, and that Sun Life Financial Inc. and its subsidiaries,
collectively referred to as the Company, adhere to legislative and regulatory requirements.
These systems include the communication of policies and the Companys Code of Business Conduct
throughout the organization. Internal controls are reviewed and evaluated by the Companys
internal auditors. The Audit and Conduct Review Committee also conducts such review and inquiry of management and the internal and
external auditors as it deems necessary towards establishing that the Company is employing
appropriate systems of internal control, is adhering to legislative and regulatory requirements and
is applying the Companys Code of Business Conduct. Both the internal and external auditors and
the Appointed Actuary have full and unrestricted access to the Audit and Conduct Review Committee, with and without
the presence of management. The Office of the Superintendent of Financial Institutions Canada conducts periodic examinations of
the Company. These examinations are designed to evaluate compliance with provisions of the
Insurance Companies Act of Canada and to ensure that the interests of policyholders, depositors and
the public are safeguarded. The Companys foreign operations and foreign subsidiaries are examined
by regulators in their local jurisdictions. The Appointed Actuary, who is a member of management, is appointed by the Board to discharge the
various actuarial responsibilities required under the Insurance Companies Act of Canada, and
conducts the valuation of the Companys actuarial liabilities. The role of the Appointed Actuary
is described in more detail in Note 12 on page 28. The report of the Appointed Actuary appears on
page 52. The Companys external auditors, Deloitte & Touche LLP, Chartered Accountants, conduct an
independent examination of the financial statements and meet separately with both management and
the Audit and Conduct Review Committee to discuss the results of their examination. The auditors report to the
shareholders appears on page 52.  (-s- Donald A. Stewart) Donald A. Stewart
  (-s- Paul W. Derksen) Paul W. Derksen
 Toronto, February 14, 2005 1
Sun Life Financial Inc.




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##### Table of Contents



CONSOLIDATED FINANCIAL STATEMENTS 
 Consolidated Statements of Operations YEARS ENDED DECEMBER 31 (in millions of Canadian dollars, except for per share amounts)2004
    
    
    2003
    
    
    2002REVENUEPremium income:Annuities
    
    $
    4,588
    
    
    $
    4,805
    
    
    $
    7,402Life insurance
    
    
    5,966
    
    
    
    6,325
    
    
    
    5,403Health insurance
    
    
    2,367
    
    
    
    2,413
    
    
    
    2,07012,921
    
    
    
    13,543
    
    
    
    14,875Net investment income (Note 8)
    
    
    5,924
    
    
    
    5,703
    
    
    
    5,131Fee income
    
    
    2,903
    
    
    
    2,810
    
    
    
    3,09521,748
    
    
    
    22,056
    
    
    
    23,101POLICY BENEFITS AND EXPENSESPayments to policyholders, beneficiaries and depositors:Maturities and surrenders
    
    
    5,726
    
    
    
    6,050
    
    
    
    5,476Annuity payments
    
    
    1,495
    
    
    
    1,567
    
    
    
    1,486Death and disability benefits
    
    
    2,458
    
    
    
    2,488
    
    
    
    2,067Health benefits
    
    
    1,737
    
    
    
    1,696
    
    
    
    1,573Policyholder dividends and interest on claims and deposits
    
    
    1,116
    
    
    
    1,125
    
    
    
    1,08612,532
    
    
    
    12,926
    
    
    
    11,688Net transfers to segregated funds
    
    
    600
    
    
    
    544
    
    
    
    1,329Increase in
actuarial liabilities (Note 12)
    
    
    1,425
    
    
    
    1,510
    
    
    
    3,822Commissions
    
    
    1,916
    
    
    
    1,848
    
    
    
    1,909Operating expenses (Note 17)
    
    
    2,831
    
    
    
    3,088
    
    
    
    2,779Premium taxes
    
    
    182
    
    
    
    171
    
    
    
    168Interest expense (Notes 13 and 14)
    
    
    195
    
    
    
    209
    
    
    
    19219,681
    
    
    
    20,296
    
    
    
    21,887OPERATING INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTERESTS
    
    
    2,067
    
    
    
    1,760
    
    
    
    1,214Income taxes (Note 20)
    
    
    293
    
    
    
    387
    
    
    
    98Non-controlling interests in net income of subsidiaries (Note 15)
    
    
    80
    
    
    
    65
    
    
    
    83NET INCOME FROM CONTINUING OPERATIONS
    
    
    1,694
    
    
    
    1,308
    
    
    
    1,033Loss from discontinued operations, net of income taxes (Note 5)
    
    
    
    
    
    
    
    
    
    
    36TOTAL NET INCOME
    
    
    1,694
    
    
    
    1,308
    
    
    
    997Less participating policyholders net income (loss)
    
    
    13
    
    
    
    (1
    )
    
    
    (1
    )SHAREHOLDERS NET INCOME
    
    $
    1,681
    
    
    $
    1,309
    
    
    $
    998Average exchange rates:U.S. Dollars
    
    
    1.30
    
    
    
    1.40
    
    
    
    1.57U.K. Pounds
    
    
    2.38
    
    
    
    2.29
    
    
    
    2.36Earnings
per share (Note 18)BasicContinuing operations
    
    $
    2.81
    
    
    $
    2.15
    
    
    $
    1.91Discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    (0.07
    )Shareholders net income
    
    $
    2.81
    
    
    $
    2.15
    
    
    $
    1.84DilutedContinuing operations
    
    $
    2.79
    
    
    $
    2.15
    
    
    $
    1.90Discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    (0.07
    )Shareholders net income
    
    $
    2.79
    
    
    $
    2.15
    
    
    $
    1.83Weighted average shares outstanding in millions (Note 18)Basic
    
    
    599
    
    
    
    608
    
    
    
    543Diluted
    
    
    602
    
    
    
    608
    
    
    
    543
 The attached notes form part of these consolidated financial statements. 2
www.sunlife.com Annual Report 2004




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CONSOLIDATED FINANCIAL STATEMENTS 
 Consolidated Balance Sheets AS AT DECEMBER 31 (in
millions of Canadian dollars)2004
    
    
    2003ASSETSBonds (Note 8)
    
    $
    64,496
    
    
    $
    66,090Mortgages (Note 8)
    
    
    13,862
    
    
    
    13,601Stocks (Note 8)
    
    
    3,463
    
    
    
    3,473Real estate (Note 8)
    
    
    3,148
    
    
    
    3,067Cash, cash equivalents and short-term securities
    
    
    5,966
    
    
    
    4,972Policy loans and other invested assets
    
    
    5,982
    
    
    
    5,973Invested assets
    
    
    96,917
    
    
    
    97,176Goodwill (Note 10)
    
    
    5,471
    
    
    
    5,573Intangible assets (Note 10)
    
    
    751
    
    
    
    763Other assets (Note 11)
    
    
    4,618
    
    
    
    5,697Total general fund assets
    
    $
    107,757
    
    
    $
    109,209Segregated funds net assets
    
    $
    56,564
    
    
    $
    54,086LIABILITIES AND EQUITYActuarial liabilities and other policy liabilities (Note 12)
    
    $
    76,056
    
    
    $
    77,354Amounts on deposit
    
    
    3,144
    
    
    
    3,120Deferred net realized gains (Note 8)
    
    
    3,466
    
    
    
    3,124Other liabilities (Note 13)
    
    
    7,159
    
    
    
    7,795Total general fund liabilities
    
    
    89,825
    
    
    
    91,393Subordinated debt (Note 14)
    
    
    2,182
    
    
    
    2,504Non-controlling interests in subsidiaries (Note 15)
    
    
    1,338
    
    
    
    1,336Total equity
    
    
    14,412
    
    
    
    13,976Total general fund liabilities and equity
    
    $
    107,757
    
    
    $
    109,209Segregated funds contract liabilities
    
    $
    56,564
    
    
    $
    54,086December 31 exchange rates:U.S. Dollars
    
    
    1.20
    
    
    
    1.29U.K. Pounds
    
    
    2.32
    
    
    
    2.30
 The attached notes form part of these consolidated financial statements. Approved on behalf of the Board of Directors  (-s- Donald A. Stewart) Donald A. Stewart
  (-s- Ronald W. Osborne) Ronald W. Osborne
 3
Sun Life Financial Inc.




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CONSOLIDATED FINANCIAL STATEMENTS  YEARS ENDED DECEMBER 31 (in millions of Canadian dollars)PARTICIPATINGPOLICYHOLDERS
    
    
    SHAREHOLDERS
    
    
    2004
    
    
    2003
    
    
    2002SHARE CAPITALBalance, beginning of year
    
    $
    
    
    
    $
    7,289
    
    
    $
    7,289
    
    
    $
    7,420
    
    
    $
    1,100Common shares issued, net of issuance costs,
as consideration for business acquisitions (Notes 3 and 16)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    6,281Stock options exercised (Note 19)
    
    
    
    
    
    
    75
    
    
    
    75
    
    
    
    28
    
    
    
    39Common shares purchased for cancellation (Note 16)
    
    
    
    
    
    
    (126
    )
    
    
    (126
    )
    
    
    (222
    )
    
    
    Balance, end of year
    
    
    
    
    
    
    7,238
    
    
    
    7,238
    
    
    
    7,289
    
    
    
    7,420CONTRIBUTED SURPLUSBalance, beginning of year
    
    
    
    
    
    
    76
    
    
    
    76
    
    
    
    57
    
    
    
    Stock option compensation (Note 19)
    
    
    
    
    
    
    11
    
    
    
    11
    
    
    
    26
    
    
    
    21Stock options exercised (Notes 16 and 19)
    
    
    
    
    
    
    (17
    )
    
    
    (17
    )
    
    
    (7
    )
    
    
    (12
    )Fair value of stock options granted as consideration
for business acquisition (Note 3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48Balance, end of year
    
    
    
    
    
    
    70
    
    
    
    70
    
    
    
    76
    
    
    
    57RETAINED EARNINGSBalance, beginning of year
    
    
    72
    
    
    
    7,212
    
    
    
    7,284
    
    
    
    6,694
    
    
    
    5,994Balance of
participating policyholders account of
Clarica Life Insurance Company at date of acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Net income
    
    
    13
    
    
    
    1,681
    
    
    
    1,694
    
    
    
    1,308
    
    
    
    997Dividends on common shares
    
    
    
    
    
    
    (515
    )
    
    
    (515
    )
    
    
    (413
    )
    
    
    (294
    )Common shares purchased for cancellation (Note 16)
    
    
    
    
    
    
    (262
    )
    
    
    (262
    )
    
    
    (305
    )
    
    
    Balance, end of year
    
    
    85
    
    
    
    8,116
    
    
    
    8,201
    
    
    
    7,284
    
    
    
    6,694CURRENCY TRANSLATION ACCOUNTBalance, beginning of year
    
    
    (5
    )
    
    
    (668
    )
    
    
    (673
    )
    
    
    738
    
    
    
    631Changes for the year
    
    
    (3
    )
    
    
    (421
    )
    
    
    (424
    )
    
    
    (1,411
    )
    
    
    107Balance, end of year
    
    
    (8
    )
    
    
    (1,089
    )
    
    
    (1,097
    )
    
    
    (673
    )
    
    
    738Total equity
    
    $
    77
    
    
    $
    14,335
    
    
    $
    14,412
    
    
    $
    13,976
    
    
    $
    14,909
 The attached notes form part of these consolidated financial statements. 4
www.sunlife.com Annual Report 2004




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CONSOLIDATED FINANCIAL STATEMENTS 
 Consolidated Statements of Cash Flows YEARS ENDED DECEMBER 31 (in millions of Canadian dollars)2004
    
    
    2003
    
    
    2002CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIESNet income from continuing operations
    
    $
    1,694
    
    
    $
    1,308
    
    
    $
    1,033Items not affecting cash:Increase in
actuarial and other policy-related liabilities
    
    
    1,205
    
    
    
    1,430
    
    
    
    3,795Amortization of:Net deferred realized and unrealized gains on investments
    
    
    (498
    )
    
    
    (356
    )
    
    
    (242
    )Deferred acquisition costs and intangible assets
    
    
    201
    
    
    
    258
    
    
    
    333Gain on sale of subsidiaries
    
    
    
    
    
    
    
    
    
    
    (177
    )Future income taxes
    
    
    262
    
    
    
    91
    
    
    
    (87
    )Provisions for losses on investments
    
    
    21
    
    
    
    113
    
    
    
    366Stock option compensation (Note 19)
    
    
    11
    
    
    
    26
    
    
    
    21Other changes in other assets and liabilities
    
    
    353
    
    
    
    181
    
    
    
    (613
    )New mutual fund business acquisition costs capitalized
    
    
    (84
    )
    
    
    (152
    )
    
    
    (194
    )Redemption fees of mutual funds
    
    
    65
    
    
    
    73
    
    
    
    115Net cash provided by operating activities
    
    
    3,230
    
    
    
    2,972
    
    
    
    4,350CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIESBorrowed funds
    
    
    10
    
    
    
    (96
    )
    
    
    (103
    )Issuance of subordinated debt (Note 14)
    
    
    
    
    
    
    
    
    
    
    799Redemption of subordinated debt (Note 14)
    
    
    (267
    )
    
    
    (189
    )
    
    
    (337
    )Issuance of common shares on exercise of stock options (Note 16)
    
    
    58
    
    
    
    21
    
    
    
    27Issuance of
Sun Life ExchangEable Capital Securities  Series B (Note 15)
    
    
    
    
    
    
    
    
    
    
    200Common shares purchased for cancellation (Note 16)
    
    
    (388
    )
    
    
    (527
    )
    
    
    Dividends paid on common shares
    
    
    (515
    )
    
    
    (413
    )
    
    
    (294
    )Net cash provided by (used in) financing activities
    
    
    (1,102
    )
    
    
    (1,204
    )
    
    
    292CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIESSales, maturities and repayments of:Bonds
    
    
    35,484
    
    
    
    39,138
    
    
    
    30,556Mortgages
    
    
    2,529
    
    
    
    3,128
    
    
    
    3,528Stocks
    
    
    1,422
    
    
    
    1,416
    
    
    
    4,285Real estate
    
    
    233
    
    
    
    131
    
    
    
    432Purchases of:Bonds
    
    
    (35,834
    )
    
    
    (43,323
    )
    
    
    (38,300
    )Mortgages
    
    
    (3,111
    )
    
    
    (2,673
    )
    
    
    (2,904
    )Stocks
    
    
    (1,374
    )
    
    
    (1,267
    )
    
    
    (2,818
    )Real estate
    
    
    (274
    )
    
    
    (191
    )
    
    
    (227
    )Policy loans
    
    
    (33
    )
    
    
    (68
    )
    
    
    (151
    )Short-term securities
    
    
    (454
    )
    
    
    1,095
    
    
    
    (317
    )Other investments
    
    
    (48
    )
    
    
    316
    
    
    
    (39
    )Acquisitions, net of cash acquired from continuing operations (Note 3)
    
    
    
    
    
    
    (266
    )
    
    
    2,749Disposals, net of cash disposed of (Note 5)
    
    
    
    
    
    
    
    
    
    
    (10
    )Net cash used in investing activities
    
    
    (1,460
    )
    
    
    (2,564
    )
    
    
    (3,216
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    273
    
    
    
    103Changes due to fluctuations in exchange rates
    
    
    (90
    )
    
    
    (455
    )
    
    
    44Increase (decrease) in cash and cash equivalents
    
    
    578
    
    
    
    (978
    )
    
    
    1,573Cash and cash equivalents, beginning of year
    
    
    3,178
    
    
    
    4,156
    
    
    
    2,583Cash and cash equivalents, end of year
    
    
    3,756
    
    
    
    3,178
    
    
    
    4,156Short-term securities, end of year
    
    
    2,210
    
    
    
    1,794
    
    
    
    2,996Cash, cash equivalents and short-term securities, end of year
    
    $
    5,966
    
    
    $
    4,972
    
    
    $
    7,152Supplementary InformationCash and cash equivalents:Cash
    
    $
    392
    
    
    $
    489
    
    
    $
    328Cash equivalents
    
    
    3,364
    
    
    
    2,689
    
    
    
    3,828$
    3,756
    
    
    $
    3,178
    
    
    $
    4,156Cash disbursements made for:Interest on borrowed funds and subordinated debt
    
    $
    197
    
    
    $
    207
    
    
    $
    201Income taxes, net of refunds
    
    $
    265
    
    
    $
    149
    
    
    $
    229
 The attached notes form part of these consolidated financial statements. 5
Sun Life Financial Inc.




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CONSOLIDATED FINANCIAL STATEMENTS 
 Consolidated Statements of Changes in Segregated Funds Net Assets YEARS ENDED DECEMBER 31 (in millions of Canadian dollars)2004
    
    
    2003
    
    
    2002ADDITIONS TO SEGREGATED FUNDSDeposits:Annuities
    
    $
    5,928
    
    
    $
    5,624
    
    
    $
    5,105Life insurance
    
    
    1,199
    
    
    
    344
    
    
    
    1,5377,127
    
    
    
    5,968
    
    
    
    6,642Net transfers from general funds
    
    
    600
    
    
    
    544
    
    
    
    1,329Net realized and unrealized gains (losses)
    
    
    3,804
    
    
    
    6,456
    
    
    
    (8,658
    )Other investment income
    
    
    1,500
    
    
    
    1,411
    
    
    
    1,34313,031
    
    
    
    14,379
    
    
    
    656DEDUCTIONS FROM SEGREGATED FUNDSPayments to policyholders and their beneficiaries
    
    
    8,050
    
    
    
    6,776
    
    
    
    7,366Management fees
    
    
    622
    
    
    
    556
    
    
    
    564Taxes and other expenses
    
    
    120
    
    
    
    167
    
    
    
    57Effect of changes in currency exchange rates
    
    
    1,761
    
    
    
    5,549
    
    
    
    (349
    )10,553
    
    
    
    13,048
    
    
    
    7,638Net additions (reductions) to segregated funds for the year
    
    
    2,478
    
    
    
    1,331
    
    
    
    (6,982
    )Acquisitions (Note 3)
    
    
    
    
    
    
    
    
    
    
    11,193Segregated funds net assets, beginning of year
    
    
    54,086
    
    
    
    52,755
    
    
    
    48,544Segregated funds net assets, end of year
    
    $
    56,564
    
    
    $
    54,086
    
    
    $
    52,755
 Consolidated Statements of Segregated Funds Net Assets AS AT DECEMBER 31 (in millions of Canadian dollars)2004
    
    
    2003ASSETSSegregated and mutual fund units
    
    $
    43,589
    
    
    $
    40,721Stocks
    
    
    7,082
    
    
    
    7,892Bonds
    
    
    5,600
    
    
    
    5,546Cash, cash equivalents and short-term securities
    
    
    961
    
    
    
    686Real estate
    
    
    159
    
    
    
    148Mortgages
    
    
    61
    
    
    
    78Other assets
    
    
    716
    
    
    
    58058,168
    
    
    
    55,651LIABILITIES
    
    
    1,604
    
    
    
    1,565Net assets attributable to segregated funds policyholders
    
    $
    56,564
    
    
    $
    54,086
 The attached notes form part of these consolidated financial statements. 6
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
 Notes to the Consolidated Financial Statements  1. Accounting Policies DESCRIPTION OF BUSINESS Sun Life Financial Inc. is a publicly traded company and is the holding company of Sun Life
Assurance Company of Canada (Sun Life Assurance). Both companies are incorporated under the
Insurance Companies Act of Canada, and are regulated by the Office of the Superintendent of
Financial Institutions Canada (OSFI). Sun Life Financial Inc., together with all its subsidiaries,
including its wholly-owned consolidated subsidiary Sun Life Assurance, are collectively referred to
as Sun Life Financial or the Company. The Company is an internationally diversified financial
services organization providing savings, retirement and pension products, and life and health
insurance to individuals and groups through its operations in Canada, the United States, the United
Kingdom and Asia. The Company also operates mutual fund and investment management businesses,
primarily in Canada, the United States and Asia. BASIS OF PRESENTATION The Company prepares its consolidated financial statements in accordance with Canadian generally
accepted accounting principles (GAAP). The preparation of financial statements in conformity with Canadian GAAP requires management to
make estimates and assumptions that affect: 
    the reported amounts of assets and liabilities at the date of the financial statements, 
    the disclosure of contingent assets and liabilities at the date of the financial statements, and 
    the reported amounts of revenues, policy benefits and expenses during the reporting period.  A reconciliation of the impact
on assets, liabilities, equity, comprehensive income and net income
arising from differences between Canadian and U.S. GAAP is provided in
Note 23. Disclosures reflected in these consolidated financial
statements substantially comply with those required under U.S. GAAP. The significant accounting policies used in the preparation of these consolidated financial
statements are summarized below. BASIS OF CONSOLIDATION The consolidated financial statements reflect the accounts of the Company, including life insurance
and non-life insurance subsidiaries. Significant intercompany balances and transactions have been
eliminated. The purchase method is used to account for subsidiaries with the difference between
the acquisition cost of a subsidiary and the fair value of the net identifiable assets acquired
recorded as goodwill. Operating results of the subsidiaries are included in the consolidated
statements of operations from the dates of their acquisition. The equity method is used to account
for other entities over which the Company is able to exercise a significant influence. These
investments are reported in other invested assets in the consolidated balance sheets with the
Companys share of earnings reported in net investment income in the consolidated statements of
operations. BONDS AND MORTGAGES Bonds and mortgages are carried at amortized cost, net of allowances for losses. A bond or mortgage is classified as impaired where payment is 90 days past due, foreclosure or
power of sale procedures have started or other circumstances warrant. Regular reviews are
performed on portfolios during which management considers various factors to identify invested
assets of potential concern. Consideration is given to general economic and business conditions,
industry trends, specific developments with regard to security issuers and current market
valuations. When an asset is classified as impaired, allowances for losses are established to
adjust the carrying value of the asset to its net recoverable amount. Interest is no longer
accrued and previous interest accruals are reversed. Allowances for
losses and write-offs of
specific investments net of recoveries, are charged
against net investment income. Once the conditions causing the impairment improve and future
payments are reasonably assured, allowances are reduced and the invested asset is no longer
classified as impaired. Sectoral allowances are also established for classes of assets when there
is concern about the ultimate collection of principal or interest. The Companys actuarial
liabilities include additional provisions for possible future asset losses. Realized gains and losses on the sales of bonds and mortgages are deferred and amortized into net
investment income on a constant yield basis over the remaining period to maturity. STOCKS Stocks are originally recorded at cost and the carrying value is adjusted towards fair value at 5%
of the difference between fair value and carrying value per quarter. Realized gains and losses on
sales of stocks are deferred and amortized into net investment income at the rate of 5% of the
unamortized balance each quarter. The Company records a write-down for any other than temporary
decline in the aggregate value of the stock portfolio. 7
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Accounting Policies (Contd) REAL ESTATE Real estate includes real estate held for investment and real estate held for sale. Real estate held for
investment:Real estate held for investment is originally recorded at cost.
The carrying value is adjusted towards fair value at 3% of the difference between fair value and
carrying value per quarter. Realized gains and losses on sales are deferred and amortized into net
investment income at the rate of 3% of the unamortized balance each quarter. Market value is determined for each property by qualified appraisers. Appraisals are obtained
annually for high value properties and at least once every three years for other properties. The
Company monitors the values of these properties to determine that, in aggregate, the carrying
values used are not in excess of market values and records a write-down for any other than
temporary decline in the value of the portfolio. Real estate held for sale:Properties held for sale are usually acquired through foreclosure.
They are measured at fair value less the cost to sell. When the amount at which the foreclosed
assets are initially measured is different from the carrying amount of the loan, a gain or loss is
recorded at the time of foreclosure. DERIVATIVE FINANCIAL INSTRUMENTS The Companys derivative instruments include swaps, options, financial futures and forward
contracts and are used to manage risks or to replicate the exposures associated with interest rate,
currency and equity market fluctuations. The Companys monitoring policies are described in Note
9. The accounting policies for the various types of derivative instruments used by the Company are
described below. Most of the Companys derivatives are used as part of a portfolio of assets to match actuarial
liabilities as to duration and amounts. The most significant of these are interest rate swaps and
options. The accounting for these instruments is at amortized cost, consistent with other fixed
term portfolio investments. The net receivable or payable on the interest rate swaps is accrued to
other assets or other liabilities with the net spread of the swaps recorded to net investment
income. Realized gains or losses associated with these derivatives are deferred and amortized to
net investment income. Premiums paid for interest rate options are deferred in other invested
assets and amortized to net investment income over the term of the options. Many of the foreign currency swaps and forwards are used in combination with other investments to
generate a specific investment return. These are accounted for at amortized cost. The net payable
or receivable on currency swaps is included in other assets or other liabilities with the net
spread of the swaps recorded to net investment income. Any realized gains and losses resulting
from the termination of these derivative instruments are deferred and amortized into income on a
basis consistent with the foreign currency investments with which the swaps and forwards are
combined. Certain of the equity futures, options and swaps are held for investment purposes. The accounting
policy for these investments is the same as that for stocks. Several derivative instruments are used for hedging specific risk exposures and are either
accounted for using hedge accounting or are reported at their fair values on the balance sheet with
changes in fair value reported in income. The derivatives that are accounted for using hedge
accounting are documented at inception and effectiveness is assessed on a quarterly basis. Certain
interest rate swaps are used to hedge a floating-rate loan. The net receivable or payable on the
interest rate swaps is accrued to other assets or other liabilities with the net spread of the
swaps recorded to net investment income. The Company uses currency swaps and forwards to reduce
foreign exchange fluctuations associated with certain foreign currency investment financing
activities and investments in subsidiaries. The accounting for these contracts is consistent with
the underlying investment. Changes in exchange gains or losses on these currency swaps and
forwards are included in other assets or other liabilities and the currency translation account in
equity, offsetting the respective exchange gains or losses arising from the conversion of the
underlying investment. Equity forwards and swaps are used to hedge the variability in the cash
flows associated with certain stock-based compensation plans described in Note 19. One equity
forward is accounted for using hedge accounting. A portion of the fair value of this forward is
recorded in other assets or other liabilities with the change in fair value reported in operating
expenses, consistent with the accounting for the stock-based compensation liability. The remaining
forwards and swaps are recorded in other invested assets or other liabilities at their fair values
with changes in their fair values reported in net investment income. Equity index futures, swaps,
options and forwards are used to reduce exposure to the effect of stock market fluctuations in the
actuarial liabilities associated with certain products. These derivative instruments are recorded
in other invested assets or other liabilities at their fair values with changes in fair value
reported in net investment income. POLICY LOANS Policy loans are carried at their unpaid balance and are fully secured by the policy values on
which the loans are made. CASH, CASH EQUIVALENTS AND SHORT-TERM SECURITIES Cash equivalents and short-term securities are highly liquid investments and are carried at
amortized cost. Cash equivalents have a term to maturity of less than three months while
short-term securities have a term to maturity exceeding three months but less than one year. OTHER INVESTED ASSETS Other invested assets include the Companys investment in segregated funds, investments accounted
for by the equity method, derivatives that are reported at fair value and investments in equipment
leases. 8
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Accounting Policies (Contd) DEFERRED ACQUISITION COSTS Deferred acquisition costs arising on mutual fund sales are amortized over the periods of the
related sales charges, which range from three to seven years. Deferred acquisition costs arising
on segregated funds are calculated and included in actuarial liabilities. Actuarial liabilities
implicitly include acquisition costs on insurance and annuity product sales. GOODWILL Goodwill represents the excess of the cost of businesses acquired over the fair value of the net
identifiable tangible and intangible assets and is not amortized. Goodwill is assessed for
impairment annually by comparing the carrying values of the appropriate business segments,
including any associated subsidiary segments, as required, to their respective fair values. If any
potential impairment is identified, it is quantified by comparing the carrying value of the
respective goodwill to its fair value. INTANGIBLE ASSETS Identifiable intangible assets consist of finite-life and indefinite-life intangible assets.
Finite-life intangible assets include the value of the banking distribution channel, the sales
potential of field force and asset administration contracts. These intangible assets are amortized
on a straight-line basis over varying periods of up to 40 years. The indefinite-life intangible
assets include fund management contracts, brand name and state licenses. Indefinite-life
intangibles are assessed for impairment annually by comparing their carrying values to their fair
values. If the carrying values of the indefinite-life intangibles exceed their fair values, these
assets are considered impaired and a charge for impairment is recognized. CAPITAL ASSETS Furniture, computers, other equipment and leasehold improvements are carried at cost less
accumulated depreciation and amortization. Depreciation and amortization are recorded on a
straight-line basis over the estimated useful lives of these assets, which generally range from two
to ten years. LOANS SECURITIZATION The Company periodically securitizes assets, such as mortgages or bonds, by selling them to trusts
that issue securities to investors. These transactions are accounted for as sales when control
over the assets has been surrendered and consideration other than beneficial interests in these
transferred assets has been received in exchange. Gains or losses on these securitization
transactions are included in deferred net realized gains, and will be amortized into net investment
income as described above under Bonds and Mortgages. In determining the gain or loss on sale of
the assets, the carrying value of the assets sold is allocated between the portion sold and the
portion retained based on their relative fair values on the date of sale. These fair values are
determined using either quoted market prices or discounted cash flow models. Interests in the
securitized assets, such as subordinated investments in the issued securities or servicing rights,
may be retained. These subordinated investments and servicing rights are classified as bonds and
other assets, respectively. On a quarterly basis, the Company compares the carrying value of
retained interests arising from securitizations to their fair values, determined based on
discounted cash flows. If the carrying values of retained interests exceed their fair values, these
assets are considered impaired and an impairment charge is recognized. SEGREGATED FUNDS Segregated funds are lines of business in which the Company issues a contract where the benefit
amount is directly linked to the market value of the investments held in the particular segregated
fund. Although the underlying assets are registered in the name of the Company and the segregated
fund contract holder has no direct access to the specific assets, the contractual arrangements are
such that the segregated fund policyholder bears the risk and
rewards of the funds investment performance. In addition, certain individual contracts have
guarantees from the Company. The Company derives fee income from segregated funds, which is
included in fee income on the consolidated statements of operations. Fee income includes fund
management fees as well as mortality, policy administration and surrender charges on segregated
funds. Changes in the Companys interest in the segregated funds, including undistributed net
investment income, are reflected in net investment income.
Policyholder transfers between general funds and segregated funds are included in net transfers to segregated funds
on the consolidated statements of operations. Separate consolidated financial statements are provided for the segregated funds. Segregated fund
assets are carried at fair value. Fair values are determined using quoted market values or, where
quoted market values are not available, estimated fair values as determined by the Company. The
investment results of the segregated funds are reflected directly in segregated fund liabilities.
Deposits to segregated funds are reported as increases in segregated funds liabilities and are not
reported as revenues in the consolidated statements of operations. Segregated fund assets may not
be applied against liabilities that arise from any other business of the Company. AMOUNTS ON DEPOSIT Amounts on deposit represent premiums paid in advance, reinvested policy dividends and customer
deposits in the Companys trust subsidiaries. ACTUARIAL LIABILITIES Actuarial liabilities and other policy liabilities, including policy benefits payable and provision
for policyholder dividends, are computed using generally accepted actuarial practice in accordance
with the standards established by the Canadian Institute of Actuaries including the requirements of
OSFI. 9
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Accounting Policies (Contd) INCOME TAXES The Company uses the liability method of tax allocation. Under this method, the income tax expense
consists of both an expense for current income taxes and an expense for future income taxes.
Current income tax expense (benefit) represents the expected payable (receivable) resulting from
the current years operations. Future income tax expense (benefit) represents the movement during
the year in the cumulative temporary differences between the carrying value of the Companys assets
and liabilities on the balance sheet and their values for tax purposes. Future income tax assets
are recognized to the extent that they are more likely than not to be realized. Future income tax
liabilities and assets are calculated based on income tax rates and laws that, at the balance sheet
date, are expected to apply when the liability or asset is realized, which are normally those
enacted or considered substantively enacted at the consolidated balance sheet dates. In determining the impact of taxes, the Company is required to comply with the standards of both
the Canadian Institute of Actuaries and the Canadian Institute of Chartered Accountants (CICA).
Actuarial standards require that the projected timing of all cash flows associated with policy
liabilities, including income taxes, be included in the determination of actuarial liabilities
under the Canadian asset liability method. The actuarial liabilities are first computed including
all related income tax effects on a discounted basis, including the effects of temporary
differences that have already occurred. Future income tax assets and/or liabilities arising from
temporary differences that have already occurred are computed without discounting. The
undiscounted future income tax assets and/or liabilities are reclassified from the actuarial
liabilities to future income taxes on the balance sheets. The net result of this reclassification
is to leave the discounting effect of the future income taxes in the actuarial liabilities. PREMIUM INCOME AND RELATED EXPENSES Gross premiums for all types of insurance contracts, and contracts with limited mortality or
morbidity risk, are generally recognized as revenue when due. When premiums are recognized,
actuarial liabilities are computed, with the result that benefits and expenses are matched with
such revenue. FOREIGN CURRENCY TRANSLATION The Companys exchange gains and losses arising from the conversion of its self-sustaining foreign
operations are included in the currency translation account of the consolidated statements of
equity. Revenues and expenses in foreign currencies, including amortized gains and losses on
foreign investments, are translated into Canadian dollars at an average of the market exchange
rates during the year. Assets and liabilities are translated into Canadian dollars at
market exchange rates at the end of the year. The net translation adjustment is reported as a
separate item in the consolidated statements of equity. A proportionate amount of the exchange gain or loss accumulated in the separate component of
shareholders equity is reflected in net income when there is a reduction in the Companys net
investment in a foreign operation resulting from a capital transaction, dilution, or sale of all or
part of the foreign operation. PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS The Company sponsors non-contributory defined benefit pension plans for eligible employees,
primarily in Canada, the United States, the United Kingdom and the Philippines. The defined
benefit pension plans offer benefits based on length of service and final average earnings and
certain plans offer some indexation of benefits. The specific features of these plans vary in
accordance with the employee group and countries in which employees are located. In addition, the
Company maintains supplementary non-contributory pension arrangements for eligible employees,
primarily for benefits which do not qualify for funding under the various registered pension plans. The Company has also established defined contribution pension plans for eligible qualifying
employees. Company contributions to these defined contribution pension plans are subject to certain
vesting requirements. Generally,
Company contributions are a set percentage of employees annual income and matched against employee
contributions. In addition to the Companys pension plans, in some countries the Company provides certain
post-retirement medical, dental and life insurance benefits to eligible qualifying employees, and
to their dependents upon meeting certain requirements. Eligible retirees may be required to pay a
portion of the premiums for these benefits and, in general, deductible amounts and co-insurance
percentages apply to benefit payments. A significant portion of the Companys employees may become
eligible for these benefits upon retirement. These post-retirement benefits are not pre-funded. Defined benefit pension costs related to current services are charged to income as services are
rendered. Based on managements best estimate assumptions, actuarial valuations of the pension
obligations are determined using the projected benefit method pro-rated on service. The estimated
present value of post-retirement health care and life insurance benefits is charged to income over
the employees years of service to the date of eligibility. For the purpose of calculating the
expected return on pension plan assets for most of the Canadian pension plans, a market-related
asset value is used which recognizes asset gains and losses in a systematic and rational manner
over a period of five years. For all other pension plans the actual market value of plan assets is
used to calculate the expected return on assets. Any transition adjustments, as well as future
adjustments arising from plan amendments, are amortized to income over the average remaining
service period of active employees expected to receive benefits under the plans. Only future
variations in actuarial estimates in excess of certain minimums are amortized. 10
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Accounting Policies (Contd) STOCK-BASED COMPENSATION Stock options granted to employees are accounted for using the fair value method. Under the fair
value method, fair value of the stock options is estimated at the grant date and the total fair
value of the options is amortized over the vesting periods as compensation expense with an offset
to contributed surplus. For options that are forfeited before vesting, the compensation expense
that has previously been recognized in operating expenses and contributed surplus is reversed.
When options are exercised, contributed surplus is reversed and the shares issued are credited to
share capital in the consolidated statements of equity. The liabilities for other stock-based compensation plans are calculated based on the number of
award units outstanding at the end of the reporting period. Each unit is equivalent in value to
the fair market value of a common share of Sun Life Financial Inc. The liabilities are accrued and
expensed on a straight-line basis over the vesting periods. 2. Changes in Accounting Policies ADOPTED IN 2004 Hedging Relationships:The Company adopted Hedging Relationships, CICA Handbook Accounting
Guideline 13, effective January 1, 2004, on a prospective basis. This Accounting Guideline
requires that all conditions with respect to identification, documentation, designation and
effectiveness of hedges be satisfied before companies choose to use hedge accounting. These
conditions are applicable to hedges existing on or after January 1, 2004. Certain derivatives that
were considered to be part of a hedging relationship, including the options that hedge the
guarantees contained in certain variable annuity products, did not qualify for hedge accounting
under the new requirements in Accounting Guideline 13. As a result, these derivatives are reported
in other invested assets or other liabilities on the consolidated balance sheets at their fair
values effective January 1, 2004. The resulting transitional gain of $46 as at January 1, 2004,
was deferred in other liabilities on the consolidated balance sheet and will be recognized in
income in the same period as the original hedged items. Increases or decreases in the fair values
of these derivatives subsequent to January 1, 2004, are reported in net investment income in the
consolidated statements of operations. This change in accounting policy did not have a material
impact on these consolidated financial statements. Impairment of Long-Lived Assets:The Company adopted Impairment of Long-Lived Assets, CICA
Handbook Section 3063, on January 1, 2004. Under this standard, the impairment test of long-lived
assets is a two-step process with the first step determining when an impairment is recognized and
the second step measuring the amount of the impairment. To test for and measure impairment, assets
are grouped at the lowest level for which identifiable cash flows are largely independent. An
impairment loss is recognized when the carrying amount of an asset to be held and used exceeds the
sum of the undiscounted cash flows expected from its use and eventual disposition. An impairment
loss is measured as the amount by which the assets carrying amount exceeds its fair value. An
asset classified as held for sale is measured at the lower of its carrying amount or fair value
less cost to sell. This change in accounting policy did not have a material impact on these
consolidated financial statements. Employee Future Benefits:The Company adopted the new disclosure requirements in CICA Handbook
Section 3461, Employee Future Benefits (CICA 3461R), effective January 1, 2004. CICA 3461R was
amended to require additional disclosures in the annual and interim financial statements pertaining
to defined benefit pension and other post-retirement benefit plans. The new annual disclosures are
effective for years ending on or after June 30, 2004, and the new interim disclosures are effective
for interim periods ending on or after June 30, 2004. The additional annual disclosures of the
Companys pension and other post-retirement benefit plans are provided in Note 22. Asset Retirement Obligations:The Company adopted Asset Retirement Obligations, CICA Handbook
Section 3110, effective January 1, 2004, on a retroactive basis. This standard requires companies
to record the fair value of an asset retirement obligation in the period in which it is incurred
and increase the carrying amount of the related long-lived asset. Interest expense on the asset
retirement obligation is accrued each period and the capitalized cost is depreciated over the
useful life of the related asset. If the obligation is not settled for its recorded amount, a gain
or loss on settlement will be realized. This change in accounting policy did not have a material
impact on these consolidated financial statements. Generally Accepted Accounting Principles:The Company adopted Generally Accepted Accounting
Principles, CICA Handbook Section 1100, on January 1, 2004. This standard establishes standards
for financial reporting in accordance with GAAP, and provides guidance on sources to consult when
selecting accounting policies and determining appropriate disclosures when a matter is not dealt
with explicitly in the primary sources of GAAP. The adoption of this standard did not have a
material impact on these consolidated financial statements. FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS Consolidation of Variable Interest Entities:The Company will adopt Consolidation of Variable
Interest Entities, CICA Handbook Accounting Guideline 15, on January 1, 2005. This Guideline
provides guidance for application of consolidation principles to those entities defined as variable
interest entities (VIEs). VIEs are entities in which equity investors do not have a controlling
financial interest and include entities where the equity invested is considered insufficient to
finance the entitys activities without additional subordinated financial support. Under this
Guideline, the Company will be required to consolidate the VIEs that result in the Company being
exposed to a majority of expected losses, benefit from a majority of expected residual returns, or
both. In September 2004, Accounting Guideline 15 was revised to harmonize the Canadian guidance with
revised Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of
Variable Interest Entities, the U.S. GAAP equivalent of Accounting Guideline 15. 11
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. Changes in Accounting Policies (Contd) The following is a summary of the impact of this Guideline for the major categories of VIEs that
the Company is involved with. Sun Life ExchangEable Capital Securities(SLEECS):  Other Variable Interest Entities:  Financial Instruments  Disclosure and Presentation:The Company will adopt the amendments to the
accounting requirements in CICA Handbook Section 3860, Financial Instruments  Disclosure and
Presentation, on January 1, 2005. Securities issued by the Company that give the Company an
unrestricted obligation to settle the principal amount in cash or in the equivalent value of its
own shares, must be classified as debt. The Company does not expect these amendments to have a
material impact on the consolidated financial statements. 3. Acquisitions Effective July 25, 2002, the Company acquired approximately 71 million common shares of CI Fund
Management Inc. (CI Funds), representing a 31.7% economic interest, in exchange for all the shares of
Spectrum Investment Management Limited (Spectrum) and Clarica Diversico Ltd. (Diversico). These
shares of CI Funds were valued at the weighted average price of $9.15 per share on July 24, 2002. The
Company recorded a gain of $177 before taxes in net investment income for the sale of the two
subsidiaries. Previously unrecognized net capital losses were used to fully offset the tax on the
gain. The acquired intangible asset consists of fund management contracts of $510 that are not
subject to amortization. The investment is accounted for using the equity method of accounting and
is included in other invested assets on the consolidated balance sheets. Effective March 20, 2003,
the Company increased its ownership percentage in CI Funds to 34% by issuing approximately 2 million
common shares of Sun Life Financial Inc. in exchange for approximately 5 million common shares of
CI Funds. The 2 million common shares of Sun Life Financial Inc. were recorded at a total fair value of
$63. The acquired non-amortizable intangible asset consists of fund management contracts of $43.
In the fourth quarter of 2003, CI Funds acquired the Canadian operations of Assante Corporation (Assante)
and Synergy Asset Management Inc. (Synergy) by issuing shares and a payment of cash to Assante and
Synergy shareholders. The Company supported these acquisitions by purchasing approximately 21
million common shares of CI Funds for $266 in order to maintain its ownership percentage of 34%. The
intangible assets acquired through these two transactions consist of non-amortizable fund
management contracts of $180 and amortizable asset administration contracts of $11. Effective May 29, 2002, the Company acquired all the outstanding common shares of Clarica Life
Insurance Company (Clarica) that were not already beneficially owned by the Company as general fund
assets for an ascribed price of $51.28 per Clarica common share. The acquisition was completed by
way of a capital reorganization of Clarica pursuant to which holders of Clarica common shares
received 1.5135 common shares of Sun Life Financial Inc. for each Clarica common share held.
Approximately 185 million common shares of Sun Life Financial Inc. were issued at an ascribed price
of $33.88 per share based on a volume-weighted average closing price of the common shares for the
period from December 13 to 19, 2001. The common shares of Clarica that were beneficially owned by
the Company as general fund assets had a carrying value of $540 at the date of acquisition. In
addition, all the unvested Clarica stock options vested immediately prior to the closing date and
on May 29, 2002, these Clarica stock options were exercisable to acquire approximately 5 million
common shares of Sun Life Financial Inc. as described in Note 19. The Company recorded $48 as part
of the purchase consideration and share capital,
representing the fair value of the outstanding Clarica stock options based on the average share
price of Clarica from December 13 to 19, 2001. The following supplemental unaudited pro forma information has been prepared to give effect to
the acquisition of Clarica, as if the transaction had been completed at the beginning of 2002.
This information is calculated by combining the results of operations of the Company for 2002 with
that of Clarica prior to the acquisition date and adjusting for the amortization of Claricas
identifiable intangible assets ($7, net of taxes), and the elimination of amortization of net
unrealized gains and deferred net realized gains as a result of fair value adjustments to the
assets and liabilities of Clarica ($13, net of taxes). The pro forma information is not intended
to reflect what would have actually resulted had the transaction been completed at the beginning of
2002. Supplemental unaudited pro forma condensed information: 2002Revenue
    
    $
    25,217Shareholders net income
    
    $
    1,186Weighted average number of shares outstanding (in millions)
    
    
    618Basic earnings per share
    
    $
    1.92Shareholders net income on a diluted basis
    
    $
    1,186Weighted average number of shares outstanding on a diluted basis (in millions)
    
    
    618Diluted earnings per share
    
    $
    1.92
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. Acquisitions (Contd) The transactions are summarized below: 2003
    
    
    2002
    
    
    2002CI Funds
    (2)
    
    Cl Funds
    
    
    ClaricaPercentage of shares acquired
    
    
    2.3%
    
    
    
    31.7%
    
    
    
    100%Invested assets acquired
    
    $
    72
    
    
    $
    23
    
    
    $
    31,637Other assets acquired
    
    
    235
    
    
    
    722
    
    
    
    2,672307
    
    
    
    745
    
    
    
    34,309Actuarial liabilities and other policy liabilities acquired
    
    
    
    
    
    
    
    
    
    
    24,835Amounts on deposit acquired
    
    
    
    
    
    
    
    
    
    
    1,277Other liabilities acquired
    
    
    168
    
    
    
    231
    
    
    
    5,059
    (1)168
    
    
    
    231
    
    
    
    31,171Net balance sheet assets acquired
    
    $
    139
    
    
    $
    514
    
    
    $
    3,138Considerations:Common shares issued or exchanged
    
    $
    63
    
    
    $
    571
    
    
    $
    6,284Carrying value of investments in acquirees shares
    
    
    
    
    
    
    36
    
    
    
    540Fair value of outstanding Clarica stock options
    
    
    
    
    
    
    
    
    
    
    48Transaction and other related costs
    
    
    
    
    
    
    
    
    
    
    57Cash cost of acquisition
    
    
    266
    
    
    
    
    
    
    
    Total consideration
    
    $
    329
    
    
    $
    607
    
    
    $
    6,929Goodwill on acquisition
    
    $
    190
    
    
    $
    93
    
    
    $
    3,791Cash and cash equivalents acquired
    
    
    
    
    
    
    
    
    
    $
    2,816
  (1)
    Other liabilities acquired include subordinated debt of $746 and
preferred shares of $160.(2)
    Net impact of all 2003 transactions related to CI Funds. Other assets acquired
include $234 of intangible assets. 4. Reorganization, Restructuring and Other Related Charges In conjunction with the acquisition of Clarica in 2002, the Company recorded an increase in
actuarial liabilities and a charge for restructuring costs. These accruals cover increased renewal
commission expenses, severance, the elimination of duplicate systems, facilities and operations, as
well as other exiting costs. The balance of $84 at the beginning of the year has been
substantially utilized. On January 14, 2002, the Company announced an agreement with the Marlborough Stirling group to
outsource the administration of the Companys individual life and pension business in the United
Kingdom which had already been closed for new business. During 2004, expenses related to closing
branches, contract cancellations, system migrations and other related costs of $10 ($33 and $88 in
2003 and 2002, respectively) were included in the operating expenses in the consolidated statements
of operations. 13
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. Disposals and Discontinued Operations Effective February 28, 2003, the Company sold its United Kingdom group insurance business to Unum
Limited (UnumProvident). Under the agreements, UnumProvident acquired the Companys United Kingdom
group income protection business together with the renewal rights to the group life business. The
transaction resulted in a gain that is not considered material to these consolidated financial
statements. Effective January 7, 2003, the Company sold all the common shares of Clarica U.S., Inc. (Clarica
U.S.) to Midland National Life Insurance Company for $414 in cash. A loss of $48 on the sale of
Clarica U.S. was accrued in 2002. The transactions are summarized below: 2003
    
    
    2002
    
    
    2002Clarica U.S.
    
    
    Spectrum(1)
    
    
    Diversico(1)Percentage of shares disposed of
    
    
    100%
    
    
    
    100%
    
    
    
    100%Invested assets disposed of
    
    $
    5,047
    
    
    $
    9
    
    
    $
    2Other assets disposed of
    
    
    225
    
    
    
    96
    
    
    
    3155,272
    
    
    
    105
    
    
    
    317Actuarial liabilities and other policy liabilities disposed of
    
    
    4,265
    
    
    
    
    
    
    
    Amounts on deposit disposed of
    
    
    
    
    
    
    
    
    
    
    Other liabilities disposed of
    
    
    553
    
    
    
    36
    
    
    
    44,818
    
    
    
    36
    
    
    
    4Net balance sheet assets disposed of
    
    $
    454
    
    
    $
    69
    
    
    $
    313Considerations:Common shares exchanged
    
    $
    
    
    
    $
    249
    
    
    $
    322Transaction and other related costs
    
    
    (8
    )
    
    
    (7
    )
    
    
    (5
    )Net proceeds of disposal
    
    
    414
    
    
    
    
    
    
    
    Total consideration
    
    $
    406
    
    
    $
    242
    
    
    $
    317Pre-tax gain (loss) on sale
    
    $
    (48
    )(2)
    
    $
    173
    
    
    $
    4Cash and cash equivalents disposed of
    
    $
    133
    
    
    $
    8
    
    
    $
    2
  (1)
    For summary information see Note 3.(2)
    Loss accrued in 2002 and reported as part of the income (loss) from discontinued
operations. As a result of the plan of disposal for Clarica U.S., it was accounted for as a discontinued
operation in 2002. The components of the $36 loss from discontinued operations for 2002 shown in
the consolidated statements of operations are as follows: 2002REVENUE
    
    $
    945EXPENSES
    
    
    923Net operating income before income taxes
    
    
    22Income taxes expense
    
    
    10Net operating income
    
    
    12Gain (loss) on sale of Clarica U.S.
    
    
    (48
    )Income (loss) from discontinued operations, net of income taxes
    
    $
    (36
    )
 14
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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. Segmented Information The Company has six reportable segments: SLF Canada, SLF United States, MFS Investment Management
(MFS), SLF Asia, SLF United Kingdom and Corporate Capital. These reportable segments reflect the
Companys management structure and internal financial reporting. Each of these segments operates
in the financial services industry and has its own management. They derive their revenues
principally from mutual funds, investment management and annuities, life and health insurance, life
retrocession and financial reinsurance. Revenues not attributed to the strategic business units are
derived primarily from investments of a corporate nature and earnings on capital. Corporate Capital includes the run-off reinsurance operations and those other operations for which
management responsibility resides in head office. Net income (loss) from continuing operations in
this category is shown net of certain expenses borne centrally. As Clarica U.S. has been discontinued and the sale was completed on January 7, 2003, revenue,
expenses and net income (loss) from continuing operations for 2002 do not include these results. Inter-segment transactions consist primarily of internal financing agreements. They are measured
at market values prevailing when the arrangements were negotiated. Inter-segment revenue consists
of interest of $333 in 2004 ($352 in 2003 and $306 in 2002) and fee income of $44 in 2004 ($45 in
2003 and $68 in 2002). The results of the segments operations are discussed in the Managements Discussion and Analysis.
The results for MFS for 2004 include the $59 ($211 in 2003) net provision for regulatory issues and
other actions as described in Note 21. Results by segment for the years ended December 31United States
    
    
    
    
    
    
    United
    
    
    Corporate
    
    
    ConsolidationCanada
    
    
    Sun Life
    
    
    MFS
    
    
    Asia
    
    
    Kingdom
    
    
    Capital
    
    
    Adjustments
    
    Total2004Revenue
    
    $
    8,614
    
    
    $
    9,429
    
    
    $
    1,700
    
    
    $
    697
    
    
    $
    1,258
    
    
    $
    427
    
    
    $
    (377
    )
    
    $
    21,748Change in actuarial liabilities
    
    $
    (232
    )
    
    $
    1,332
    
    
    $
    
    
    
    $
    290
    
    
    $
    (81
    )
    
    $
    116
    
    
    $
    
    
    
    $
    1,425Interest on claims and deposits
    
    $
    87
    
    
    $
    17
    
    
    $
    
    
    
    $
    29
    
    
    $
    3
    
    
    $
    1
    
    
    $
    
    
    
    $
    137Interest expenses
    
    $
    132
    
    
    $
    135
    
    
    $
    15
    
    
    $
    
    
    
    $
    25
    
    
    $
    222
    
    
    $
    (334
    )
    
    $
    195Income taxes (benefit)
    
    $
    289
    
    
    $
    55
    
    
    $
    108
    
    
    $
    14
    
    
    $
    (4
    )
    
    $
    (169
    )
    
    $
    
    
    
    $
    293Net income (loss) from
continuing operations
    
    $
    979
    
    
    $
    392
    
    
    $
    114
    
    
    $
    45
    
    
    $
    173
    
    
    $
    (9
    )
    
    $
    
    
    
    $
    1,6942003Revenue
    
    $
    8,636
    
    
    $
    9,663
    
    
    $
    1,684
    
    
    $
    587
    
    
    $
    1,443
    
    
    $
    440
    
    
    $
    (397
    )
    
    $
    22,056Change in actuarial liabilities
    
    $
    456
    
    
    $
    1,046
    
    
    $
    
    
    
    $
    224
    
    
    $
    (60
    )
    
    $
    (156
    )
    
    $
    
    
    
    $
    1,510Interest on claims and deposits
    
    $
    84
    
    
    $
    18
    
    
    $
    
    
    
    $
    29
    
    
    $
    3
    
    
    $
    1
    
    
    $
    
    
    
    $
    135Interest expenses
    
    $
    117
    
    
    $
    152
    
    
    $
    23
    
    
    $
    
    
    
    $
    25
    
    
    $
    246
    
    
    $
    (354
    )
    
    $
    209Income taxes (benefit)
    
    $
    342
    
    
    $
    97
    
    
    $
    5
    
    
    $
    12
    
    
    $
    8
    
    
    $
    (77
    )
    
    $
    
    
    
    $
    387Net income (loss) from
continuing operations
    
    $
    826
    
    
    $
    305
    
    
    $
    (43
    )
    
    $
    37
    
    
    $
    203
    
    
    $
    (20
    )
    
    $
    
    
    
    $
    1,3082002Revenue
    
    $
    6,563
    
    
    $
    11,877
    
    
    $
    1,979
    
    
    $
    661
    
    
    $
    1,828
    
    
    $
    567
    
    
    $
    (374
    )
    
    $
    23,101Change in actuarial liabilities
    
    $
    535
    
    
    $
    2,500
    
    
    $
    
    
    
    $
    293
    
    
    $
    168
    
    
    $
    326
    
    
    $
    
    
    
    $
    3,822Interest on claims and deposits
    
    $
    74
    
    
    $
    29
    
    
    $
    
    
    
    $
    30
    
    
    $
    2
    
    
    $
    
    
    
    $
    
    
    
    $
    135Interest expenses
    
    $
    77
    
    
    $
    154
    
    
    $
    29
    
    
    $
    
    
    
    $
    28
    
    
    $
    211
    
    
    $
    (307
    )
    
    $
    192Income taxes (benefit)
    
    $
    191
    
    
    $
    38
    
    
    $
    109
    
    
    $
    11
    
    
    $
    (18
    )
    
    $
    (233
    )
    
    $
    
    
    
    $
    98Net income (loss) from
continuing operations
    
    $
    514
    
    
    $
    360
    
    
    $
    174
    
    
    $
    24
    
    
    $
    190
    
    
    $
    (229
    )
    

    $
    
    
    
    $
    1,033
 Assets by segment as at December 31United States
    
    
    
    
    
    
    United
    
    
    Corporate
    
    
    ConsolidationCanada
    
    
    Sun Life
    
    
    MFS
    
    
    Asia
    
    
    Kingdom
    
    
    Capital
    
    
    Adjustments
    
    Total2004General fund assets
    
    $
    51,752
    
    
    $
    39,641
    
    
    $
    824
    
    
    $
    2,292
    
    
    $
    10,214
    
    
    $
    3,878
    
    
    $
    (844
    )
    
    $
    107,757Segregated funds net assets
    
    $
    24,170
    
    
    $
    25,146
    
    
    $
    
    
    
    $
    32
    
    
    $
    7,216
    
    
    $
    
    
    
    $
    
    
    
    $
    56,5642003General fund assets
    
    $
    51,522
    
    
    $
    40,763
    
    
    $
    1,084
    
    
    $
    2,021
    
    
    $
    10,532
    
    
    $
    4,057
    
    
    $
    (770
    )
    
    $
    109,209Segregated funds net assets
    
    $
    22,535
    
    
    $
    24,519
    
    
    $
    
    
    
    $
    11
    
    
    $
    7,021
    
    
    $
    
    
    
    $
    
    
    
    $
    54,086
 15
Sun Life Financial Inc.




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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. Segmented Information (Contd) The following table shows revenue, net income (loss) from continuing operations and assets by
territory for Corporate Capital: 2004
    
    
    2003
    
    
    2002RevenueUnited States
    
    $
    285
    
    
    $
    134
    
    
    $
    181Other Countries
    
    
    142
    
    
    
    306
    
    
    
    386Total revenue
    
    $
    427
    
    
    $
    440
    
    
    $
    567Net income (loss) from continuing operations:United States
    
    $
    44
    
    
    $
    (63
    )
    
    $
    (241
    )Other Countries
    
    
    (53
    )
    
    
    43
    
    
    
    12Total net income (loss) from continuing operations
    
    $
    (9
    )
    
    $
    (20
    )
    
    $
    (229
    )Assets:General funds:United States
    
    $
    3,177
    
    
    $
    1,838
    
    
    $
    1,160Other countries
    
    
    701
    
    
    
    2,219
    
    
    
    2,788Total assets
    
    $
    3,878
    
    
    $
    4,057
    
    
    $
    3,948
 7. Fair Value of Financial Instruments Financial instruments are contractual rights or obligations to either receive or deliver an asset.
In an exchange of financial instruments, fair value refers to the amount that would be agreed
upon between willing knowledgeable parties. Estimated fair values do not necessarily represent the
values for which these financial instruments could have been sold at the dates of the consolidated
balance sheets. A significant portion of any difference between fair values and carrying values relates to invested
assets that are matched to liabilities as to duration, within specified limits. If these assets
are sold before maturity, the Company will reinvest the proceeds to ensure there are sufficient
assets to match liabilities. Consequently, changes in the fair values of assets backing
liabilities will tend to be offset by changes in the fair values of those liabilities. The fair values and the methods and assumptions used to estimate fair values for invested assets
are discussed in Note 8. Derivative financial instruments are discussed in Note 9. Fair values of
actuarial liabilities, future income taxes related to life insurance companies and deferred net
realized gains are disclosed in Note 12. The fair values and discussion of the method for
estimating these values for subordinated debt are included in Note 14. The carrying value and fair
value of amounts on deposit are $3,144 and $3,150, respectively, as at December 31, 2004 ($3,120
and $3,139, respectively, as at December 31, 2003). Fair values of fixed rate deposits are
determined by discounting the expected future cash flows using current market interest rates for
similar deposits. For amounts on deposit with no stated maturity, fair value is equal to carrying
value. 16
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##### Table of Contents



8. Invested Assets and Income The Company invests primarily in bonds, mortgages, stocks and real estate. The accounting
policy for each type of invested asset is described in Note 1. A) FAIR VALUE OF INVESTED ASSETS The carrying values and fair values of the Companys invested assets are shown in the following
table. 2004
    
    
    
    
    
    
    
    
    
    
    2003Carrying
    
    
    Fair
    
    
    
    
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Yield %
    
    
    Value
    
    
    Value
    
    
    Yield %ASSETSBonds
    
    $
    64,496
    
    
    $
    68,556
    
    
    
    6.22
    
    
    $
    66,090
    
    
    $
    70,092
    
    
    
    5.98Mortgages
    
    
    13,862
    
    
    
    14,576
    
    
    
    6.80
    
    
    
    13,601
    
    
    
    14,381
    
    
    
    7.00Stocks
    
    
    3,463
    
    
    
    3,376
    
    
    
    10.33
    
    
    
    3,473
    
    
    
    3,102
    
    
    
    7.48Real estate
    
    
    3,148
    
    
    
    3,421
    
    
    
    9.12
    
    
    
    3,067
    
    
    
    3,287
    
    
    
    8.89Policy loans
    
    
    2,936
    
    
    
    2,936
    
    
    
    6.50
    
    
    
    3,003
    
    
    
    3,003
    
    
    
    6.99Cash, cash equivalents and short-term securities
    
    
    5,966
    
    
    
    5,966
    
    
    
    n/a
    
    
    
    4,972
    
    
    
    4,973
    
    
    
    n/aOther invested assets
    
    
    3,046
    
    
    
    3,967
    
    
    
    n/a
    
    
    
    2,970
    
    
    
    3,414
    
    
    
    n/aTotal invested assets
    
    $
    96,917
    
    
    $
    102,798
    
    
    
    6.12
    
    
    $
    97,176
    
    
    $
    102,252
    
    
    
    5.79
 The fair value of publicly traded bonds is determined using quoted market prices. For non-publicly
traded bonds, fair value is determined using a discounted cash flow approach that includes
provisions for credit risk and assumes that the securities will be held to maturity. Fair value of
mortgages is determined by discounting the expected future cash flows using current market interest
rates for mortgages with similar credit risks and terms to maturity. Fair value of stocks is based
on quoted market prices, usually the last trade values. Fair value of real estate is determined by
reference to sales of comparable properties in the marketplace and the net present value of the
expected future cash flows, discounted using current interest rates. Due to their nature, the fair
values of policy loans and cash and cash equivalents are assumed to be equal to their carrying
values. The fair values of short-term securities are based on market yields. The fair values of
other invested assets are determined by reference to market prices for similar investments. Other
invested assets in the table above includes the Companys
investment in CI Funds with a carrying value of
$1,014 and a fair value of $1,805 ($987 and $1,407, respectively, in 2003). Yield is calculated
based on total net investment income divided by the total of the average carrying value of invested
assets, which includes accrued investment income net of deferred net realized gains. B) INVESTMENT POLICIES It is the Companys policy to diversify all investment portfolios. The Companys mortgage
loans, stocks and real estate investments are diversified by type and location and, for mortgage
loans, by borrower. Interest rate risk, which is the potential for loss due to interest rate
fluctuations, is discussed in Note 12. Credit risk is the risk of financial loss resulting from the failure of debtors to make
payments of interest or principal when due. The Company controls this risk through detailed credit
and underwriting policies, as well as through setting counterparty exposure limits. The Company
maintains policies which set limits, based on consolidated equity, to the credit exposure for
investments in any single issuer and in any associated group of issuers. Exceptions exist for
investments in securities which are issued or guaranteed by either 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. C) INVESTED ASSETS BY TYPE i) BONDS The carrying value and fair value of bonds by rating are shown in the table below. 2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueBonds by credit rating:AAA
    
    $
    16,895
    
    
    $
    17,549
    
    
    $
    18,714
    
    
    $
    19,499AA
    
    
    8,714
    
    
    
    9,492
    
    
    
    7,915
    
    
    
    8,438A
    
    
    19,187
    
    
    
    20,701
    
    
    
    18,952
    
    
    
    20,393BBB
    
    
    17,695
    
    
    
    18,662
    
    
    
    17,980
    
    
    
    19,080BB & lower
    
    
    2,005
    
    
    
    2,152
    
    
    
    2,529
    
    
    
    2,682Total bonds
    
    $
    64,496
    
    
    $
    68,556
    
    
    $
    66,090
    
    
    $
    70,092
 Investment grade bonds are those rated BBB and above. The Companys bond portfolio has 96.9%
(96.2% in 2003) invested in investment grade bonds based on carrying value. 17
Sun Life Financial Inc.




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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. Invested Assets and Income (Contd) Gross unrealized gains (losses) on bonds are shown in the tables below. Gross unrealized gains
and losses are not brought into income or included in the carrying value on the consolidated
balance sheets. 2004Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueIssued or guaranteed by:Canadian federal government
    
    $
    5,601
    
    
    $
    218
    
    
    $
    
    
    
    $
    5,819Canadian provincial and municipal governments
    
    
    5,716
    
    
    
    742
    
    
    
    
    
    
    
    6,458U.S. Treasury and other U.S. agencies

    
    
    1,224
    
    
    
    52
    
    
    
    (4
    )
    
    
    1,272Other foreign governments
    
    
    2,805
    
    
    
    179
    
    
    
    (21
    )
    
    
    2,963Corporate
    
    
    40,351
    
    
    
    2,845
    
    
    
    (85
    )
    
    
    43,111Asset-backed securities
    
    
    8,799
    
    
    
    221
    
    
    
    (87
    )
    
    
    8,933Total bonds
    
    $
    64,496
    
    
    $
    4,257
    
    
    $
    (197
    )
    
    $
    68,5562003Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueIssued or guaranteed by:Canadian federal government
    
    $
    6,209
    
    
    $
    161
    
    
    $
    (1
    )
    
    $
    6,369Canadian provincial and municipal governments
    
    
    5,106
    
    
    
    588
    
    
    
    (3
    )
    
    
    5,691U.S. Treasury and other U.S. agencies
    
    
    1,143
    
    
    
    44
    
    
    
    (13
    )
    
    
    1,174Other foreign governments
    
    
    3,437
    
    
    
    196
    
    
    
    (32
    )
    
    
    3,601Corporate
    
    
    40,604
    
    
    
    3,118
    
    
    
    (151
    )
    
    
    43,571Asset-backed securities
    
    
    9,591
    
    
    
    208
    
    
    
    (113
    )
    
    
    9,686Total bonds
    
    $
    66,090
    
    
    $
    4,315
    
    
    $
    (313
    )
    
    $
    70,092
 The carrying value of bonds by issuer country is as follows: 2004
    
    
    2003Canada
    
    $
    25,556
    
    
    $
    25,708United States
    
    
    27,857
    
    
    
    29,036United Kingdom
    
    
    6,989
    
    
    
    7,465Other
    
    
    4,094
    
    
    
    3,881Total bonds
    
    $
    64,496
    
    
    $
    66,090
 The contractual maturities of bonds as at December 31 are shown in the table below. Bonds that are
not due at a single maturity date are included in the table in the year of final maturity.
Asset-backed securities that are not due at a single maturity date are shown separately. Actual
maturities could differ from contractual maturities because of the borrowers right to call or
right to prepay obligations, with or without prepayment penalties. 2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueDue in one year or less
    
    $
    3,770
    
    
    $
    3,801
    
    
    $
    3,449
    
    
    $
    3,487Due in years two through five
    
    
    12,789
    
    
    
    13,206
    
    
    
    15,366
    
    
    
    16,011Due in years six through ten
    
    
    14,671
    
    
    
    15,566
    
    
    
    14,318
    
    
    
    15,269Due after ten years
    
    
    24,467
    
    
    
    27,050
    
    
    
    23,366
    
    
    
    25,639Asset-backed securities
    
    
    8,799
    
    
    
    8,933
    
    
    
    9,591
    
    
    
    9,686Total bonds
    
    $
    64,496
    
    
    $
    68,556
    
    
    $
    66,090
    
    
    $
    70,092
 ii) MORTGAGES The carrying value of non-residential and residential mortgages by geographic location is shown in
the table below. Residential mortgages include mortgages for single and multiple family
dwellings. 2004
    
    
    2003Non-residential
    
    
    Residential
    
    
    Total
    
    
    Non-residential
    
    
    Residential
    
    
    TotalCanada
    
    $
    5,684
    
    
    $
    3,676
    
    
    $
    9,360
    
    
    $
    5,799
    
    
    $
    3,952
    
    
    $
    9,751United States
    
    
    4,098
    
    
    
    172
    
    
    
    4,270
    
    
    
    3,465
    
    
    
    92
    
    
    
    3,557United Kingdom
    
    
    231
    
    
    
    1
    
    
    
    232
    
    
    
    292
    
    
    
    1
    
    
    
    293Total mortgages
    
    $
    10,013
    
    
    $
    3,849
    
    
    $
    13,862
    
    
    $
    9,556
    
    
    $
    4,045
    
    
    $
    13,601
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. Invested Assets and Income (Contd) At December 31, 2004, scheduled mortgage loan maturities, before allowances for losses, are as
follows: Year
    
    Amount2005
    
    $
    1,1172006
    
    
    1,3152007
    
    
    1,2572008
    
    
    1,3022009
    
    
    1,165Thereafter
    
    
    7,743Total mortgages
    
    $
    13,899
 Actual payments could differ from the scheduled mortgage loan maturities because borrowers may have
the right to prepay obligations, with or without prepayment penalties. iii) STOCKS The carrying value of stocks by issuer country is as follows: 2004
    
    
    2003Canada
    
    $
    791
    
    
    $
    802United States
    
    
    1,105
    
    
    
    1,014United Kingdom
    
    
    1,417
    
    
    
    1,505Other
    
    
    150
    
    
    
    152Total stocks
    
    $
    3,463
    
    
    $
    3,473
 Gross unrealized gains (losses) on stocks are shown in the following table. Gross
    
    
    Gross
    
    
    EstimatedCarrying
    
    
    Original
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairValue
    
    
    Cost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueTotal 2004
    
    $
    3,463
    
    
    $
    2,695
    
    
    $
    744
    
    
    $
    (63
    )
    
    $
    3,376Total 2003
    
    $
    3,473
    
    
    $
    2,660
    
    
    $
    549
    
    
    $
    (107
    )
    
    $
    3,102
 iv) REAL ESTATE The carrying value of real estate by geographic location is as follows: 2004
    
    
    2003Canada
    
    $
    1,869
    
    
    $
    1,874United States
    
    
    917
    
    
    
    837United Kingdom
    
    
    360
    
    
    
    354Other
    
    
    2
    
    
    
    2Total real estate
    
    $
    3,148
    
    
    $
    3,067
 Real estate includes real estate held for investment and real estate held for sale, as described in
Note 1. The carrying value and fair value of real estate in each of these categories is shown in
the table below. 2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueReal estate held for investment
    
    $
    3,139
    
    
    $
    3,408
    
    
    $
    3,057
    
    
    $
    3,273Real estate held for sale
    
    
    9
    
    
    
    13
    
    
    
    10
    
    
    
    14Total real estate
    
    $
    3,148
    
    
    $
    3,421
    
    
    $
    3,067
    
    
    $
    3,287
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. Invested Assets and Income (Contd) D) IMPAIRED INVESTED ASSETS The Company has impaired invested assets with specific allowances and other sectoral allowances, at
December 31, as follows: 2004
    
    
    2003Impaired
    
    
    Allowance
    
    
    Impaired
    
    
    AllowanceCarrying Value
    (1)
    
    for Losses
    (2)
    
    Carrying Value
    (1)
    
    for Losses
    (2)Bonds
    
    $
    333
    
    
    $
    213
    
    
    $
    574
    
    
    $
    302Mortgages
    
    
    74
    
    
    
    37
    
    
    
    79
    
    
    
    42Other
    
    
    34
    
    
    
    13
    
    
    
    46
    
    
    
    22Total
    
    $
    441
    
    
    $
    263
    
    
    $
    699
    
    
    $
    366
  (1)
    
    Impaired carrying value shown above is shown gross, before allowance for losses.
Includes $12 in 2004 ($25 in 2003) of impaired mortgages that have no allowance for losses.
Impaired mortgage loans with no allowance for losses are loans for which, at a minimum, either
the fair value of the collateral or the expected future cash flows exceed the carrying value.(2)
    
    Includes sectoral allowances of $74 and $24 for bonds and mortgages,
respectively, in 2004 ($92 and $32, respectively, in 2003). The remaining allowances are
specific allowances. Additional information related to impaired invested assets is shown in the following table. 2004
    
    
    2003Mortgages with scheduled payments 90 days or more in arrears:Carrying value
    
    $
    22
    
    
    $
    20Percentage of total mortgages before allowances
    
    
    0.2%
    
    
    
    0.2%Weighted average recorded investment in impaired mortgage loans, before allowances
    
    $
    66
    
    
    $
    85Interest received on impaired mortgage loans (recorded as received)
    
    $
    4
    
    
    $
    5Carrying value of bonds, mortgages and real estate (including specific allowances)
that were non-income producing for the preceding 12 months
    
    $
    100
    
    
    $
    129
 The changes in the allowances for losses are as follows: Bonds
    
    
    Mortgages
    
    
    Other
    
    
    TotalBalance, January 1, 2003
    
    $
    417
    
    
    $
    63
    
    
    $
    15
    
    
    $
    495Provision for losses
    
    
    108
    
    
    
    (6
    )
    
    
    11
    
    
    
    113Write-offs, net of recoveries
    
    
    (159
    )
    
    
    (7
    )
    
    
    (2
    )
    
    
    (168
    )Effect of changes in currency exchange rates
    
    
    (64
    )
    
    
    (8
    )
    
    
    (2
    )
    
    
    (74
    )Balance, December 31, 2003
    
    $
    302
    
    
    $
    42
    
    
    $
    22
    
    
    $
    366Provision for losses
    
    
    22
    
    
    
    
    
    
    
    (1
    )
    
    
    21Write-offs, net of recoveries
    
    
    (92
    )
    
    
    (2
    )
    
    
    (7
    )
    
    
    (101
    )Effect of changes in currency exchange rates
    
    
    (19
    )
    
    
    (3
    )
    
    
    (1
    )
    
    
    (23
    )Balance, December 31, 2004
    
    $
    213
    
    
    $
    37
    
    
    $
    13
    
    
    $
    263
 E) DEFERRED NET REALIZED GAINS Deferred net realized gains are realized gains and losses which have not yet been recognized in
income. The changes in deferred net realized gains are shown in the table below. Bonds
    
    
    Mortgages
    
    
    Stocks
    
    
    Real Estate
    
    
    Derivatives
    
    
    TotalBalance, January 1, 2003
    
    $
    1,832
    
    
    $
    83
    
    
    $
    1,450
    
    
    $
    191
    
    
    $
    (100
    )
    
    $
    3,456Net realized gains (losses) for the period
    
    
    509
    
    
    
    87
    
    
    
    (4
    )
    
    
    7
    
    
    
    (59
    )
    
    
    540Amortization of deferred net realized gains
    
    
    (221
    )
    
    
    (28
    )
    
    
    (240
    )
    
    
    (21
    )
    
    
    14
    
    
    
    (496
    )Effect of changes in currency exchange rates
    
    
    (208
    )
    
    
    (7
    )
    
    
    (150
    )
    
    
    (13
    )
    
    
    2
    
    
    
    (376
    )Balance, December 31, 2003
    
    $
    1,912
    
    
    $
    135
    
    
    $
    1,056
    
    
    $
    164
    
    
    $
    (143
    )
    
    $
    3,124Net realized gains (losses) for the period
    
    
    526
    
    
    
    60
    
    
    
    148
    
    
    
    56
    
    
    
    114
    
    
    
    904Amortization of deferred net realized gains
    
    
    (277
    )
    
    
    (32
    )
    
    
    (222
    )
    
    
    (23
    )
    
    
    12
    
    
    
    (542
    )Effect of changes in currency exchange rates
    
    
    (14
    )
    
    
    (5
    )
    
    
    (8
    )
    
    
    (1
    )
    
    
    8
    
    
    
    (20
    )Balance, December 31, 2004
    
    $
    2,147
    
    
    $
    158
    
    
    $
    974
    
    
    $
    196
    
    
    $
    (9
    )
    
    $
    3,466
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. Invested Assets and Income (Contd) F) NET INVESTMENT INCOME Net investment income has the following components: 2004
    
    
    2003
    
    
    2002Interest from:Bonds
    
    $
    3,807
    
    
    $
    3,831
    
    
    $
    3,810Mortgages
    
    
    899
    
    
    
    951
    
    
    
    899Policy loans
    
    
    202
    
    
    
    224
    
    
    
    195Cash, cash equivalents and short-term securities
    
    
    113
    
    
    
    134
    
    
    
    122Interest income
    
    
    5,021
    
    
    
    5,140
    
    
    
    5,026Dividends from stocks
    
    
    116
    
    
    
    103
    
    
    
    135Real estate income (net)
    
    
    229
    
    
    
    222
    
    
    
    223Amortization of deferred net realized gains
    
    
    542
    
    
    
    496
    
    
    
    433Amortization of unrealized gains and losses
    
    
    (44
    )
    
    
    (140
    )
    
    
    (186
    )Derivative realized and unrealized gains and losses(1)
    
    
    39
    
    
    
    (85
    )
    
    
    (89
    )Other items (net) (2)
    
    
    145
    
    
    
    184
    
    
    
    2036,048
    
    
    
    5,920
    
    
    
    5,745Provisions for losses on investments
    
    
    (21
    )
    
    
    (113
    )
    
    
    (365
    )Investment expenses and taxes
    
    
    (103
    )
    
    
    (104
    )
    
    
    (99
    )Impact of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (150
    )Total net investment income
    
    $
    5,924
    
    
    $
    5,703
    
    
    $
    5,131
  (1)
    
    Consists of realized and unrealized gains on derivatives that are reported at
fair value. Additional derivative income (loss) of $(72) ($(47) in 2003, $(122) in 2002) is
included in net investment income.(2)
    
    Includes gains and losses on sales of subsidiaries (Note 5). G) SECURITIES LENDING The Company engages in securities lending to generate additional income. Certain securities from
its portfolio are loaned to other institutions for short periods. Collateral, which exceeds the
fair value of the loaned securities, is deposited by the borrower with a lending agent, usually a
securities custodian, and maintained by the lending agent until the underlying security has been
returned to the Company. The fair value of the loaned securities is monitored on a daily basis
with additional collateral obtained or refunded as the fair values fluctuate. It is the Companys
practice to obtain a guarantee from the lending agent against counterparty default, including
collateral deficiency. At December 31, 2004, the Company had loaned securities (which are included
in invested assets) with a carrying value and fair value of approximately $2,071 and $2,130,
respectively ($568 and $609, respectively, in 2003). H) LOAN SECURITIZATIONS During the year, the Company sold commercial mortgages to a trust which subsequently issued
securities backed by the commercial mortgages. The Company was retained to service and administer
the mortgages and also retained a subordinated investment interest in the issued securities.
Similar transactions occurred in 2003 and 2002. Details of these transactions are shown in the
following table. 2004
    
    
    2003
    
    
    2002Carrying value of mortgages sold
    
    $
    161
    
    
    $
    623
    
    
    $
    497Gain on sale
    
    $
    18
    
    
    $
    70
    
    
    $
    28
 As at December 31, 2004, the key assumptions used in the discounted cash flow models to determine
the fair value of retained interest amounts and the sensitivity of these fair values to an
immediate 10% and 20% adverse change in key assumptions are as follows: 2004
    
    
    2003Mortgages
    
    
    Bonds
    
    
    Mortgages
    
    
    BondsCarrying value of retained interests
    
    $
    134
    
    
    $
    4
    
    
    $
    161
    
    
    $
    4Fair value of retained interests
    
    $
    146
    
    
    $
    4
    
    
    $
    174
    
    
    $
    5Weighted average remaining life (in years)
    
    
    3.6-20.4
    
    
    
    7.7
    
    
    
    5.5-21.24
    
    
    
    8.7Discount rate
    
    
    2.5-7.0%
    
    
    
    11.1%
    
    
    
    2.5-7.0%
    
    
    
    11.1%Impact on fair value of 10% adverse change
    
    $
    2
    
    
    $
    
    
    
    $
    6
    
    
    $
    1Impact on fair value of 20% adverse change
    
    $
    5
    
    
    $
    
    
    
    $
    10
    
    
    $
    1Anticipated credit losses
    
    
    
    
    
    
    0.6%
    
    
    
    
    
    
    
    0.6%Impact on fair value of 10% adverse change
    
    
    
    
    
    $
    1
    
    
    
    
    
    
    $
    1Impact on fair value of 20% adverse change
    
    
    
    
    
    $
    1
    
    
    
    
    
    
    $
    2
 The
sensitivity analysis in the preceding table is hypothetical and should be used with caution. As
the figures indicate, changes in fair value based on variations in assumptions generally cannot be
extrapolated because the relationship of the change in the assumption to the change in fair value
may not be linear. Also, in this table, the effect of a variation in a particular assumption on
the fair value of the retained interest is calculated without changing any other assumption. In
reality, changes in one factor may result in changes in another, which might magnify or counteract
the sensitivities. The credit losses, net of recoveries, of the securitized bond portfolio for 2004 were $nil ($4 in
2003). As at December 31, 2004, the securitized bond portfolio included bonds of $2 that were 90
days or more past due ($17 in 2003). 21
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. Invested Assets and Income (Contd) The following table summarizes certain cash flows received from securitization trusts in 2004,
2003 and 2002: 2004
    
    
    2003
    
    
    2002Mortgages
    
    
    Bonds
    
    
    Mortgages
    
    
    Bonds
    
    
    Mortgages
    
    
    BondsProceeds from new securitizations
    
    $
    179
    
    
    $
    
    
    
    $
    693
    
    
    $
    
    
    
    $
    525
    
    
    $
    Cash flows received on retained interests and servicing fees
    
    $
    57
    
    
    $
    
    
    
    $
    26
    
    
    $
    
    
    
    $
    17
    
    
    $
    2
 9. Derivative Financial Instruments The Company uses derivative instruments for hedging and risk management purposes or in
replication strategies to reproduce permissible investments. The accounting policies for the
derivative financial instruments are described in Note 1. The Company monitors the gap in market
sensitivities between liabilities and supporting assets for its hedging strategies. That gap is
managed within defined tolerance limits by, where appropriate, the use of derivative instruments.
Models and techniques are used by the Company to ensure the continuing effectiveness of its hedging
and risk management strategies. Derivative instruments are either exchange-traded or over-the-counter contracts negotiated between
two counterparties. The notional amount is the basis for calculating payments and is generally not
the actual amount exchanged. Since counterparty failure in an over-the-counter derivative
transaction could render it ineffective for hedging purposes, the Company transacts its derivative
contracts with counterparties rated AA or better. In limited circumstances, the Company will enter
into transactions with lower rated counterparties if credit enhancement features are included. As
at December 31, 2004, the Company had assets of $63 ($94 in 2003) pledged as collateral for
derivative contracts. The Company has the following amounts outstanding at December 31: 2004Notional AmountsFair Value
    
    
    Term to Maturity
    
    
    TotalUnder
    
    
    1 to
    
    
    Over
    
    
    NotionalPositive(1)
    
    
    Net
    
    
    1 year
    
    
    5 years
    
    
    5 years
    
    
    AmountInterest rate contracts
    
    $
    215
    
    
    $
    (148
    )
    
    $
    1,776
    
    
    $
    4,040
    
    
    $
    8,567
    
    
    $
    14,383Foreign exchange contracts
    
    
    793
    
    
    
    720
    
    
    
    2,395
    
    
    
    881
    
    
    
    1,858
    
    
    
    5,134Equity and other contracts(2)
    
    
    561
    
    
    
    508
    
    
    
    2,510
    
    
    
    6,404
    
    
    
    1,786
    
    
    
    10,700Total
    
    $
    1,569
    
    
    $
    1,080
    
    
    $
    6,681
    
    
    $
    11,325
    
    
    $
    12,211
    
    
    $
    30,217Over-the-counter contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    29,247Exchange-traded contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    970
 2003Notional AmountsFair Value
    
    
    Term to Maturity
    
    
    TotalUnder
    
    
    1 to
    
    
    Over
    
    
    NotionalPositive(1)
    
    
    Net
    
    
    1 year
    
    
    5 years
    
    
    5 years
    
    
    AmountInterest rate contracts
    
    $
    249
    
    
    $
    (173
    )
    
    $
    2,271
    
    
    $
    5,781
    
    
    $
    6,325
    
    
    $
    14,377Foreign exchange contracts
    
    
    599
    
    
    
    570
    
    
    
    892
    
    
    
    1,119
    
    
    
    1,657
    
    
    
    3,668Equity and other contracts
    
    
    385
    
    
    
    318
    
    
    
    3,836
    
    
    
    1,770
    
    
    
    2,512
    
    
    
    8,118Total
    
    $
    1,233
    
    
    $
    715
    
    
    $
    6,999
    
    
    $
    8,670
    
    
    $
    10,494
    
    
    $
    26,163Over-the-counter contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,924Exchange-traded contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    239
  (1)
    
    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.(2)
    
    Equity and other contracts in 2004 includes an equity forward with a fair
value of $4 hedging the variation in the cash flows associated with the anticipated payments
under certain stock-based compensation plans expected to occur in 2007. The fair value that
has not been recognized ($3) will be recognized in net income as the liability is accrued for
the stock-based compensation plan over the vesting period. Fair values of interest rate swap contracts and foreign exchange swap and forward contracts are
determined by discounting expected future cash flows using current market interest and exchange
rates for similar instruments. Fair values of options, financial futures and common stock index
swaps are based on the quoted market prices or the value of underlying securities or indices. 22
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10. Goodwill and Intangible Assets GOODWILL In addition to the goodwill of $5,471 ($5,573 in 2003) shown on the consolidated balance sheets,
goodwill of $395 ($396 in 2003) for investments accounted for by the equity method is included in
other invested assets. There were no write-downs of goodwill due to impairment during the years
ended December 31, 2004, 2003 and 2002. Changes in goodwill of subsidiaries and investments accounted for by the equity method are as
follows: United
    
    
    
    
    
    
    CorporateCanada
    
    
    States
    
    
    Asia
    
    
    Capital
    
    
    TotalBalance, January 1, 2003
    
    $
    3,861
    
    
    $
    2,010
    
    
    $
    30
    
    
    $
    277
    
    
    $
    6,178Acquisitions
    
    
    190
    
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    238Dispositions
    
    
    (3
    )
    
    
    (41
    )
    
    
    (1
    )
    
    
    
    
    
    
    (45
    )Effect of changes in currency exchange rates
    
    
    
    
    
    
    (360
    )
    
    
    
    
    
    
    (42
    )
    
    
    (402
    )Balance, December 31, 2003
    
    $
    4,048
    
    
    $
    1,609
    
    
    $
    29
    
    
    $
    283
    
    
    $
    5,969Acquisitions
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    43Dispositions
    
    
    (17
    )
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (18
    )Effect of changes in currency exchange rates
    
    
    
    
    
    
    (112
    )
    
    
    
    
    
    
    (16
    )
    
    
    (128
    )Balance, December 31, 2004
    
    $
    4,041
    
    
    $
    1,497
    
    
    $
    28
    
    
    $
    300
    
    
    $
    5,866
 INTANGIBLE ASSETS In addition to the intangible assets of $751 ($763 in 2003) shown on the consolidated balance
sheets, intangible assets of $744 ($744 in 2003) for investments accounted for by the equity method
are included in other invested assets. Amortization of intangible assets recorded in operating
expenses during the year was $22 ($24 in 2003 and $17 in 2002). There were no write-downs of
intangibles due to impairment during the years ended December 31, 2004, 2003 and 2002. As at
December 31, 2004, the components of the intangible assets are as follows: 2004
    
    
    2003Gross carrying
    
    
    Accumulated
    
    
    Net
    
    
    Gross carrying
    
    
    Accumulated
    
    
    Netamount
    
    
    amortization
    
    
    amount
    
    
    amount
    
    
    amortization
    
    
    amountAmortizable intangible assets:Sales potential of field force
    
    $
    400
    
    
    $
    25
    
    
    $
    375
    
    
    $
    400
    
    
    $
    16
    
    
    $
    384Asset administration contracts
    
    
    201
    
    
    
    21
    
    
    
    180
    
    
    
    201
    
    
    
    14
    
    
    
    187Banking distribution channel
    
    
    33
    
    
    
    10
    
    
    
    23
    
    
    
    36
    
    
    
    8
    
    
    
    28Other
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    1
    
    
    
    2636
    
    
    
    57
    
    
    
    579
    
    
    
    640
    
    
    
    39
    
    
    
    601Non-amortizable intangible assets:Fund management contracts
    
    
    850
    
    
    
    
    
    
    
    850
    
    
    
    839
    
    
    
    
    
    
    
    839Brand name
    
    
    54
    
    
    
    
    
    
    
    54
    
    
    
    54
    
    
    
    
    
    
    
    54State licenses
    
    
    12
    
    
    
    
    
    
    
    12
    
    
    
    13
    
    
    
    
    
    
    
    13916
    
    
    
    
    
    
    
    916
    
    
    
    906
    
    
    
    
    
    
    
    906Total intangible assets
    
    $
    1,552
    
    
    $
    57
    
    
    $
    1,495
    
    
    $
    1,546
    
    
    $
    39
    
    
    $
    1,507
 11. Other Assets Other assets consist of the following: 2004
    
    
    2003Accounts receivable
    
    $
    1,244
    
    
    $
    1,772Investment income due and accrued
    
    
    1,121
    
    
    
    1,153Future income taxes (Note 20)
    
    
    722
    
    
    
    977Deferred acquisition costs
    
    
    362
    
    
    
    548Prepaid expenses
    
    
    219
    
    
    
    188Outstanding premiums
    
    
    294
    
    
    
    389Accrued benefit asset (Note 22)
    
    
    438
    
    
    
    435Capital assets
    
    
    168
    
    
    
    196Other
    
    
    50
    
    
    
    39Total other assets
    
    $
    4,618
    
    
    $
    5,697
 Amortization of deferred acquisition costs charged to income amounted to $179 in 2004 ($234 and
$316 in 2003 and 2002, respectively). Capital assets are carried at a cost of $591 ($601 in 2003), less accumulated depreciation and
amortization of $423 ($405 in 2003). Depreciation and amortization charged to income totalled $62
($67 and $75 in 2003 and 2002, respectively). 23
Sun Life Financial Inc.




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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. Actuarial Liabilities and Other Policy Liabilities A) ACTUARIAL POLICIES Actuarial liabilities and other policy liabilities represent the estimated amounts which, together
with estimated future premiums and net investment income, will provide for outstanding claims,
estimated future benefits, policyholders dividends, taxes (other than income taxes) and expenses
on in-force policies. In calculating actuarial liabilities and other policy liabilities, assumptions must be made about
the timing and amount of many events, including death, accident or sickness, investment, inflation,
policy termination, expenses, taxes, premiums, commissions and policyholder dividends. The general
approaches to the setting of assumptions used by the Company are described later in this note. The Company uses best estimate assumptions for expected future experience. Uncertainty is inherent
in the process, as no one can accurately predict the future. Some assumptions relate to events
that are anticipated to occur many years in the future and are likely to require subsequent
revision. Additional provisions are included in the actuarial liabilities to provide for possible
adverse deviations from the best estimates. If the assumption is more susceptible to change or if
the actuary is less certain about the underlying best estimate assumption, a correspondingly larger
provision is included in the actuarial liabilities. In determining these provisions, the Company ensures: 
    When taken one at a time, each provision is reasonable with respect to the underlying best estimate assumption,
and the extent of uncertainty present in making that assumption. 
    In total, the cumulative effect of all provisions is reasonable with respect to the total actuarial liabilities. With the passage of time and resulting reduction in estimation risk, the provisions are released
into income. In recognition of the long-term nature of policy liabilities, the margin for possible
deviations generally increases for contingencies further in the future. The best estimate
assumptions and margins for adverse deviations are reviewed annually and revisions are made where
deemed necessary and prudent. Provision for Policyholder Dividends An amount equal to the earned and accrued portion of policyholder dividends including earned and
accrued terminal dividends is shown as a provision for policyholder dividends. Actuarial
liabilities provide for the payment of policyholder dividends that are forecasted to be paid over
the next 12 months and beyond, in excess of dividends earned and accrued. Both liabilities are
determined taking into account the scale of dividends approved by the Board and the expectation
that future dividends will be adjusted to reflect future experience. Policyholder dividends of
$809 are included in policyholder dividends and interest on claims and deposits in the consolidated
statements of operations ($867 in 2003 and $899 in 2002, on a restated basis). B) COMPOSITION OF ACTUARIAL LIABILITIES AND OTHER POLICY LIABILITIES The actuarial liabilities and other policy liabilities consist of the following: 2004United
    
    
    
    
    
    
    United
    
    
    OtherCanada
    
    
    States
    
    
    Asia
    
    
    Kingdom
    
    
    Operations
    (1)
    
    TotalIndividual participating life
    
    $
    11,133
    
    
    $
    5,137
    
    
    $
    1,042
    
    
    $
    3,648
    
    
    $
    92
    
    
    $
    21,052Individual non-participating life
    
    
    1,797
    
    
    
    4,129
    
    
    
    199
    
    
    
    (20
    )
    
    
    330
    
    
    
    6,435Group life
    
    
    1,227
    
    
    
    121
    
    
    
    1
    
    
    
    4
    
    
    
    
    
    
    
    1,353Individual annuities
    
    
    10,040
    
    
    
    19,038
    
    
    
    
    
    
    
    3,553
    
    
    
    
    
    
    
    32,631Group annuities
    
    
    5,999
    
    
    
    3,057
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,056Health insurance
    
    
    3,228
    
    
    
    447
    

    
    
    (1
    )
    
    
    
    
    
    
    57
    
    
    
    3,731Total actuarial liabilities
    
    
    33,424
    
    
    
    31,929
    
    
    
    1,241
    
    
    
    7,185
    
    
    
    479
    
    
    
    74,258Add: Other policy liabilities(2)
    
    
    793
    
    
    
    420
    
    
    
    36
    
    
    
    100
    
    
    
    449
    
    
    
    1,798Actuarial liabilities and other policy liabilities
    
    $
    34,217
    
    
    $
    32,349
    
    
    $
    1,277
    
    
    $
    7,285
    
    
    $
    928
    
    
    $
    76,056
 2003United
    
    
    
    
    
    
    United
    
    
    OtherCanada
    
    
    States
    
    
    Asia
    
    
    Kingdom
    
    
    Operations
    (1)
    
    TotalIndividual participating life
    
    $
    10,746
    
    
    $
    5,338
    
    
    $
    874
    
    
    $
    3,743
    
    
    $
    85
    
    
    $
    20,786Individual non-participating life
    
    
    1,605
    
    
    
    3,359
    
    
    
    171
    
    
    
    (27
    )
    
    
    313
    
    
    
    5,421Group life
    
    
    1,333
    
    
    
    116
    
    
    
    1
    
    
    
    25
    
    

    
    
    
    
    
    1,475Individual annuities
    
    
    10,680
    
    
    
    19,315
    
    
    
    
    
    
    
    3,433
    
    
    
    
    
    
    
    33,428Group annuities
    
    
    6,181
    
    
    
    4,397
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,578Health insurance
    
    
    3,131
    
    
    
    451
    
    
    
    
    
    
    
    
    
    
    
    54
    
    
    
    3,636Total actuarial liabilities
    
    
    33,676
    
    
    
    32,976
    
    
    
    1,046
    
    
    
    7,174
    
    
    
    452
    
    
    
    75,324Add: Other policy liabilities(2)
    
    
    773
    
    
    
    420
    
    
    
    41
    
    
    
    124
    
    
    
    672
    
    
    
    2,030Actuarial liabilities and other policy liabilities
    
    $
    34,449
    
    
    $
    33,396
    
    
    $
    1,087
    
    
    $
    7,298
    
    
    $
    1,124
    
    
    $
    77,354
  (1)
    
    Primarily business from the run-off reinsurance operations.(2)
    
    Consists of policy benefits payable, provisions for unreported claims, provisions
for policyholder dividends and provisions for experience rating refunds. 24
www.sunlife.com Annual Report 2004




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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. Actuarial Liabilities and Other Policy Liabilities (Contd) C) TOTAL ASSETS SUPPORTING ACTUARIAL LIABILITIES, EQUITY AND OTHER The following tables show the total assets supporting actuarial liabilities, equity and other: 2004Bonds
    
    
    Mortgages
    
    
    Stocks
    
    
    Real Estate
    
    
    Other
    
    
    TotalIndividual participating life
    
    $
    13,116
    
    
    $
    3,400
    
    
    $
    2,653
    
    
    $
    2,153
    
    
    $
    4,727
    
    
    $
    26,049Individual non-participating life
    
    
    5,182
    
    
    
    1,175
    
    
    
    288
    
    
    
    7
    
    
    
    1,309
    
    
    
    7,961Group life
    
    
    1,684
    
    
    
    562
    
    
    
    8
    
    
    
    26
    
    
    
    222
    
    
    
    2,502Individual annuities
    
    
    28,322
    
    
    
    4,810
    
    
    
    51
    
    
    
    62
    
    
    
    2,512
    
    
    
    35,757Group annuities
    
    
    7,070
    
    
    
    2,281
    
    
    
    32
    
    
    
    121
    
    
    
    791
    
    
    
    10,295Health insurance
    
    
    4,685
    
    
    
    1,358
    
    
    
    11
    
    
    
    40
    
    
    
    440
    
    
    
    6,534Equity and other
    
    
    4,437
    
    
    
    276
    
    
    
    420
    
    
    
    739
    
    
    
    12,787
    
    
    
    18,659Total assets
    
    $
    64,496
    
    
    $
    13,862
    
    
    $
    3,463
    
    
    $
    3,148
    
    
    $
    22,788
    
    
    $
    107,757
 2003Bonds
    
    
    Mortgages
    
    
    Stocks
    
    
    Real Estate
    
    
    Other
    
    
    TotalIndividual participating life
    
    $
    12,544
    
    
    $
    3,626
    
    
    $
    2,691
    
    
    $
    2,094
    
    
    $
    4,617
    
    
    $
    25,572Individual non-participating life
    
    
    4,293
    
    
    
    885
    
    
    
    259
    
    
    
    5
    
    
    
    1,213
    
    
    
    6,655Group life
    
    
    1,672
    
    
    
    573
    
    
    
    17
    
    
    
    21
    
    
    
    346
    
    
    
    2,629Individual annuities
    
    
    28,163
    
    
    
    4,535
    
    
    
    58
    
    
    
    26
    
    
    
    4,808
    
    
    
    37,590Group annuities
    
    
    8,524
    
    
    
    2,436
    
    
    
    26
    
    
    
    118
    
    
    
    781
    
    
    
    11,885Health insurance
    
    
    4,431
    
    
    
    1,298
    
    
    
    15
    
    
    
    16
    
    
    
    874
    
    
    
    6,634Equity and other
    
    
    6,463
    
    
    
    248
    
    
    
    407
    
    
    
    787
    
    
    
    10,339
    
    
    
    18,244Total assets
    
    $
    66,090
    
    
    $
    13,601
    
    
    $
    3,473
    
    
    $
    3,067
    
    
    $
    22,978
    
    
    $
    109,209
 D) CHANGES IN ACTUARIAL LIABILITIES Changes in actuarial liabilities during the year are as follows: 2004
    
    
    2003Actuarial liabilities, January 1
    
    $
    75,324
    
    
    $
    87,521Change in liabilities on in-force business
    
    
    (2,374
    )
    
    
    (1,891
    )Liabilities arising from new policies
    
    
    3,799
    
    
    
    3,225Significant changes in assumptions or methodology:(1)Gross increases
    
    
    
    
    
    
    313Gross decreases
    
    
    
    
    
    
    (137
    )Increase in actuarial liabilities
    
    
    1,425
    
    
    
    1,510Changes in intrinsic value of options that hedge certain variable annuity products(2)
    
    
    
    
    
    
    (199
    )Dispositions
    
    
    
    
    
    
    (4,683
    )Other
    
    
    (29
    )
    
    
    80Change due to ceding reinsurance agreements
    
    
    (30
    )
    
    
    (465
    )Effect of changes in currency exchange rates
    
    
    (2,432
    )
    
    
    (8,440
    )Actuarial liabilities, December 31
    
    
    74,258
    
    
    
    75,324Add: Other policy liabilities
    
    
    1,798
    
    
    
    2,030Actuarial liabilities and other policy liabilities, December 31
    
    $
    76,056
    
    
    $
    77,354
  (1)
    
    During the second quarter of 2003, the Company implemented a number of changes
to its U.S. actuarial liability calculations. These changes reflect improved modelling
capabilities now permitted under the updated Canadian Institute of Actuaries Consolidated
Standards of Practice and the impact of lower interest rates on the cost of certain
guarantees. The net impact of these changes resulted in an increase to actuarial liabilities
of $6 (gross increases of $143 net of gross decreases of $137). The actuarial liability for
segregated fund guarantees was increased by approximately $170 in the fourth quarter of 2003
to protect against increased downside risk following the rise in the equity markets.(2)
    
    The changes in intrinsic value of the options that hedge certain variable annuity
products were included in the increase in actuarial liabilities in the consolidated statements
of operations and in other invested assets in the consolidated balance sheets in 2003. In
2004, these options no longer qualify for hedge accounting as per CICA Handbook Accounting
Guideline 13, as described in Note 2. 25
Sun Life Financial Inc.




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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. Actuarial Liabilities and Other Policy Liabilities (Contd) E) FAIR VALUE OF ACTUARIAL LIABILITIES, FUTURE INCOME TAXES AND DEFERRED NET REALIZED GAINS The fair value of total actuarial liabilities shown in the tables above is $81,641 in 2004 and
$81,713 in 2003 as restated. Fair value of actuarial liabilities is determined by reference to the
fair value of the assets supporting those liabilities. The fair value of the net deferred income
tax asset related to life insurance companies is $(494) in 2004 (carrying value of $294) and $(25)
in 2003 (carrying value of $426). Fair value of income taxes represents the amount that would be
recognized on the balance sheet if the financial instruments were measured at fair value. Deferred
net realized gains, which are taken into account in establishing the actuarial liabilities, no
longer exist when financial assets and liabilities are measured at fair value. F) ASSUMPTIONS AND MEASUREMENT UNCERTAINTY Mortality Mortality refers to the rate at which death occurs for a defined group of people. Insurance
mortality assumptions are generally based on the Companys average five-year experience. For
annuities, Company experience is combined with industry experience, since the Companys own
experience is insufficient to be statistically reliable. Assumed future mortality rates on
annuities are adjusted to reflect expected improvements in mortality. Assumed mortality rates for
life insurance contracts do not reflect any future improvement which might occur. For products where higher mortality would be financially adverse to the Company, a 1% increase in
the best estimate assumption would decrease net income by $106. For products where lower mortality
would be financially adverse to the Company, a 1% reduction in the mortality assumption would
decrease net income by $32. Morbidity Morbidity refers to the rate of accident or sickness, and recovery therefrom, for a defined group
of people. Most of the Companys disability insurance is marketed on a group basis. In Canada,
the Company offers critical illness policies and long-term care on an individual basis. Medical
stop-loss insurance is offered on a group basis in the United States. In Canada, group morbidity
assumptions are based on the Companys five-year average experience, modified to reflect the trend
in recovery rates. For long-term care and critical illness insurance, assumptions are developed in
collaboration with our reinsurers and are largely based on their experience. In the United States,
Company experience is used for both medical stop-loss and disability assumptions, with some
consideration for industry experience. Larger provisions for adverse deviation are used for those
benefits where Company or industry experience is limited. For products where the morbidity is a
significant assumption, a 1% change in that assumption would reduce net income by $13. Investment Return The Company generally maintains distinct asset portfolios for each line of business. To ensure the
adequacy of assets backing the liabilities, the Company does cash flow testing using a set of
plausible future interest rates and economic environments as well as a set of prescribed scenarios.
In each test, asset and liability cash flows are projected. Net cash flows are invested in new
assets, if positive, or assets are sold to meet cash needs, in accordance with the assumptions in
the test and the standards of the Canadian Institute of Actuaries. Whenever needed, specific
assumptions are made for cyclical credit risks that exceed the long-term expectation. Deferred net
realized gains are taken into account in establishing the actuarial liabilities. Asset Default In addition to the allowances for losses on invested assets outlined in Note 8, the actuarial
liabilities include an amount of $2,160 determined on a pre-tax basis ($2,005 in 2003) to provide
for possible future asset defaults and loss of asset value. This provision results from a
reduction in the expected future investment yield or a reduction in the value of equity assets
recognized in the computation of actuarial liabilities. The reduction varies depending on the
creditworthiness of the class of asset. Segregated Fund Guarantees The Company has a large volume of variable annuities primarily in the United States subject to
equity market movements. The Company also reinsures the guarantees offered on variable annuities
issued by other insurance companies in the United States, although the Company no longer accepts
new business on these reinsurance treaties. The Company monitors its experience for these
guarantees on a monthly basis, and has hedged a large percentage of its exposure with long-dated
put options against the S&P 500. The Company has a block of unit-linked products in the United Kingdom which offer guaranteed
annuity purchase price options. While not segregated fund guarantees, the exposure to the annuity
options is dependent on the equity market movements. The Company used stochastic modelling techniques which test a large number of different scenarios
of future market returns to estimate the actuarial liability for the various guarantees offered
under variable annuities and under the United Kingdom annuity options. The sensitivity of the
actuarial liability to changes in expected equity market returns is significant for those blocks of
business. For example, a 1% reduction in the expected long-term equity market return assumption
would decrease net income by $65 in respect of these guarantees. 26
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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. Actuarial Liabilities and Other Policy Liabilities (Contd) Interest Rate Interest rate risk is the potential for financial loss arising from changes in interest rates. For
example, the Company is exposed to this risk when the cash flows from assets and the policy
obligations they support are significantly mismatched, as this may result in the need to either
sell assets to meet policy payments and expenses, or reinvest excess asset cash flows under
unfavourable interest environments. To manage this risk, an investment policy statement is established for each portfolio of assets and
related liabilities. Asset/liability management programs are in place to implement these policy
statements. The primary approach used is duration gap analysis, which measures the sensitivity of
assets and liabilities to interest rate changes across the entire yield curve. Key rate duration
analysis is used to examine the duration gap of assets and liabilities at discrete intervals on the
yield curve. These gaps are managed within specified tolerance limits. Interest rate sensitivity is provided for in the actuarial liabilities for all policies, with
adequate provisions to absorb moderate changes in interest rates. For certain product types, including participating insurance and certain forms of universal life
policies and annuities, policyholders share investment performance through changes in the amount of
dividends declared or to the rate of interest credited. These changes occur routinely as interest
rates change, and reflect the normal operation of these policies according to their contractual
terms. These products generally have minimum interest rate guarantees. For the Companys actuarial liabilities, an immediate 1% parallel increase in interest rates at
December 31, 2004 across the entire yield curve, assuming the Company was unable to take any
investment action to mitigate the impact of this change, would result in an estimated increase in
net income of $36. Conversely, an immediate 1% parallel decrease in interest rates, again assuming
no other investment action, would result in an estimated decrease in net income of $134. Among the different lines of insurance business, annuities are one of the most sensitive to changes
in interest rates. Asset and liability cash flows by year for this business are set out in the
table below. The negative cumulative gap for Canada and the United Kingdom is due to liability
cash flows extending out farther in the future than asset cash flows. In the United States, the
overall shorter nature of the liability cash flows leads to a positive cash flow gap. On a
duration basis, the Companys various annuity portfolios of assets and liabilities are considered
well matched. 2004Under
    
    
    1 to
    
    
    Over 5 years
    
    
    Over1 year
    
    
    5 years
    
    
    to 10 years
    
    
    10 years
    
    
    TotalCANADAAssets
    
    $
    3,642
    
    
    $
    8,351
    
    
    $
    3,723
    
    
    $
    8,176
    
    
    $
    23,892Liabilities
    
    
    3,347
    
    
    
    8,633
    
    
    
    3,879
    
    
    
    8,965
    
    
    
    24,824Cash flow gap
    
    $
    295
    
    
    $
    (282
    )
    
    $
    (156
    )
    
    $
    (789
    )
    
    $
    (932
    )UNITED STATESAssets
    
    $
    2,695
    
    
    $
    10,116
    
    
    $
    9,401
    
    
    $
    4,524
    
    
    $
    26,736Liabilities
    
    
    3,310
    
    
    
    11,116
    
    
    
    6,916
    
    
    
    3,337
    
    
    
    24,679Cash flow gap
    
    $
    (615
    )
    
    $
    (1,000
    )
    
    $
    2,485
    
    
    $
    1,187
    
    
    $
    2,057UNITED KINGDOMAssets
    
    $
    334
    
    
    $
    940
    
    
    $
    1,293
    
    
    $
    4,857
    
    
    $
    7,424Liabilities
    
    
    238
    
    
    
    1,084
    
    
    
    1,329
    
    
    
    5,101
    
    
    
    7,752Cash flow gap
    
    $
    96
    
    
    $
    (144
    )
    
    $
    (36
    )
    
    $
    (244
    )
    
    $
    (328
    )
 Policy Termination Rates Policyholders may allow their policies to terminate prior to the end of the contractual coverage
period by choosing not to continue to pay premiums or by exercising one of the non-forfeiture
options in the contract. Assumptions for termination experience on life insurance are generally
based on the Companys average five-year experience. Termination rates vary by plan, age at issue,
method of premium payment and policy duration. For universal life contracts, it is also necessary
to set assumptions about premium cessation occurring prior to termination of the policy. Studies
prepared by industry or actuarial bodies are used for certain products where the Companys
experience is too limited to be statistically valid. For individual life insurance products where fewer terminations would be financially adverse to the
Company, net income would be decreased by $62 if the termination rate assumption were reduced by
10% starting in policy year six (5% for participating policies and policies with adjustable
premiums). For products where more terminations would be financially adverse to the Company, net
income would be decreased by $62 if an extra 1% of the in-force policies were assumed to terminate
each year beginning in policy year six (0.5% for participating policies and policies with
adjustable premiums). Operating Expenses and Inflation Actuarial liabilities provide for future policy-related expenses. These include the costs of
premium collection, claims adjudication and processing, actuarial calculations, preparation and
mailing of policy statements and related indirect expenses and overheads. Expense assumptions are
mainly based on recent Company experience using an internal expense allocation methodology. The
increases assumed in future expenses are consistent with the inflation rate used in the scenario
testing under the standards established by the Canadian Institute of Actuaries. The sensitivity of
actuarial liabilities to a 10% increase in unit expenses Company-wide would result in a decrease in
net income of $248. 27
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. Actuarial Liabilities and Other Policy Liabilities (Contd) G) REINSURANCE AGREEMENTS Reinsurance is used primarily to limit exposure to large losses. The Board approves the Companys
individual life insurance retention policy and limits which require that such arrangements be
placed with well-established, highly rated reinsurers. Coverage is well diversified and controls
are in place to manage exposure to reinsurance counterparties. While reinsurance arrangements
provide for the recovery of claims arising from the liabilities ceded, the Company retains primary
responsibility to the policyholders. The effect of reinsurance on premiums and payments to
policyholders, beneficiaries and depositors is summarized as follows: 2004
    
    
    2003
    
    
    2002Premiums:Direct premiums
    
    $
    13,253
    
    
    $
    13,688
    
    
    $
    15,061Reinsurance assumed
    
    
    655
    
    
    
    723
    
    
    
    577Reinsurance ceded
    
    
    (987
    )
    
    
    (868
    )
    
    
    (763
    )$
    12,921
    
    
    $
    13,543
    
    
    $
    14,875Payments to policyholders, beneficiaries and depositors:Direct payments
    
    $
    12,671
    
    
    $
    13,036
    
    
    $
    11,585Reinsurance assumed
    
    
    602
    
    
    
    809
    
    
    
    511Reinsurance ceded
    
    
    (741
    )
    
    
    (919
    )
    
    
    (408
    )$
    12,532
    
    
    $
    12,926
    
    
    $
    11,688
 Actuarial liabilities are shown net of ceded reinsurance of $2,931 in 2004 ($2,528 in 2003). H) ROLE OF THE APPOINTED ACTUARY The Appointed Actuary is appointed by the Board and is responsible for ensuring that the
assumptions and methods used in the valuation of policy liabilities are in accordance with accepted
actuarial practice, applicable legislation and associated regulations or directives. The Appointed Actuary is required to provide an opinion regarding the appropriateness of the policy
liabilities at the balance sheet dates to meet all obligations to policyholders of the Company.
Examination of supporting data for accuracy and completeness and analysis of Company assets for
their ability to support the amount of policy liabilities are important elements of the work
required to form this opinion. The Appointed Actuary is required each year to analyze the financial condition of the Company and
prepare a report for the Board. The 2004 analysis tested the capital adequacy of the Company until
December 31, 2008, under various adverse economic and business conditions. The Appointed Actuary
reviews the calculation of the Companys Canadian Minimum Continuing Capital and Surplus
Requirements (MCCSR) ratio, which is calculated on its worldwide insurance operations. The MCCSR
ratio at December 31, 2004, was well in excess of the minimum requirement. In addition, foreign
operations and foreign subsidiaries of the Company must comply with local capital requirements in
each of the jurisdictions in which they operate. Furthermore, the Company is required to
appropriate retained earnings of $2,328 ($2,406 in 2003). All of these regulatory requirements
constrain the Companys ability to distribute its retained earnings. 13. Other Liabilities Other liabilities consist of the following: 2004
    
    
    2003Accounts payable
    
    $
    3,151
    
    
    $
    3,368Bond repurchase agreements
    
    
    1,645
    
    
    
    1,458Accrued expenses and taxes
    
    
    919
    
    
    
    1,425Borrowed funds
    
    
    153
    
    
    
    123Future income taxes (Note 20)
    
    
    505
    
    
    
    515Accrued benefit liability (Note 22)
    
    
    456
    
    
    
    447Provisions for future policyholder costs
    
    
    82
    
    
    
    173Other
    
    
    248
    
    
    
    286Total other liabilities
    
    $
    7,159
    
    
    $
    7,795
 The Company enters into bond repurchase agreements for operational funding and liquidity purposes.
Bond repurchase agreements have maturities ranging from 4 to 96 days, averaging 21 days, and
bearing interest rates averaging 2.5% as at December 31, 2004 (2.7% in 2003). As at December 31,
2004, the Company had assets with a total market value of $1,654 ($1,457 in 2003) pledged as
collateral for the bond repurchase agreements. 28
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13. Other Liabilities (Contd) The following obligations are included in borrowed funds in the table above: Currency of Borrowing
    
    Maturity
    
    
    2004
    
    
    2003Bank credit facilities(1)
    
    U.S. dollars
    
    
    2005
    
    
    $
    36
    
    
    $
    39Encumbrances on real estate
    
    Canadian dollars
    
    
    2005-2012
    
    
    
    52
    
    
    
    34U.S. dollars
    
    
    2006-2014
    
    
    
    65
    
    
    
    50Total borrowed funds
    
    
    
    
    
    
    
    
    
    $
    153
    
    
    $
    123
 (1)
    
    At a floating rate, linked to London Inter Bank Offered Rate. At December 31, 2004, aggregate maturities of encumbrances on real estate are as follows: Year
    
    Amount2005
    
    $
    72006
    
    
    62007
    
    
    152008
    
    
    182009
    
    
    2Thereafter
    
    
    69Total
    
    $
    117
 At December 31, 2004, bank credit facilities are $36 ($39 in 2003) and the weighted average
interest rates related to those borrowings is 1.6% (1.5% in 2003). The U.S. dollar bank credit
facility is secured by the future distribution fee stream of the mutual funds under the management
of MFS. At December 31, 2004, the Company had $180 in a line of credit from a financial institution of
which $144 was unused. This line of credit has a term of one year. Interest expense for the borrowed funds was $11, $15 and $26 for 2004, 2003 and 2002, respectively. 14. Subordinated Debt The following obligations are included in subordinated debt: InterestCurrency

    
    Rate
    
    
    Maturity
    
    
    2004
    
    
    2003Subordinated debentures (1)
    
    Canadian dollars
    
    
    5.80%
    
    
    
    2013
    
    
    $
    
    
    
    $
    253Subordinated debentures (2)
    
    Canadian dollars
    
    
    6.65%
    
    
    
    2015
    
    
    
    300
    
    
    
    300Subordinated debentures(3)
    
    Canadian dollars
    
    
    6.15%
    
    
    
    2022
    
    
    
    799
    
    
    
    799Subordinated debentures (4)
    
    Canadian dollars
    
    
    6.30%
    
    
    
    2028
    
    
    
    150
    
    
    
    150Subordinated notes (5)
    
    U.S. dollars
    
    
    6.63%
    
    
    
    2007
    
    
    
    33
    
    
    
    35Subordinated notes
    
    U.S. dollars
    
    
    7.25%
    
    
    
    2015
    
    
    
    180
    
    
    
    193Cumulative capital securities (6)
    
    U.S. dollars
    
    
    8.53%
    
    
    
    
    
    
    
    720
    
    
    
    774Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,182
    
    
    $
    2,504Fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,416
    
    
    $
    2,771
  (1)
    
    Redeemed on November 15, 2004. Redemption premiums of $17 ($12 net of taxes)
were recorded in net investment income in 2004.(2)
    
    After October 12, 2010, interest is payable at 1% over the 90-day Bankers
Acceptance Rate. Redeemable in whole or in part at any time prior to October 12, 2010. On or
after October 12, 2010, redeemable in whole on interest payment date.(3)
    
    Issued June 25, 2002. After June 30, 2012, interest is payable at 1.54%
over the 90-day Bankers Acceptance Rate. Redeemable in whole or in part at any time.(4)
    
    Redeemable in whole or in part at any time.(5)
    
    In the third quarter of 2003, $165 (81.6% of the originally issued notes)
was redeemed. Redemption premiums of $24 ($14 net of taxes) were recorded in net
investment income in 2003.(6)
    
    On May 6, 1997, Sun Life of Canada (U.S.) Capital Trust I, a Delaware
statutory business trust of the Company, issued U.S.$600 of 8.53% cumulative capital
securities (Securities). These Securities have no scheduled maturity date. Distributions are
payable semi-annually in arrears and are indirectly guaranteed by Sun Life Assurance on a
subordinated basis. Fair value is based on market prices for the same or similar instruments as appropriate.
Interest expense on subordinated debt was $174, $194 and $166 for 2004, 2003 and 2002,
respectively. All of the subordinated debt and cumulative capital securities qualify as capital for Canadian
regulatory purposes. 29
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 15. Non-controlling Interests in Subsidiaries Non-controlling interests in the consolidated balance sheets consist of the following: 2004
    
    
    2003SLEECS issued by the Trust
    
    $
    1,150
    
    
    $
    1,150Preferred shares of Sun Life Assurance(1)
    
    
    152
    
    
    
    155Non-controlling interests in MFS and McLean Budden Limited
    
    
    36
    
    
    
    31Total non-controlling interests in subsidiaries
    
    $
    1,338
    
    
    $
    1,336
  (1)
    
    These preferred shares were issued by Clarica before amalgamating with Sun Life
Assurance. Non-controlling interests in net income of subsidiaries include the preferred shares dividend
payments of $7 ($7 in 2003 and $5 in 2002), non-controlling interests in the Trust of $52 ($51 in
2003 and $45 in 2002) and non-controlling interests in MFS and McLean Budden Limited of $21 ($7 in
2003 and $33 in 2002). On June 25, 2002, the Trust, a controlled trust of Sun Life Assurance, issued $200 of non-voting
Sun Life ExchangEable Capital Securities  Series B (SLEECS Series B). Holders of the SLEECS
Series B are entitled to receive a semi-annual non-cumulative fixed cash distribution of $35.465
per SLEECS Series B, representing an annual yield of 7.093% of the one thousand dollar initial
issue price, payable out of the Trusts net distributable funds. The SLEECS Series B are subject
to terms that are similar to those of the prior Sun Life ExchangEable
Capital Securities  Series A (SLEECS Series A) offering as described below. The proceeds of this offering were used for general
corporate purposes, including investments in subsidiaries. On October 19, 2001, the Trust issued $950 of non-voting SLEECS Series A. Holders of the SLEECS
Series A are entitled to receive a semi-annual non-cumulative fixed cash distribution of $34.325
per SLEECS Series A, representing an annual yield of 6.865% of the one thousand dollars initial
issue price, payable out of the Trusts net distributable funds. If Sun Life Assurance has not
declared dividends on its non-cumulative preferred Class B Shares, Series A or on any of its
preferred shares listed on a stock exchange, cash distributions will not be made on the SLEECS
Series A. Subject to regulatory approval, the Trust may redeem the SLEECS Series A at any time
after the fifth anniversary of the date of issuance and, in certain limited circumstances, may also
redeem the SLEECS Series A during the first five years. The holders of the SLEECS Series A have
the right at any time to surrender each one thousand dollars face amount of SLEECS Series A and to
receive from the Trust in exchange 40 non-cumulative preferred Class A Shares, Series Z of Sun Life
Assurance, subject to compliance with the Declaration of Trust. Both SLEECS Series A and SLEECS
Series B qualify as capital for Canadian regulatory purposes. Pursuant to the Share Exchange Agreement, Sun Life Financial Inc. and Sun Life Assurance agreed
that if the Trust fails to pay on any regular distribution date the required cash distributions on
the SLEECS in full, Sun Life Assurance will not pay dividends on its public preferred shares. SUBSEQUENT EVENT

On February 8, 2005, Sun Life Assurance announced that,
subject to regulatory approval, its Board of Directors approved the
redemption of its Non-Cumulative Redeemable Class E Preferred
Shares, Series 1 (Preferred shares of Sun Life Assurance in the
preceding table) on June 30, 2005. These preferred shares will
be redeemed at a price equal to $25 per share, together with declared
but unpaid dividends. 16. Share Capital and Normal Course Issuer Bid The authorized share capital of Sun Life Financial Inc. consists of the following: 
    An unlimited number of common shares without nominal or par value. Each common share is entitled to one vote at meetings of the shareholders of Sun Life Financial
Inc. There are no pre-emptive, redemption, purchase or conversion rights attached to the common shares. 
    An unlimited number of Class A and Class B non-voting preferred shares, issuable in series. The Board is authorized to fix before issuing the shares, the number,
the consideration per share, the designation of and the rights and restrictions of the Class A and Class B shares of each series, subject to the special rights and
restrictions attached to all the Class A and Class B shares. The changes and the number of shares issued and outstanding are as follows: 2004
    
    
    2003
    
    
    2002Number
    
    
    
    
    
    
    Number
    
    
    
    
    
    
    Numberof shares
    
    
    Amount
    
    
    of shares
    
    
    Amount
    
    
    of shares
    
    
    AmountCommon shares (in millions of shares)Balance, January 1
    
    
    600
    
    
    $
    7,289
    
    
    
    618
    
    
    $
    7,420
    
    
    
    432
    
    
    $
    1,100Common shares issued, net of issuance costs and fair
value of stock options granted as consideration for
business acquisition (Note 3)
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    63
    
    
    
    185
    
    
    
    6,281Stock options exercised (Note 19)
    
    
    2
    
    
    
    75
    
    
    
    1
    
    
    
    28
    
    
    
    1
    
    
    
    39Common shares purchased for cancellation
    
    
    (10
    )
    
    
    (126
    )
    
    
    (18
    )
    
    
    (222
    )
    
    
    
    
    
    
    Common shares cancelled for lost policyholders
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    Balance, December 31
    
    
    592
    
    
    $
    7,238
    
    
    
    600
    
    
    $
    7,289
    
    
    
    618
    
    
    $
    7,420
 30
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 16. Share Capital and Normal Course Issuer Bid (Contd) On January 8, 2004, Sun Life Financial Inc. announced that it was authorized to purchase up to
30 million common shares, representing approximately 5% of its issued and outstanding common
shares, under a normal course issuer bid pursuant to the rules of the Toronto Stock Exchange (the
TSX) during the period from January 12, 2004, to January 11, 2005. Shares purchased in this normal
course issuer bid were cancelled following purchases. In 2004, approximately 10 million common
shares were purchased at an average price of $37.93 per share for a total amount of $388. On February 12, 2003, Sun Life Financial Inc. announced a similar normal course issuer bid program
during the period from February 14, 2003, to January 5, 2004 and for the purchase of up to 31
million common shares, representing approximately 5% of its issued and outstanding common shares.
As at December 31, 2003, Sun Life Financial Inc. had purchased approximately 18 million of its
common shares at an average price of $28.88 per share for a total amount of $527. On January 6, 2005, Sun Life Financial Inc. announced that it was authorized to purchase up to 30
million shares, representing approximately 5% of its issued and outstanding common shares, under a
renewed normal course issuer bid program that will cover the period from January 12, 2005, to
January 11, 2006. In accordance with the provisions of the Demutualization Plan of Sun Life Assurance Company of
Canada and the share capital by-law of Sun Life Financial Inc., unclaimed demutualization benefits
issued to eligible policyholders whose addresses were not known to the Company (lost policyholders)
were cancelled on February 22, 2003. The unclaimed demutualization benefits that were cancelled on
February 22, 2003, include approximately three million common shares of Sun Life Financial Inc. with
a nominal share capital, accumulated dividends of approximately $3 and demutualization benefits
payable in cash of approximately $10. Under the Demutualization Plan, lost policyholders may claim
their cancelled demutualization benefits (including all unpaid dividends on shares) at any time
without interest. 17. Operating Expenses Operating expenses consist of the following: 2004
    
    
    2003
    
    
    2002Compensation costs
    
    $
    1,557
    
    
    $
    1,510
    
    
    $
    1,684Premises and equipment costs
    
    
    290
    
    
    
    287
    
    
    
    299Restructuring and other related charges
    
    
    27
    
    
    
    128
    
    
    
    158Capital asset depreciation and amortization (Note 11)
    
    
    62
    
    
    
    67
    
    
    
    76Other(1)
    
    
    895
    
    
    
    1,096
    
    
    
    605Impact of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (43
    )Total operating expenses
    
    $
    2,831
    
    
    $
    3,088
    
    
    $
    2,779
  (1)
    
    Other for 2004 includes a $66 pre-tax provision for MFS regulatory issues and
other actions ($338 in 2003). 18. Earnings Per Share Details of the calculation of the net income and the weighted average number of shares used in
the earnings per share computations are as follows: 2004
    
    
    2003
    
    
    2002Shareholders net income from continuing operations
    
    $
    1,681
    
    
    $
    1,309
    
    
    $
    1,034Less: Effect of stock options of subsidiaries(1)
    
    
    2
    
    
    
    
    
    
    
    3Shareholders net income from continuing operations on a diluted basis
    
    $
    1,679
    
    
    $
    1,309
    
    
    $
    1,031Income (loss) from discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (36
    )Shareholders net income on a diluted basis
    
    $
    1,679
    
    
    $
    1,309
    
    
    $
    995Weighted average number of shares outstanding for basic earnings per share (in millions)
    
    
    599
    
    
    
    608
    
    
    
    543Add: Adjustments relating to the dilutive impact of stock options(1), (2)
    
    
    3
    
    
    
    
    
    
    
    Weighted average number of shares outstanding on a diluted basis (in millions)
    
    
    602
    
    
    
    608
    
    
    
    543
  (1)
    
    The effect of stock options is calculated based on the treasury stock method
requirements which assume that unrecognized compensation as well as any proceeds from the
exercise of the options would be used to purchase common shares at the average market prices
during the period.(2)
    
    Options to purchase approximately 4 million shares of Sun Life Financial
Inc. at the average exercise price of $33.22 per share were outstanding as at December 31,
2003. However, they were not included in the diluted earnings per share calculations, because
their exercise prices were greater than the average market price of the common shares. 31
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 19. Stock-Based Compensation STOCK OPTION PLANS Sun Life Financial Inc. granted stock options to certain employees and directors under the
Executive Stock Option Plan and the Director Stock Option Plan and to all eligible employees under
the Special 2001 Stock Option Award Plan. These options may be exercised at the closing price of
the common shares on the TSX on the trading day preceding the grant date. The options granted
under the stock option plans will vest at various times: over a four-year period under the
Executive Stock Option Plan with the exception of two special grants
with a five-year period, two
years after the grant date under the Special 2001 Stock Option Award Plan and over a two-year
period or immediately upon death or attainment of the mandatory age for retirement under the
Director Stock Option Plan. All options have a maximum exercise period of 10 years. The maximum
number of common shares that may be issued under the Executive Stock Option Plan, the Special 2001
Stock Option Award Plan and the Director Stock Option Plan are 29,525,000 shares, 1,150,000 shares
and 150,000 shares, respectively. Effective April 2, 2003, further grants under the Sun Life
Financial Inc. Director Stock Option Plan were discontinued. As described in Note 3, all of the Clarica stock options vested immediately prior to the closing
date of the acquisition and each unexercised Clarica stock option outstanding on May 29, 2002
became exercisable to acquire common shares of Sun Life Financial Inc. These Clarica stock options
are included with those of Sun Life Financial Inc. in the following tables. The activities in the stock option plans for the years ended December 31 are as follows: 2004
    
    
    2003
    
    
    2002Number of
    
    
    Weighted
    
    
    Number of
    
    
    Weighted
    
    
    Number of
    
    
    Weightedstock options
    
    
    average
    
    
    stock options
    
    
    average
    
    
    stock options
    
    
    average(thousands)
    
    
    exercise price
    
    
    (thousands)
    
    
    exercise price
    
    
    (thousands)
    
    
    exercise priceBalance, January 1
    
    
    15,239
    
    
    
    $  27.17
    
    
    
    12,421
    
    
    
    $  29.82
    
    
    
    5,545
    
    
    
    $  29.87Granted
    
    
    173
    
    
    
    36.67
    
    
    
    4,778
    
    
    
    27.70
    
    
    
    4,467
    
    
    
    33.16Granted as
considerationfor business acquisition (Note 3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,503
    
    
    
    24.78Exercised
    
    
    2,267
    
    
    
    25.69
    
    
    
    863
    
    
    
    22.51
    
    
    
    1,196
    
    
    
    22.58Forfeited
    
    
    688
    
    
    
    26.97
    

    
    
    1,097
    
    
    
    28.76
    
    
    
    898
    
    
    
    30.82Balance, December 31
    
    
    12,457
    
    
    
    $  26.90
    
    
    
    15,239
    
    
    
    $  27.17
    
    
    
    12,421
    
    
    
    $  29.82Exercisable, December 31
    
    
    6,318
    
    
    
    $  27.36
    
    
    
    5,291
    
    
    
    $  27.30
    
    
    
    4,065
    
    
    
    $  26.37
 The stock options outstanding and exercisable as at December 31, 2004, by exercise price, are as
follows: Options Outstanding
    
    Options ExercisableNumber of
    
    
    Weighted average
    
    
    Weighted
    
    Number of
    
    
    Weightedstock options
    
    
    remaining contractual
    
    
    average
    
    stock options
    
    
    averageRange of exercise prices
    
    (thousands)
    
    
    life (years)
    
    
    exercise price
    
    (thousands)
    
    
    exercise price$19.05 to $24.95
    
    
    3,750
    
    
    
    7.33
    
    
    
    $ 22.04
    
    
    1,567
    
    
    
    $ 22.00$25.01 to $30.91
    
    
    6,239
    
    
    
    7.05
    
    
    
    27.48
    
    
    3,235
    
    
    
    27.63$31.00 to $33.20
    
    
    2,227
    
    
    
    7.04
    
    
    
    32.52
    
    
    1,465
    
    
    
    32.19$33.25 to $38.54
    
    
    241
    
    
    
    8.60
    
    
    
    35.48
    
    
    51
    
    
    
    36.7312,457
    
    
    
    7.16
    
    
    
    $ 26.90
    
    
    6,318
    
    
    
    $ 27.36
 The weighted average fair values of the stock options, calculated using the Black-Scholes
option-pricing model, granted during the year ended December 31, 2004 was $9.81 ($7.61 and $10.62
for 2003 and 2002, respectively). The assumptions for the Black-Scholes option-pricing model to
determine the fair value as at December 31 are as follows: Weighted average assumptions
    
    2004
    
    
    2003
    
    
    2002Risk-free interest rate
    
    
    4.5%
    
    
    
    5.0%
    
    
    
    5.4%Expected volatility
    
    
    24.8%
    
    
    
    25.0%
    
    
    
    25.0%Dividend yield
    
    
    2.3%
    
    
    
    2.5%
    
    
    
    1.7%Expected life of the option (in years)
    
    
    7
    
    
    
    7
    
    
    
    7
 For the options issued prior to January 1, 2002, and valued using the intrinsic value method, no
compensation expense was recognized as the options exercise price was not less than the market
price of the underlying stock on the day of grant. When the options are exercised, the proceeds
received are credited to common shares. EMPLOYEE SHARE OWNERSHIP PLAN The Company matches employees contributions to the Sun Life Financial Employee Stock Plan (Plan)
for eligible employees in Canada who may contribute from 1% to 20% of their base earnings to the
Plan. The Company matches 50% of the lower of the employee contributions and 5% of the employees
base earnings to an annual maximum of one thousand five hundred dollars. The Companys
contributions vest immediately and are expensed. 32
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 19. Stock-Based Compensation (Contd) OTHER STOCK-BASED COMPENSATION PLANS All other stock-based compensation plans use notional units that are valued based on Sun Life
Financial Inc.s common share price on the TSX. Any fluctuation in Sun Life
Financial Inc.s common share price changes the value of the units, which affects the Companys
stock-based compensation expense. Upon exercise of these units, payments are made to the employees
with a corresponding reduction in the accrued liability. In 2004, an aggregate expense of $18 ($9
and $2 for 2003 and 2002, respectively), was recognized in operating expenses in the consolidated
statements of operations for changes in the amount of the Companys liability for these units.
Details of these plans are as follows: Senior Executives Deferred Share Unit (DSU) Plan:Under the DSU plan, designated executives may
elect to receive all or a portion of their annual incentive award (which is expensed for the year
awarded in operating expenses in the consolidated statements of operations) in the form of DSUs.
Each DSU is equivalent to one common share and earns dividend equivalents in the form of additional
DSUs at the same rate as the dividends on common shares. The designated executives must elect to
participate in the plan prior to the beginning of the plan year and this election is irrevocable.
Awards generally vest immediately, however, participants are not permitted to redeem the DSUs until
termination, death or retirement. The value at the time of redemption will be based on the fair
market value of the common shares immediately before their conversion. As at December 31, 2004,
there were 541,907 units outstanding (582,031 and 344,989 for 2003 and 2002, respectively). The
Company uses equity swaps to hedge its exposure to variations in cash flows associated with the
outstanding DSUs. Restricted Share Unit (RSU) Plan:Under the RSU plan, participants are granted units that are
equivalent to one common share and have a fair market value of a common share on the date of grant.
Plan participants must hold RSUs for 36 months from the date of grant. RSUs earn dividend
equivalents in the form of additional RSUs at the same rate as the dividends on common shares. The
redemption value is the fair market value of an equal number of common shares. As at December 31,
2004, there were 1,643,513 RSUs outstanding (663,753 and 176,379 for 2003 and 2002, respectively).
The Company uses equity forwards to hedge its exposure to variations in cash flows associated with
the outstanding RSUs. Performance Share Unit (PSU) Plan:Under the PSU plan, participants are granted units that are the
equivalent to one common share and have a fair market value of a common share on the date of grant.
Plan participants must hold PSUs for 36 months from the date of grant. PSUs earn dividend
equivalents in the form of additional PSUs at the same rate as the dividends on common shares. No
PSUs will vest or become payable unless the Company meets its threshold targets with respect to
specified performance targets. The plan provides for an enhanced payout if the Company achieves
superior levels of performance to motivate participants to achieve a higher return for
shareholders. Payments to participants are based on the number of PSUs earned multiplied by the
market value of the common shares at the end of the three-year performance period. As at December
31, 2004 there were 273,035 PSUs outstanding (nil in 2003 and 2002). The Company uses equity swaps
to hedge its exposure to variations in cash flows associated with the outstanding PSUs. 20. Income Taxes In the consolidated statements of operations, the income tax expense for the Companys
worldwide operations has the following components: 2004
    
    
    2003
    
    
    2002CONTINUING OPERATIONSCanadian income tax expense (benefit):Current
    
    $
    98
    
    
    $
    61
    
    
    $
    116Future
    
    
    125
    
    
    
    222
    
    
    
    (72
    )Total
    
    
    223
    
    
    
    283
    
    
    
    44Foreign income tax expense (benefit):Current
    
    
    (67
    )
    
    
    235
    
    
    
    69Future
    
    
    137
    
    
    
    (131
    )
    
    
    (15
    )Total
    
    
    70
    
    
    
    104
    
    
    
    54Income tax expense related to continuing operations
    
    
    293
    
    
    
    387
    
    
    
    98DISCONTINUED OPERATIONSForeign income tax expense (benefit):Current
    
    
    
    
    
    
    
    
    
    
    (1
    )Future
    
    
    
    
    
    
    
    
    
    
    11Total
    
    
    
    
    
    
    
    
    
    
    10Income tax expense related to discontinued operations
    
    
    
    
    
    
    
    
    
    
    10Total income taxes
    
    $
    293
    
    
    $
    387
    
    
    $
    108
 The after-tax undistributed earnings of most non-Canadian subsidiaries would be taxed only upon
their repatriation to Canada. The Company recognizes a future tax liability, if any, on these
undistributed earnings to the extent that management expects they will be repatriated in the
foreseeable future. To the extent repatriation of such earnings is not currently planned, the
Company has not recognized the future tax liability. If the undistributed earnings of all
non-Canadian subsidiaries not currently planned were repatriated, additional taxes that would be
payable are estimated to be $63 as at December 31, 2004 ($67 and $56 in 2003 and 2002,
respectively). 33
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 20. Income Taxes (Contd) The Companys effective worldwide income tax rate differs from the combined Canadian federal
and provincial statutory income tax rate, as follows: 2004
    
    
    2003
    
    
    2002%
    
    
    
    
    
    
    %
    
    
    
    
    
    
    %Net income from continuing operations
    
    
    
    
    
    $
    1,694
    
    
    
    
    
    
    $
    1,308
    
    
    
    
    
    
    $
    1,033Add: Income taxes
    
    
    
    
    
    
    293
    
    
    
    
    
    
    
    387
    
    
    
    
    
    
    
    98Non-controlling interests in net income of subsidiaries
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    83Net income from continuing operations before income taxes
and non-controlling interests in net income of subsidiaries
    
    
    
    
    
    $
    2,067
    
    
    
    
    
    
    $
    1,760
    
    
    
    
    
    
    $
    1,214Taxes at the combined Canadian federal and
provincial statutory income tax rate
    
    $
    683
    
    
    
    33.0
    
    
    $
    607
    
    
    
    34.5
    
    
    $
    456
    
    
    
    37.6Increase (decrease) in rate resulting from:Higher (lower) effective rates on income
subject to taxation in foreign jurisdictions
    
    
    (259
    )
    
    
    (12.4
    )
    
    
    (134
    )
    
    
    (7.6
    )
    
    
    (183
    )
    
    
    (15.1
    )Tax (benefit) cost of unrecognized losses
    
    
    (19
    )
    
    
    (0.9
    )
    
    
    (37
    )
    
    
    (2.1
    )
    
    
    (103
    )
    
    
    (8.5
    )Tax exempt investment income
    
    
    (94
    )
    
    
    (4.6
    )
    
    
    (91
    )
    
    
    (5.1
    )
    
    
    (107
    )
    
    
    (8.8
    )Capital taxes
    
    
    7
    
    
    
    0.3
    
    
    
    11
    
    
    
    0.6
    
    
    
    8
    
    
    
    0.7Changes to statutory income tax rates
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    1.6
    
    
    
    (2
    )
    
    
    (0.2
    )Other
    
    
    (25
    )
    
    
    (1.2
    )
    
    
    2
    
    
    
    0.1
    
    
    
    29
    
    
    
    2.4Companys effective worldwide income taxes
    
    $
    293
    
    
    
    14.2
    
    
    $
    387
    
    
    
    22.0
    
    
    $
    98
    
    
    
    8.1
 The
Company has accumulated tax losses, primarily in the United Kingdom, totalling $1,317 ($2,530 in
2003). The benefit of these tax losses has been recognized to the extent that they are more likely
than not to be realized in the amount of $93 ($320 in 2003) in future income taxes. The Company
will realize this benefit in future years through a reduction in current income taxes as and when
the losses are utilized. These tax losses are subject to examination by various tax authorities
and could be reduced as a result of the adjustments to tax returns. Furthermore, legislative,
business or other changes may limit the Companys ability to utilize these losses. The following are the future tax assets and liabilities in the consolidated balance sheets by
source of temporary differences: 2004
    
    
    2003Assets
    
    
    Liabilities
    
    
    Assets
    
    
    LiabilitiesInvestments
    
    $
    196
    
    
    $
    484
    
    
    $
    182
    
    
    $
    613Actuarial liabilities
    
    
    134
    
    
    
    35
    
    
    
    54
    
    
    
    (78
    )Deferred acquisition costs
    
    
    300
    
    
    
    (2
    )
    
    
    324
    
    
    
    (9
    )Losses available for carry forward
    
    
    250
    
    
    
    (40
    )
    
    
    506
    
    
    
    (117
    )Other
    
    
    39
    
    
    
    28
    
    
    
    214
    
    
    
    106919
    
    
    
    505
    
    
    
    1,280
    
    
    
    515Valuation allowance
    
    
    (197
    )
    
    
    
    
    
    
    (303
    )
    
    
    Total
    
    $
    722
    
    
    $
    505
    
    
    $
    977
    
    
    $
    515
 Future income taxes are the result of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. The
sources of these temporary differences and the recognized tax effects for continuing operations in
the consolidated statements of operations are as follows: 2004
    
    
    2003
    
    
    2002Investments
    
    $
    (193
    )
    
    $
    (65
    )
    
    $
    (128
    )Actuarial liabilities
    
    
    126
    
    
    
    113
    
    
    
    454Deferred acquisition costs
    
    
    97
    
    
    
    (144
    )
    
    
    (128
    )Losses (incurred) utilized
    
    
    248
    
    
    
    148
    
    
    
    (268
    )Other
    
    
    (16
    )
    
    
    39
    
    
    
    (17
    )Future income tax expense (benefit) related to continuing operations
    
    $
    262
    
    
    $
    91
    
    
    $
    (87
    )
 34
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 21. Commitments, Guarantees and Contingencies LEASE COMMITMENTS The Company leases offices and certain equipment. These are operating leases with rents charged to
operations in the year to which they relate. Total future rental payments for the remainder of
these leases are as follows: 2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterFuture rental payments
    
    $
    103
    
    
    $
    92
    
    
    $
    80
    
    
    $
    49
    
    
    $
    41
    
    
    $
    126
 CONTRACTUAL COMMITMENTS In the normal course of business, various contractual commitments are outstanding which are not
reflected in the consolidated financial statements. At December 31, 2004, there were outstanding
contractual commitments as follows: Expires in
    
    
    Expires in
    
    
    Expires in30 days
    
    
    31 to 365 days
    
    
    2006 or later
    
    
    TotalContractual commitments
    
    $
    119
    
    
    $
    962
    
    
    $
    673
    
    
    $
    1,754
 The majority of these commitments are to extend credit under commercial and residential mortgage
loans and private placements. LETTERS OF CREDIT The Company issues commercial letters of credit in the normal course of business. At December 31,
2004, letters of credit in the amount of $341 have been issued. INDEMNITIES In the normal course of its business, the Company has entered into agreements that include
indemnities in favour of third parties, such as purchase and sale agreements, confidentiality
agreements, engagement letters with advisors and consultants, outsourcing agreements, leasing
contracts, trade-mark licensing agreements, underwriting and agency agreements, information
technology agreements, distribution agreements, financing agreements and service agreements. These
indemnification agreements may require the Company to compensate the counterparties for damages,
losses, or costs incurred by the counterparties as a result of breaches in representation, changes
in regulations (including tax matters) or as a result of litigation claims or statutory sanctions
that may be suffered by the counterparty as a consequence of the transaction. The Company has also
agreed to indemnify its directors and certain of its officers and employees in accordance with the
Companys by-laws. These indemnification provisions will vary based upon the nature and terms of
the agreements. In many cases, these indemnification provisions do not contain limits on the
Companys liability and the occurrence of contingent events that will trigger payment under these
indemnities is difficult to predict. As a result, the Company cannot estimate its potential liability under these indemnities. The Company believes that the likelihood of
conditions arising that would trigger these indemnities is remote and, historically, the Company
has not made any significant payment under such indemnification provisions. In certain cases, the Company has recourse against third parties with respect to the aforesaid
indemnities and the Company also maintains insurance policies that may provide coverage against
certain of these claims. LEGAL AND REGULATORY PROCEEDINGS In 2003, industry-wide regulatory investigations were launched in the U.S. investment industry
regarding market timing, late trading and related issues. On February 5, 2004, MFS reached a
settlement with federal and state regulators related to administrative proceedings alleging that
certain MFS fund prospectuses contained false and misleading information regarding market timing
and related issues. In these settlements, MFS agreed to pay U.S.$225 to compensate investors in
certain funds, of which U.S.$50 was a penalty, agreed to pay an
administrative fine of U.S.$1 and
agreed to reduce fees on certain MFS funds by approximately U.S.$25 annually for five years. The
Company recorded a $211 after-tax charge to income in the fourth quarter of 2003 in connection with
these settlements. Under these settlements, MFS neither admitted nor denied any wrongdoing. On March 31, 2004, MFS settled an administrative proceeding with the Securities and Exchange
Commission regarding disclosure of brokerage allocation practices in connection with sales of
certain MFS funds. Under the terms of that settlement, in which MFS neither admitted nor denied any
wrongdoing, MFS agreed to pay U.S. one dollar in disgorgement and U.S.$50 in penalty to certain MFS
funds. The Company recorded a $59 net of minority interest charge to income in the first quarter
of 2004 in connection with this settlement. The Company and its subsidiaries are co-operating with insurance and securities regulators and
other government and self-regulatory agencies in Canada and the United States in their continuing
investigations and examinations with respect to various issues, including market timing and late
trading of mutual funds and variable insurance products, directed brokerage, revenue sharing,
compensation and other arrangements with distributors and brokers, and recordkeeping requirements. 35
Sun Life Financial Inc.




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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 21. Commitments, Guarantees and Contingencies (Contd) Since December 2003, Sun Life Financial Inc., MFS and certain of its subsidiaries, MFS
Corporation Retirement Committee, various MFS funds, certain current and/or former Trustees of
those MFS funds, and certain officers of MFS have been named as defendants in more than 30 lawsuits
filed in the U.S. federal and state courts. The lawsuits variously have been commenced as class
actions or individual actions on behalf of investors who purchased, held or redeemed shares of the
MFS funds during specified periods, as class actions on behalf of participants in certain
retirement plan accounts, or as derivative actions on behalf of MFS funds. The lawsuits relating
to market timing and related matters have been transferred to, and consolidated before, the United
States District Court for the District of Maryland, as part of a multi-district litigation of
market timing and related claims involving several other fund complexes (In re Mutual Funds
Investment Litigation (Alger, Columbia, Janus, MFS, One Group, Putnam, Allianz Dresdner),
No.1: 04-md-15863 (transfer began March 19, 2004)). The plaintiffs in these consolidated lawsuits
generally seek injunctive relief including removal of the named Trustees, adviser and distributor,
rescission of contracts and 12b-1 Plans, disgorgement of fees and profits, monetary damages,
punitive damages, attorneys fees and costs and other equitable and declaratory relief. The market
timing cases related to the MFS funds are Riggs v. MFS et al.,
Case No. 04-cv-01162-JFM (direct),
Hammerslough v. MFS et al., Case No. 04-md-01620
(derivative) and Anita Walker v. MFS et al., Case
No. 1:04-CV-01758 (ERISA). Four lawsuits alleging improper brokerage allocation practices and
excessive compensation are pending in the United States District Court for the District of
Massachusetts (Forsythe v. Sun Life Financial Inc., et al., No. 04cv10584 (GAO) (March 25, 2004);
Eddings v. Sun Life Financial Inc., et al., No. 04cv10764 (GAO) (April 15, 2004); Marcus Dumond, et
al. v. Massachusetts Financial Servs. Co., et al., No 04cv11458 (GAO) (May 4, 2004);and Koslow v.
Sun Life Financial Inc., et al., No. 04cv11019 (GAO) (May 20, 2004)). The plaintiffs in these
lawsuits generally seek compensatory damages, punitive damages, recovery of fees, rescission of
contracts, an accounting, restitution, declaratory relief, equitable and/or injunctive relief and
attorneys fees and costs. The various lawsuits generally allege that some or all of the
defendants (i) permitted or acquiesced in market timing and/or late trading in some of the MFS
funds and, inadequately disclosed MFS internal policies concerning market timing and such matters,
and (ii) received excessive compensation as fiduciaries to the MFS funds, or (iii) permitted or
acquiesced in the improper use of fund assets by MFS to support the distribution of MFS fund shares
and inadequately disclosed MFS use of fund assets in this manner. The actions assert that some or
all of the defendants violated U.S. federal securities laws, including the Securities Act of 1933
and the Securities Exchange Act of 1934, the Investment Company Act of 1940and the Investment
Advisers Act of 1940, the Employee Retirement Income Security Act of 1974, as well as fiduciary
duties and other violations of common law. Additional lawsuits based upon similar allegations may
be filed in the future. These actions are at an early stage and Sun Life Financial cannot predict
their outcome with certainty and is accordingly unable to determine the potential impact that
they may have on Sun Life Financials results of operations, financial position and cash flows. Additional
information concerning these and related matters is provided in the Non-GAAP Financial
Measures, MFS Investment Management and Legal and Regulatory Proceedings sections of Sun Life
Financial Inc.s 2004 Managements Discussion and Analysis and in the Risk Factors section in its
2004 Annual Information Form. PROVISIONS IN THE UNITED KINGDOM The Companys United Kingdom operations continue to be subject to regulatory overview in the United
Kingdom, including the handling of complaints about mortgage endowments. Endowment policies were
sometimes sold to provide customers with a method of repaying mortgage debt at the end of a
mortgage term. The Company has regularly engaged in discussions with United Kingdom regulators
with respect to these and other matters. The Company has provisions for future costs and expenses relating to all reviews of past business
sold both in actuarial liabilities and in other liabilities. At December 31, 2004, the combined
provision was $121 ($130 in 2003). 36
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 22. Pension Plans and Other Post-Retirement Benefits The following tables set forth the status of the defined benefit pension and other
post-retirement benefit plans. Pension
    
    Post-Retirement2004
    
    
    2003
    
    
    2004
    
    
    2003Change in projected benefit obligation:Projected benefit obligation, January 1
    
    $
    2,053
    
    
    $
    1,981
    
    
    $
    291
    
    
    $
    269Change in January 1 balance due to:Acquisitions and disposals
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    (8
    )Change in measurement date (1)
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    Service cost
    
    
    56
    
    
    
    52
    
    
    
    7
    
    
    
    8Interest cost
    
    
    121
    
    
    
    112
    
    
    
    17
    
    
    
    17Actuarial losses (gains)
    
    
    85
    
    
    
    150
    
    
    
    9
    
    
    
    26Benefits paid
    
    
    (103
    )
    
    
    (95
    )
    
    
    (10
    )
    
    
    (10
    )Curtailments, settlements and plan amendments
    
    
    1
    
    
    
    2
    
    
    
    (17
    )
    
    
    Effect of changes in currency exchange rates
    
    
    (23
    )
    
    
    (125
    )
    
    
    (4
    )
    
    
    (11
    )Projected benefit obligation, December 31(1),(2)
    
    $
    2,190
    
    
    $
    2,053
    
    
    $
    293
    
    
    $
    291Accumulated benefit obligation, December 31(3)
    
    $
    2,019
    
    
    $
    1,886Change in plan assets:Fair value of plan assets, January 1
    
    $
    2,077
    
    
    $
    2,044
    
    
    $
    
    
    
    $
    Change in January 1 balance due to:Acquisitions and disposals
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    Change in measurement date(1)
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    Net actual return on plan assets
    
    
    200
    
    
    
    253
    
    
    
    
    
    
    
    Employer contributions
    
    
    25
    
    
    
    27
    
    
    
    10
    
    
    
    10Benefits paid
    
    
    (103
    )
    
    
    (95
    )
    
    
    (10
    )
    
    
    (10
    )Effect of changes in currency exchange rates
    
    
    (22
    )
    
    
    (114
    )
    
    
    
    
    
    
    Fair value of plan assets, December 31(1)
    
    $
    2,177
    
    
    $
    2,077
    
    
    $
    
    
    
    $
    Net funded status, December 31
    
    $
    (13
    )
    
    $
    24
    
    
    $
    (293
    )
    
    $
    (291
    )Unamortized net actuarial loss
    
    
    394
    
    
    
    371
    
    
    
    45
    
    
    
    39Unamortized past service cost
    
    
    11
    
    
    
    13
    
    
    
    (20
    )
    
    
    (4
    )Unamortized transition asset
    
    
    (132
    )
    
    
    (152
    )
    
    
    (10
    )
    
    
    (12
    )Contributions (transfers), October 1 to December 31(1)
    
    
    (1
    )
    
    
    (1
    )
    
    
    1
    
    
    
    1Accrued benefit asset (liability), December 31(1)
    
    $
    259
    
    
    $
    255
    
    
    $
    (277
    )
    
    $
    (267
    )Balance sheet classification of accrued benefit asset (liability), December 31:Other assets
    
    $
    438
    
    
    $
    435
    
    
    $
    
    
    
    $
    Other liabilities
    
    $
    179
    
    
    $
    180
    
    
    $
    277
    
    
    $
    267Pension plans with projected benefit obligations in excess of plan assets:Projected benefit obligations
    
    $
    1,496
    
    
    $
    1,408Plan assets
    
    $
    1,239
    
    
    $
    1,173
 Weighted average assumptions: Pensions
    
    
    Post-retirementTo measure benefit
    
    
    To measure the net
    
    
    To measure benefit
    
    
    To measure the netobligation as of the
plans
    
    
    benefit costs or income
    
    
    obligation as of the
plans
    
    
    benefit costs or incomemeasurement date
    (1)
    
    for the period
    
    
    measurement date
    (1)
    
    for the periodDiscount rate(5)
    
    
    5.8%
    
    
    
    6.0%
    
    
    
    6.0%
    
    
    
    6.2%Expected long-term rate of
return on plan assets(4),(5)
    
    
    7.2%
    
    
    
    7.2%
    
    
    
    
    
    
    
    Rate of compensation
increase(5)
    
    
    3.9%
    
    
    
    3.9%
    
    
    
    
    
    
    
    
  (1)
    
    The measurement date for most of the plans in the United States is September 30.
For all other defined benefit plans, the measurement date is December 31. For plans with a
September 30 measurement date, contributions from October 1 to December 31 are reflected in
the balance sheet for the current year but excluded from the September 30 plan asset balance.(2)
    
    The date of the most recent actuarial valuation for funding purposes was January 1,
2004. The date of the next required actuarial valuation for funding purposes is January 1,
2005.(3)
    
    The Accumulated Benefit Obligation is smaller than the Projected Benefit Obligation
since it does not recognize projected future compensation increases.(4)
    
    Based on managements best estimate of the weighted average returns for the target
allocation at plan assets. The assumption for the expected long-term rate of return on plan
assets is based on a review of the historical asset return performance of the plan assets, the
historical returns of the market indices on which the plan assets performance is based, and
managements best estimate of the weighted average long-term expected rate of returns for the
target allocation of plan assets.(5)
    
    The assumed discount rates, the expected long-term rates of return on plan assets
and the rates of increase in future compensation used in determining the actuarial present
value of the projected benefit obligations vary according to the economic conditions of the
countries in which the pension plans are situated. 37
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 22. Pension Plans and Other Post-Retirement Benefits (Contd) Pension
    
    

Post-Retirement (1)2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Components of defined benefit cost recognized:Service cost, curtailments and settlements
    
    $
    57
    
    
    $
    54
    
    
    $
    64
    
    
    $
    7
    
    
    $
    8
    
    
    $
    1Plan amendments
    
    
    1
    
    
    
    3
    
    
    
    4
    
    
    
    (17
    )
    
    
    
    
    
    
    (5
    )Interest cost
    
    
    121
    
    
    
    112
    
    
    
    106
    
    
    
    17
    
    
    
    17
    
    
    
    15Actual return on plan assets
    
    
    (201
    )
    
    
    (252
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Actuarial losses (gains)
    
    
    84
    
    
    
    185
    
    
    
    (63
    )
    
    
    9
    
    
    
    26
    
    
    
    (10
    )Benefit cost before adjustments to recognize the
long-term nature of defined benefit plans
    
    $
    62
    
    
    $
    102
    
    
    $
    110
    
    
    $
    16
    
    
    $
    51
    
    
    $
    1Adjustments to recognize the long-term nature of
defined benefit plans:Difference between expected and actual
return on plan assets for year
    
    
    41
    
    
    
    99
    
    
    
    (151
    )
    
    
    
    
    
    
    
    
    
    
    Difference
between actuarial losses (gains) recognized and actual
actuarial losses (gains) on accrued benefit obligation for year
    
    
    (74
    )
    
    
    (170
    )
    
    
    94
    
    
    
    (7
    )
    
    
    (25
    )
    
    
    11Difference between amortization of past service costs
for year and actual plan amendments for year
    
    
    1
    
    
    
    (1
    )
    
    
    (5
    )
    
    
    16
    
    
    
    
    
    
    
    5Amortization of transition obligation (asset)
    
    
    (20
    )
    
    
    (20
    )
    
    
    (21
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )Total adjustments to defer costs to future periods
    
    $
    (52
    )
    
    $
    (92
    )
    
    $
    (83
    )
    
    $
    7
    
    
    $
    (27
    )
    
    $
    14Total benefit cost recognized
    
    $
    10
    
    
    $
    10
    
    
    $
    27
    
    
    $
    23
    
    
    $
    24
    
    
    $
    15
  (1)
    
    The assumed medical cost trend rate used in measuring the accumulated
post-retirement benefits obligation in Canada in 2004 was 10%, decreasing by 0.75% each year
until 2010, after which it remains at 5.5%. In the United States in 2004, the assumed rate
was 10%, decreasing evenly to 5% by 2010, and remaining at that level thereafter. The
assumed dental cost trend rate is 4% in Canada. In the United States in 2004, the assumed
rate was 5.1%, decreasing to 5% in 2005 and remaining at that level thereafter. Health care cost calculations are based on trend rate assumptions which may differ from actual
results. Changes in trend rate assumptions by 1% in either direction will change the health care
cost as follows: 1%Increase
    
    
    DecreaseEffect on post-retirement benefit obligations
    
    $
    42
    
    
    $
    (36
    )Effect on aggregated service and interest costs
    
    $
    4
    
    
    $
    (3
    )
 Composition of fair value of plan assets, December 31: 2004
    
    
    2003Equity investments
    
    
    48.0%
    
    
    
    50.1%Fixed income investments
    
    
    44.7%
    
    
    
    41.6%Real estate investments
    
    
    2.7%
    
    
    
    2.6%Other
    
    
    4.6%
    
    
    
    5.7%Total composition of fair value of plan assets
    
    
    100%
    
    
    
    100%
 Target allocation of plan assets, December 31: 2004
    
    
    2003Equity investments
    
    
    45.2%
    
    
    
    47.2%Fixed income investments
    
    
    45.0%
    
    
    
    46.7%Real estate investments
    
    
    5.1%
    
    
    
    1.1%Other
    
    
    4.7%
    
    
    
    5.0%Total
    
    
    100%
    
    
    
    100%
 38
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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  22.
    Pension Plans and Other Post-Retirement Benefits (Contd) The assets of the defined benefit pension plans are primarily held in trust for plan members
and are managed within the provisions of the plans investment policies and procedures.
Diversification of the investments is used to minimize credit, market and foreign currency risks.
Due to the long-term nature of the pension obligations and related cash flows, asset mix decisions
are based on long-term market outlooks within the specified tolerance ranges. The long-term
investment objectives of the defined benefit pension plans are to exceed the real rate of
investment return assumed in the actuarial valuation of plan liabilities. Over shorter periods,
the objective of the defined benefit pension plans is to exceed the average market returns of a
well-diversified portfolio. Liquidity is managed with consideration to the cash flow requirements
of the liabilities. Permitted investments of the defined benefit pension plans include guaranteed funds, annuities, as
well as pooled and non-pooled variable accumulation funds in addition to any other investment
vehicle approved by the plan sponsors which is eligible under pension regulations. The policy
statement for each fund or manager mandate either prohibits, or permits, within specified
constraints, the use of derivative instruments such as options and futures. The use of derivative
instruments is limited to unleveraged substitution and hedging strategies. The defined benefit
pension plans may not invest in securities of a related party or lend to any related party unless
such securities are publicly traded and selected by the manager acting independently on behalf of
all that managers discretionary accounts or pooled funds which have mandates similar to that of
the Companys defined benefit pension plans. The following tables set forth the expected contributions and expected future benefit payments of
the defined benefit pension and other post-retirement benefit plans. Pension
    
    
    Post-Retirement
    
    
    TotalExpected contributions for the next 12 months
    
    
    $  25
    
    
    
    $  11
    
    

    
    $  36
 Expected future benefit payments2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010-2014Pension
    
    $
    80
    
    
    $
    84
    
    
    $
    88
    
    
    $
    92
    
    
    $
    97
    
    
    $
    563Post-retirement
    
    
    9
    
    
    
    10
    
    
    
    10
    
    
    
    11
    
    
    
    11
    
    
    
    62Total
    
    $
    89
    
    
    $
    94
    
    
    $
    98
    
    
    $
    103
    
    
    $
    108
    
    
    $
    625
 The total contribution made by the Company to defined contribution plans was $35 in 2004, $35 in
2003 and $42 in 2002. 39
Sun Life Financial Inc.




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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  23.
    Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States The Companys consolidated financial statements are prepared in accordance with accounting
principles generally accepted in Canada (Cdn. GAAP). These accounting principles differ in certain
material respects from accounting principles generally accepted in the United States (U.S. GAAP).
The differing basis of accounting changes the incidence of profit recognition over the life of an
insurance contract. Regardless of the accounting basis chosen, the total profit of an insurance
contract will not change. The financial statement impact and a description of the material
differences follow. A) Reconciliation of selected Cdn. GAAP financial statement information to U.S. GAAP: i) Consolidated statements of operations: 2004
    
    
    2003
    
    
    2002Cdn.
    
    
    U.S.
    
    
    Cdn.
    
    
    U.S.*
    
    
    Cdn.
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    GAAP
    
    
    GAAP
    
    
    GAAP
    
    
    GAAPREVENUEPremiums
    
    $
    12,921
    
    
    $
    6,901
    
    
    $
    13,543
    
    
    $
    7,229
    
    
    $
    14,875
    
    
    $
    6,531Net investment income
    
    
    5,924
    
    
    
    5,693
    
    
    
    5,703
    
    
    
    5,758
    
    
    
    5,131
    
    
    
    4,448Net realized gains (losses)
    
    
    
    
    
    
    793
    
    
    
    
    
    
    
    373
    
    
    
    
    
    
    
    (44
    )Fee income
    
    
    2,903
    
    
    
    3,098
    
    
    
    2,810
    
    
    
    3,053
    
    
    
    3,095
    
    
    
    3,25821,748
    
    
    
    16,485
    
    
    
    22,056
    
    
    
    16,413
    
    
    
    23,101
    
    
    
    14,193POLICY BENEFITS AND EXPENSESPayments to policyholders, beneficiaries and depositors
    
    
    13,132
    
    
    
    9,236
    
    
    
    13,470
    
    
    
    9,159
    
    
    
    13,017
    
    
    
    7,966Increase in actuarial liabilities
    
    
    1,425
    
    
    
    835
    
    
    
    1,510
    
    
    
    1,109
    
    
    
    3,822
    
    
    
    1,377Acquisition expense amortization
    
    
    179
    
    
    
    473
    
    
    
    234
    
    
    
    613
    
    
    
    316
    
    
    
    950Other expenses
    
    
    4,945
    
    
    
    3,838
    
    
    
    5,082
    
    
    
    4,096
    
    
    
    4,732
    
    
    
    3,65419,681
    
    
    
    14,382
    
    
    
    20,296
    
    
    
    14,977
    
    
    
    21,887
    
    
    
    13,947OPERATING INCOME BEFORE INCOME TAXES AND
NON-CONTROLLING INTERESTS
    
    
    2,067
    
    
    
    2,103
    
    
    
    1,760
    
    
    
    1,436
    
    
    
    1,214
    
    
    
    246Income taxes expense (benefit)
    
    
    293
    
    
    
    403
    
    
    
    387
    
    
    
    277
    
    
    
    98
    
    
    
    (250
    )Non-controlling interests in net income of subsidiaries
    
    
    80
    
    
    
    35
    
    
    
    65
    
    
    
    14
    
    
    
    83
    
    
    
    83NET OPERATING INCOME FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES
    
    
    1,694
    
    
    
    1,665
    
    
    
    1,308
    
    
    
    1,145
    
    
    
    1,033
    
    
    
    413Discontinued operations:Gain (loss) on sale of Clarica U.S.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )
    
    
    (58
    )Net operating income of Clarica U.S.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    22Income (loss) from discontinued operations, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    (36
    )Cumulative effect of accounting changes, net of taxes (1)
    
    
    
    
    
    
    (179
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TOTAL NET INCOME
    
    
    1,694
    
    
    
    1,486
    
    
    
    1,308
    
    
    
    1,145
    
    
    
    997
    
    
    
    377Less participating policyholders net income (loss)
    
    
    13
    
    
    
    
    

    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    SHAREHOLDERS NET INCOME
    
    $
    1,681
    
    
    $
    1,486
    
    
    $
    1,309
    
    
    $
    1,145
    
    
    $
    998
    
    
    $
    377Earnings per shareBasicContinuing operations
    
    $
    2.81
    
    
    $
    2.78
    
    
    $
    2.15
    
    
    $
    1.88
    
    
    $
    1.91
    
    
    $
    0.76Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.07
    )
    
    
    (0.07
    )Cumulative effect of accounting changes
    
    
    
    
    
    
    (0.30
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareholders net income
    
    $
    2.81
    
    
    $
    2.48
    
    
    $
    2.15
    
    
    $
    1.88
    
    
    $
    1.84
    
    
    $
    0.69DilutedContinuing operations
    
    $
    2.79
    
    
    $
    2.77
    
    
    $
    2.15
    
    
    $
    1.88
    
    
    $
    1.90
    
    
    $
    0.76Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.07
    )
    
    
    (0.07
    )Cumulative effect of accounting changes
    
    
    
    
    
    
    (0.30
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareholders net income
    
    $
    2.79
    
    
    $
    2.47
    
    
    $
    2.15
    
    
    $
    1.88
    
    
    $
    1.83
    
    
    $
    0.69Weighted average shares outstanding in millionsBasic
    
    
    599
    
    
    
    599
    
    
    
    608
    
    
    
    608
    
    
    
    543
    
    
    
    543Diluted
    
    
    602
    
    
    
    602
    
    
    
    608
    
    
    
    608
    
    
    
    543
    
    
    
    543
  (1)See Section D (iv) of this note for details.*As restated . ii) Comprehensive income: U.S. GAAP includes the concept of comprehensive income. Comprehensive income is a measure of
changes in the equity of the Company during the year. It includes both net income and other
comprehensive income. Other comprehensive income includes the movement in the foreign currency
translation account, unrealized gains and losses on available for sale securities as well as the
income tax impact arising therefrom, changes to deferred acquisition costs, and other liabilities. 40
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  23.
    Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd) ii)    Comprehensive income (Contd): 2004
    
    
    2003
    
    
    2002Total net income based on U.S. GAAP
    
    $
    1,486
    
    
    $
    1,145
    
    
    $
    377Other comprehensive income:Change in unrealized foreign currency translation gains and losses*
    
    
    (437
    )
    
    
    (1,688
    )
    
    
    127Unrealized gains (losses) on available for sale securities
    
    
    637
    
    
    
    1,071
    
    
    
    2,308Reclassification adjustment for (gains) losses included in net income
    
    
    (354
    )
    
    
    (711
    )
    
    
    (54
    )Changes to deferred acquisition costs and other liabilities
    
    
    (544
    )
    
    
    (230
    )
    
    
    (685
    )Changes in gains (losses) on derivatives designated as cash flow hedges
    
    
    4
    
    
    
    8
    
    
    
    2Other
    
    
    
    
    
    
    (100
    )
    
    
    3Additional minimum pension liability
    
    
    (30
    )
    
    
    (18
    )
    
    
    (50
    )Income taxes
    
    
    97
    
    
    
    (83
    )
    
    
    (493
    )Shareholders comprehensive income (loss)
    
    $
    859
    
    
    $
    (606
    )
    
    $
    1,535
 * Shown as part of consolidated statements of equity under Cdn. GAAP. iii) Consolidated balance sheets: 2004
    
    
    2003Cdn.
    
    
    U.S.
    
    
    Cdn.
    
    
    U.S.*GAAP
    
    
    GAAP
    
    
    GAAP
    
    
    GAAPASSETSBonds
    
    $
    64,496
    
    
    
    
    
    
    $
    66,090Bonds  -  available for sale (amortized cost: 2004 - $57,120;
2003  -  $58,987)
    
    
    
    
    
    $
    60,758
    
    
    
    
    
    
    $
    62,465Bonds  -  trading
    
    
    
    
    
    
    4,129
    
    
    
    
    
    
    
    4,341Mortgages and corporate loans
    
    
    13,862
    
    
    
    17,389
    
    
    
    13,601
    
    
    
    16,656Stocks
    
    
    3,463
    
    
    
    
    
    
    
    3,473Stocks  -  available for sale (amortized cost: 2004 - $1,692;
2003  -  $1,681)
    
    
    
    
    
    
    2,059
    
    
    
    
    
    
    
    1,884Stocks  -  trading
    
    
    
    
    
    
    1,317
    
    
    
    
    
    
    
    1,218Real estate, net of accumulated depreciation (accumulated
depreciation:
2004 - $333; 2003 - $329)
    
    
    3,148
    
    
    
    2,208
    
    
    
    3,067
    
    
    
    2,188Policy loans
    
    
    2,936
    
    
    
    2,936
    
    
    
    3,003
    
    
    
    3,003Cash and cash equivalents
    

    
    3,756
    
    
    
    3,759
    
    
    
    3,178
    
    
    
    3,177Short-term securities(1)
    
    
    2,210
    
    
    
    2,379
    
    
    
    1,794
    
    
    
    1,794Other invested assets
    
    
    3,046
    
    
    
    3,579
    
    
    
    2,970
    
    
    
    2,958Total invested assets
    
    
    96,917
    
    
    
    100,513
    
    
    
    97,176
    
    
    
    99,684Deferred acquisition costs
    
    
    362
    
    
    
    5,704
    
    
    
    548
    
    
    
    5,580Future income taxes(2)
    
    
    722
    
    
    
    4
    
    
    
    977
    
    
    
    257Goodwill
    
    
    5,471
    
    
    
    4,527
    
    
    
    5,573
    
    
    
    4,626Other assets
    
    
    4,285
    
    
    
    9,323
    
    
    
    4,935
    
    
    
    9,771Segregated funds assets(3)
    
    
    
    
    
    
    56,555
    
    
    
    
    
    
    
    54,488Total consolidated assets
    
    $
    107,757
    
    
    $
    176,626
    
    
    $
    109,209
    
    
    $
    174,406Segregated funds net assets(3)
    
    $
    56,564
    
    
    
    
    
    
    $
    54,086LIABILITIES AND EQUITYActuarial liabilities
    
    $
    74,258
    
    
    $
    47,856
    
    
    $
    75,324
    
    
    $
    47,148Contract holder deposits
    
    

    
    
    
    
    37,085
    
    
    

    
    
    

    
    37,784Other policy liabilities
    
    
    1,798
    
    
    
    3,022
    
    
    
    2,030
    
    
    
    2,652Amounts on deposit
    
    
    3,144
    
    
    
    3,136
    
    
    
    3,120
    
    
    
    3,110Future income taxes(2)
    
    
    505
    
    
    
    1,032
    
    
    
    515
    
    
    
    1,100Deferred net realized gains
    
    
    3,466
    
    
    
    
    
    
    
    3,124Other liabilities
    
    
    6,654
    
    
    
    9,543
    
    
    
    7,280
    
    
    
    9,858Total consolidated liabilities
    
    
    89,825
    
    
    
    101,674
    
    
    
    91,393
    
    
    
    101,652Subordinated debt
    
    
    2,182
    
    
    
    2,210
    
    
    
    2,504
    
    
    
    2,535Non-controlling interests in subsidiaries
    
    
    1,338
    
    
    
    195
    
    
    
    1,336
    
    
    
    186Segregated funds liabilities(3)
    
    
    
    
    
    
    56,555
    
    
    
    
    
    
    
    54,077Equity
    
    
    14,412
    
    
    
    15,992
    
    
    
    13,976
    
    
    
    15,956Total consolidated liabilities and equity
    
    $
    107,757
    
    
    $
    176,626
    
    
    $
    109,209
    
    
    $
    174,406Segregated funds contract liabilities(3)
    
    $
    56,564
    
    
    
    
    
    
    $
    54,086
 (1) U.S. GAAP terminology is short-term investments.(2) U.S. GAAP terminology is deferred income tax.(3) U.S. GAAP terminology is separate accounts.* As restated. 41
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  23.
    Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd) iv) Consolidated statements of equity: 2004
    
    
    2003Cdn.
    
    
    U.S.
    
    
    Cdn.
    
    
    U.S.*GAAP
    
    
    GAAP
    
    
    GAAP
    
    
    GAAPPARTICIPATING POLICYHOLDERS CAPITAL ACCOUNT:Balance, January 1
    
    $
    72
    
    
    $
    
    
    
    $
    73
    
    
    $Net income (loss) attributed to participating policyholders
    
    
    13
    
    
    
    
    
    
    
    (1
    )Balance, December 31
    
    
    85
    
    
    
    
    
    
    
    72SHAREHOLDERS EQUITY:PAID IN CAPITALBalance, January 1
    
    
    7,365
    
    
    
    13,495
    
    
    
    7,477
    
    
    
    13,749Common shares issued, net of issuance costs,
as consideration for business acquisition(1)
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    63Stock options exercised(3)
    
    
    58
    
    
    
    58
    
    
    
    21
    
    
    
    21Common shares purchased for cancellation(1)
    
    
    (126
    )
    
    
    (230
    )
    
    
    (222
    )
    
    
    (403
    )Stock option compensation(2)
    
    
    11
    
    
    
    12
    
    
    
    26
    
    
    
    27Subsidiary equity transaction
    
    
    
    
    
    
    10

    
    
    
    
    
    
    
    38Balance, December 31
    
    
    7,308
    
    
    
    13,345
    
    
    
    7,365
    
    
    
    13,495RETAINED EARNINGSBalance, January 1
    
    
    7,212
    
    
    
    2,094
    
    
    
    6,621
    
    
    
    1,486Net income for the period attributed to shareholders
    
    
    1,681
    
    
    
    1,486
    
    
    
    1,309
    
    
    
    1,145Dividends on common shares
    
    
    (515
    )
    
    
    (515
    )
    
    
    (413
    )
    
    
    (413
    )Common shares purchased for cancellation
    
    
    (262
    )
    
    
    (158
    )
    
    
    (305
    )
    
    
    (124
    )Balance, December 31
    
    
    8,116
    
    
    
    2,907
    
    
    
    7,212
    
    
    
    2,094CURRENCY TRANSLATION ACCOUNTBalance, January 1
    
    
    (673
    )
    
    
    (833
    )
    
    
    738
    
    
    
    855Changes for the period
    
    
    (424
    )
    
    
    (437
    )
    
    
    (1,411
    )
    
    
    (1,688
    )Balance, December 31
    
    
    (1,097
    )
    
    
    (1,270
    )
    
    
    (673
    )
    
    
    (833
    )ACCUMULATED UNREALIZED GAINS AND LOSSESUnrealized gains on available for sale securities
    
    
    
    
    
    
    2,694
    
    
    
    
    
    
    
    2,501Gains (losses) on derivatives designated as cash flow hedges
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (1
    )Deferred acquisition costs and other liabilities
    
    
    
    
    
    
    (1,615
    )
    
    
    
    
    
    
    (1,247
    )Additional minimum pension liability
    
    
    
    
    
    
    (70
    )
    
    
    
    
    
    
    (53
    )Balance, December 31
    
    
    
    
    
    
    1,010
    
    
    
    
    
    
    
    1,200TOTAL EQUITY
    
    $
    14,412
    
    
    $
    15,992
    

    
    $
    13,976
    
    
    $
    15,956
  (1) Shown as share capital under Cdn. GAAP.(2)Shown as contributed surplus under Cdn. GAAP.(3)Shown as share capital and contributed surplus under Cdn. GAAP.* As restated. 42
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  23.
    Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd) v) Effect of material differences between Cdn. GAAP and U.S. GAAP net income: For the material differences between Cdn. GAAP and U.S. GAAP net income listed below, please refer
to the following section for a description of the differences in accounting policies. 2004
    
    
    2003
    
    
    2002Total net income in accordance with Cdn. GAAP
    
    $
    1,694
    
    
    $
    1,308
    
    
    $
    997Adjustments related to:InvestmentsBonds
    
    
    266
    
    
    
    274
    
    
    
    224Stocks and segregated fund units
    
    
    229
    
    
    
    (14
    )
    
    
    (691
    )Derivative instruments
    
    
    117
    
    
    
    453
    
    
    
    (22
    )Real estate
    
    
    5
    
    
    
    (83
    )
    
    
    (24
    )Total investments
    

    
    617
    
    
    
    630
    
    
    
    (513
    )Deferred acquisition costsDeferred acquisition costs  -  deferred
    
    
    909
    
    
    
    860
    
    
    
    881Deferred acquisition costs  -  amortization and interest
    
    
    (290
    )
    
    
    (440
    )
    
    
    (634
    )Total deferred acquisition costs
    
    
    619
    
    
    
    420
    
    
    
    247Actuarial
liabilities and other policyholder revenues and expensesPremium and fees revenue
    
    
    (5,528
    )
    
    
    (5,786
    )
    
    
    (7,863
    )Payments to policyholders, beneficiaries and depositors
    
    
    3,896
    
    
    
    4,311
    
    
    
    5,051Actuarial liabilities
    
    
    590
    
    
    
    401
    
    
    
    2,445Total actuarial liabilities and other policyholder revenues and expenses
    
    
    (1,042
    )
    
    
    (1,074
    )
    
    
    (367
    )Other
    
    
    (113
    )
    
    
    (249
    )
    
    
    (305
    )Income tax effect of above adjustments
    
    
    (110
    )
    
    
    110
    
    
    
    348Change in accounting policy
    
    
    (179
    )
    
    
    
    
    
    
    Redemption premiums
    
    
    
    
    
    
    
    
    
    
    (30
    )Total net income in accordance with U.S. GAAP
    
    $
    1,486
    
    
    $
    1,145
    
    
    $
    377
  B)
    The following describes the material accounting policy differences between Cdn. GAAP and U.S.
GAAP applicable to the Company: For a complete description of Cdn. GAAP accounting and actuarial policies, please refer to Notes 1
and 12, respectively. Cdn. GAAP
    
    
    U.S. GAAPBonds
    
    
    Bonds are carried at amortized
cost. Realized gains and losses
are deferred and amortized to
income using the constant yield
method over the remaining period
to maturity.
    
    
    Bonds are carried at market value.
The bonds are classified as available
for sale or trading. Unrealized
gains and losses are included in
other comprehensive income if
classified as available for sale, and
included in net income if classified
as trading. Realized gains and
losses are included in net income
immediately. Certain bonds are
included in mortgages and corporate
loans, as they do not meet the
definition of a security.Stocks
    
    
    Stocks are originally recorded at
cost. The carrying value is
adjusted towards the fair value
at 5% of the difference between
fair value and carrying value per
quarter. Realized gains and
losses are deferred and amortized
into net investment income at the
rate of 5% of the unamortized
balance each quarter. The
Company records a write-down for
any other than temporary decline
in the value of the entire stock
portfolio.
    
    
    Stocks are carried at market value.
The stocks are classified as
available for sale or trading.
Unrealized gains and losses are
included in other comprehensive
income if classified as available for
sale, and included in net income if
classified as trading. Other than
temporary declines in the value of
stock results in a write-down charged
to income.Real estate
    
    
    Real estate held for investment
is originally recorded at cost.
The carrying value is adjusted
towards the fair value at 3% of
the difference between fair
value and carrying value per
quarter. Realized gains and
losses on sales are deferred and
amortized into net investment
income at the rate of 3% of the
unamortized balance each
quarter. The Company records a
write-down for any other than
temporary decline in the value
of the entire real estate
portfolio.
    
    
    Real estate held for investment is
carried at depreciated cost.
Realized gains and losses on sales
are reflected in income immediately.
Other than temporary declines in
value of specific properties results
in a write-down charged to income.
 43
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  23.
    Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd) Cdn. GAAP
    
    
    U.S. GAAPDerivatives
    
    
    Most of the Companys derivatives
are accounted for as either fixed
term portfolio investments or
equity portfolio investments.
Fixed term portfolio investment
accounting reports investments at
amortized cost. Equity portfolio
investments are carried at a
value calculated using a moving
average market method. Realized
gains and losses on the
derivatives are deferred and
amortized into net investment
income.Certain derivative instruments
are classified as hedges and
either accounted for using hedge
accounting or fair value
accounting. Under hedge
accounting, the accounting for
the derivative follows the
underlying asset or liability
that is being hedged. Under fair
value accounting, the derivative
instrument is recorded at fair
value on the balance sheet with
increases or decreases recorded
to net investment income.
    
    
    Derivative instruments are carried at
their fair values. Changes in fair
values of derivatives that are not
hedges are recorded in income as they
arise. For fair value hedges, the
gain and loss on the derivative as
well as the related gain and loss on
the hedged item is recognized in
income. For the cash flow hedges,
the effective portion of the changes
in the fair value of the derivatives
is recorded in other comprehensive
income and the ineffective portion is
recognized in income.If an option within an insurance
contract has economic characteristics
that are different from that of the
insurance contract and the option
meets the definition of a derivative
instrument, the option is known as an
embedded derivative. The embedded
derivatives are separately accounted
for as stand-alone derivatives and
carried at fair values with the
changes in fair value recorded in
income.Deferred
acquisition
costs
    
    
    Costs of acquiring new insurance
and annuity business, primarily
commissions, underwriting, issue
expenses and agency expenses, are
implicitly recognized in
actuarial liabilities for most of
the policies.
    
    
    Acquisition costs are deferred and
recorded as an asset. Amortization
of such costs is dependent on the
product to which the costs relate.
For participating life insurance
contracts, except for participating
policies in the United Kingdom,
amortization is based on a constant
percentage of gross margin. For
universal life and investment-type
contracts, amortization is based on a
constant percentage of gross profit.
For other non-participating
products, including term, group and
disability insurance, as well as
participating policies in the United
Kingdom, amortization is based on a
constant percentage of premium. In
cases where amortization is based on
gross profit or margin, and available
for sale bonds or stocks are used to
support the underlying contract
liability or actuarial reserve, a
portion of the unrealized gains and
losses balance is removed from equity
and netted against the deferred
acquisition cost balance.Actuarial
liabilities
and
contract
holder
deposits
    
    
    Actuarial liabilities are
calculated in accordance with
Canadian generally accepted
actuarial practice. This method
uses best estimate assumptions
for future experience factors
adjusted to provide modest
margins for adverse deviation in
each experience factor.
    
    
    The actuarial liabilities for
participating life policies, except
those in the United Kingdom, are
computed using a net level premium
reserve method with interest and
mortality assumptions based primarily
upon those assumptions used for
establishing the cash surrender
values in the contract. For
universal life-type and investment
contracts, contract holder deposits
represent account balances and U.S.
GAAP liabilities primarily equal
account value balances. The account
values represent an accumulation of
gross deposits received plus credited
interest less withdrawals, expenses
and mortality charges. Other non-
participating products include term,
group and disability insurance. For
these products, as well as
participating contracts in the United
Kingdom, a net level premium method
is used with assumptions locked in at
time of issue, unless the business is
in a loss recognition position, in
which case a best estimate gross
premium valuation is used.Deferred
net
realized
gains
    
    
    Realized gains and losses on
sales of invested assets are
deferred and amortized.
    
    
    Realized gains and losses are
recognized in income immediately.
 44
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  23.
    Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd) Cdn. GAAP
    
    
    U.S. GAAPPremium
revenue,
fee
income,
maturities
and
surrenders
, and
interest
on claims
and
deposits
    
    
    Premiums for universal life and
other investment-type contracts
are recorded as revenue, and a
liability for future policy
benefits is established as a
charge to income. Interest
accrued on contracts is shown as
an increase in actuarial
liabilities. Payments to
contract holders upon maturity
are reflected as an expense with
an offsetting reduction to the
increase in actuarial
liabilities.
    
    
    Amounts received for universal life
and investment-type contracts are not
included in the income statement but
are reported as deposits to contract
holder account balances. Revenues
from these contracts are limited to
amounts assessed against
policyholders account balances for
mortality, policy administration and
surrender charges, and are included
in fee income when earned. Interest
accrued on contracts is included in
interest on claims and deposits.
Payments upon maturity or surrender
are reflected as reductions to the
contract holder deposits on the
balance sheet. Other payments in
excess of the account value, such as
death claims, are reflected as an
expense.Minimum
pension
liability
    
    
    There is no requirement to record
the additional minimum pension
liability.
    
    
    For a defined benefit pension plan,
an additional minimum pension
liability is required to be
recognized if an unfunded Accumulated
Benefit Obligation (ABO) exists and
(i) an accrued benefit asset is
recorded, or (ii) an accrued benefit
liability is recorded for an amount
less than the unfunded ABO. The
additional minimum liability is
calculated by reference to the excess
of the ABO, which is smaller than the
Projected Benefit Obligation (PBO)
since it does not recognize projected
future compensation increases, over
the fair value of plan assets. If an
additional minimum liability is
required to be recognized for a
defined benefit pension plan, an
intangible asset is recorded up to
the amount of any unamortized past
service cost, and/or unamortized
transitional obligation with any
remaining excess recorded as part of
other comprehensive income. The
additional minimum liability is
recorded as an accrued benefit
liability.Redemption
of
subordinated
debts
    
    
    Redemption premiums are
recorded once an obligation to
redeem the principal amount of
capital debentures is incurred.
    
    
    Redemption premiums are recorded when
the principal amount of the capital
debentures is redeemed.Cumulative
translation
adjustment
    
    
    A proportionate amount of the
exchange gain or loss
accumulated in the separate
component of shareholders
equity is reflected in net
income when there is a
reduction in the Companys net
investment in a foreign
operation resulting from a
capital transaction, dilution,
or sale of all or part of the
foreign operation.
    
    
    A proportionate amount of exchange
gains or losses accumulated in the
separate component of shareholders
equity is reflected in net income
only when there is a reduction in the
Companys net investment in the
foreign operation resulting from the
sale of all or part of the foreign
operation.Guarantees
    
    
    Disclosure is required for all
significant guarantees provided
by the Company.
    
    
    In addition to the disclosure
requirements, for all guarantees
issued or modified after December 31,
2002, recognition of a liability is
required at the fair value of the
obligation assumed.Future
income tax
asset and
liability(1)
    
    
    Future income tax liabilities
and assets are recognized based
on the differences between the
accounting values of assets and
liabilities and their related
tax bases using income tax
rates of enacted or
substantially enacted tax law.
    
    
    Future income tax liabilities and
assets are recorded based on income
tax rates of currently enacted tax
law. Differences in the provisions
for income taxes arise from differing
accounting policies for assets and
liabilities and differences in the
recognition of tax rate changes are
disclosed in part C (vii) of this
note.Segregated
funds(2)
    
    
    Assets and liabilities of
segregated funds are shown
separately from general assets
and liabilities of the Company.
The Companys investment in
segregated funds is included in
other invested assets.
    
    
    Assets and liabilities are called
separate accounts and are required to
be included within the financial
statements of the Company. Any
excess of the separate account assets
over separate account liabilities
primarily represents the Companys
investment in segregated funds.
With the implementation of Statement of Position 03-1 (see
section D(ii) of this note), the Company's investment in
separate accounts was reclassified to other invested assets,
consistent with Cdn. GAAP.
  (1) U.S. GAAP terminology is deferred income tax.(2) U.S. GAAP terminology is separate accounts. 45
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  23.
    Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd) C) Additional information required to be reported under U.S. GAAP: i) Realized gains (losses) from sales and redemptions of available for sale securities included in
net realized gains (losses): 2004
    
    
    2003
    
    
    2002Bonds:Gross realized gains
    
    $
    698
    
    
    $
    618
    
    
    $
    475Gross realized losses
    
    $
    (216
    )
    
    $
    (266
    )
    
    $
    (530
    )Stocks:Gross realized gains
    
    $
    233
    
    
    $
    27
    
    
    $
    268Gross realized losses
    
    $
    (51
    )
    
    $
    (91
    )
    
    $
    (416
    )
 ii) Change in net unrealized gains (losses) included in net investment income for securities classified as trading: 2004
    
    
    2003
    
    
    2002Bonds
    
    $
    41
    
    
    $
    54
    
    
    $
    82Stocks
    
    $
    201
    
    
    $
    113
    
    
    $
    (525
    )
 iii) Real estate:The depreciation expense included in the U.S. GAAP other expenses is as follows: 2004
    
    
    2003
    
    
    2002Depreciation expense
    
    $
    59
    
    
    $
    37
    
    
    $
    61
 iv) Derivatives:When the Company enters into a derivative contract, management decides if the
derivative should be designated as a hedge of an identified risk exposure and documented in order
to obtain hedge accounting following the requirements of Statement of Financial Accounting
Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. With
the exceptions noted below, hedge accounting is not pursued under SFAS 133 for most derivative
instruments and the derivatives are recorded on the balance sheet at their fair values with changes
in their fair values reported in net investment income. As at December 31, 2004, the Company had
certain interest rate swaps that were designated as cash flow hedges of the interest rate risk
relating to a floating-rate loan and an equity forward designated as a cash flow hedge of the
anticipated payments of awards under certain stock-based compensation plans expected to occur in
2007. The difference between the forward price and the spot price of this forward is excluded from
the assessment of hedge effectiveness and was recorded in net investment income in 2004. A portion
of the amount included in other comprehensive income (OCI) related to this forward is reclassified
to income as the liability is accrued for the stock-based compensation awards over the vesting
period. Additional information pertaining to these cash flow hedges is as follows: 2004
    2003Change in fair value
    
    $
    3
    $
    3Amount reclassified from OCI to income during the reporting period
    
    $
    1
    $
    Amount expected to be reclassified to income during the next 12 months
    
    $
    1
    $
    Component of loss excluded from hedge effectiveness assessment
    
    $
    2
    $
    
 The above numbers are all net of income taxes. There was no ineffectiveness from these hedges
reported to net income in 2004 and 2003. In 2004, the Company designated certain cross currency
swaps and forwards as hedges of the currency exposure of net investments in foreign operations. The
gain on these derivatives of $85 is included in the foreign currency translation account movement
for 2004 in the statement of comprehensive income. 46
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  23.
    Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd) v) Emerging Issues Task Force (EITF) 03-01 -  The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments: The EITF has reached consensus on EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, as it applies to investments accounted for under Statement of
Financial Accounting Standards No. 115 (SFAS 115), Accounting for Certain Investments in Debt and
Equity Securities, and cost method investments accounted for under Accounting Principles Board
Opinions No. 18, The Equity Method of Accounting for Investments in Common Stock (APB 18). The
FASB ratified this consensus and subsequently issued a Staff Position, FSP EITF 03-1-1, to defer
indefinitely the effective date for recognition and impairment guidance under the EITF, but not the
qualitative disclosure requirements on unrealized loss positions for all marketable equity
securities, debt securities and cost method investments for which an
other than temporary
impairment has not been recognized. The following table shows the Companys investments gross unrealized losses and fair value,
aggregated by investment category and length of time that individual available for sale securities
have been in a continuous unrealized loss position, at December 31, 2004. Less than 12 months
    
    
    12 months or more
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDescription of securities
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesDebt securities
    
    $
    6,386
    
    
    $
    (87
    )
    
    $
    2,049
    
    
    $
    (157
    )
    
    $
    8,435
    
    
    $
    (244
    )Common stock
    
    
    140
    
    
    
    (27
    )
    
    
    308
    
    
    
    (13
    )
    
    
    448
    
    
    
    (40
    )Total temporarily impaired securities
    
    $
    6,526
    
    
    $
    (114
    )
    
    $
    2,357
    
    
    $
    (170
    )
    
    $
    8,883
    
    
    $
    (284
    )
 Available for sale debt securities have generally been identified as temporarily impaired if their
amortized cost as at December 31, 2004, was greater than their fair value, resulting in an
unrealized loss. Unrealized gains and losses in respect of investments designated as trading have
been included in net income and have been excluded from the above table. Unrealized losses are largely due to interest rate fluctuations and/or depressed fair values in
sectors which have experienced unusually strong negative market reactions. In connection with the
Companys asset/liability management practices, and based on a review of these investment holdings,
it is believed that the contractual terms of these debt securities will be met and/or the Company
can hold these investments until recovery in value. A total of 889 debt securities were in an unrealized loss position at December 31, 2004, of which
642 were in a continuous loss position for less than 12 months and 247 positions for more than 12
months or more. Of the 889 debt securities, unrealized losses less
than 12 months included 529 positions with an aggregate fair
value of $3,644 (128 positions with an aggregate fair value of $428
for 12 months or more) having unrealized losses of less than one hundred thousand dollars
per individual holding. A total of 86 common stock positions were in a loss
position at December 31, 2004, of which 48 were in a continuous
loss position for less than 12 months and 38 positions for more
than 12 months or more. Of the 86 common stock positions, unrealized losses
less than 12 months included 27 positions with an aggregate fair
value of $44 (21 positions with an aggregate fair value of $4 for
12 months or more) having unrealized losses of less than one hundred
thousand dollars per individual holding. vi) Stock-based compensation:The intrinsic value method of accounting was used to account for
stock options that were granted in 2001 under Cdn. and U.S. GAAP. In 2002, the Company changed its
accounting policy for stock options granted to employees from the intrinsic value method to the
fair value method effective January 1, 2002, on a prospective basis. Had the fair value method been
used for the options granted in 2001, the net income for the year ended December 31, 2004 would
have been reduced by $2 ($6 in 2003, $15 in 2002), and there would have been no impact on basic
and diluted earnings per share for 2004 ($0.01 and $0.03 reduction in both basic and diluted
earnings per share in 2003 and 2002, respectively). 47
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  23.
    Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd) vii) Future income tax asset and liability(1):Differences between Cdn. GAAP and
U.S. GAAP that arise from differing accounting policies for assets and liabilities and differences
in the recognition of tax rate changes are as follows: 2004Future income tax asset(1)
    
    
    Future income tax liability(1)Cdn.
    
    
    U.S.
    
    
    Cdn.
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    GAAP
    
    
    GAAPInvestments
    
    $
    196
    
    
    $
    (262
    )
    
    $
    484
    
    
    $
    1,804Actuarial liabilities
    
    
    134
    
    
    
    688
    
    
    
    35
    
    
    
    (2,424
    )Deferred acquisition costs
    
    
    300
    
    
    
    (446
    )
    
    
    (2
    )
    
    
    682Losses available for carry forward
    
    
    250
    
    
    
    16
    
    
    
    (40
    )
    
    
    (277
    )Other
    
    
    39
    
    
    
    8
    
    
    
    28
    
    
    
    880Future tax asset/liability before valuation allowance
    
    
    919
    
    
    
    4
    
    
    
    505
    
    
    
    665Valuation allowance
    
    
    (197
    )
    
    
    
    
    
    
    
    
    
    
    367Total
    
    $
    722
    
    
    $
    4
    
    
    $
    505
    
    
    $
    1,032
 2003Future income tax asset(1)
    
    
    Future income tax liability(1)Cdn.
    
    
    U.S.
    
    
    Cdn.
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    GAAP
    
    
    GAAPInvestments
    
    $
    182
    
    
    $
    (205
    )
    
    $
    613
    
    
    $
    1,860Actuarial liabilities
    
    
    54
    
    
    
    773
    
    
    
    (78
    )
    
    
    (1,954
    )Deferred acquisition costs
    
    
    324
    
    
    
    (524
    )
    
    
    (9
    )
    
    
    675Losses available for carry forward
    
    
    506
    
    
    
    40
    
    
    
    (117
    )
    
    
    (601
    )Other
    
    
    214
    
    
    
    173
    
    
    
    106
    
    
    
    753Future tax asset/liability before valuation allowance
    
    
    1,280
    
    
    
    257
    
    
    
    515
    
    
    
    733Valuation allowance
    
    
    (303
    )
    
    
    
    
    
    
    
    
    
    
    367Total
    
    $
    977
    
    
    $
    257
    
    
    $
    515
    
    
    $
    1,100
  (1) U.S. GAAP terminology is deferred income tax. viii) Acquisition of Clarica:The Company acquired all of the outstanding common shares of
Clarica that were not beneficially owned by the Company effective
May 29, 2002, as described in Note 3. The following amounts of the assets, liabilities and goodwill at the dates of acquisition under
Cdn. and U.S. GAAP are different due to the different accounting policies used for the two
standards. ClaricaCdn. GAAP
    
    
    U.S. GAAPInvested assets acquired
    
    $
    31,637
    
    
    $
    31,641Other assets acquired (1)
    
    
    2,672
    
    
    
    5,374Segregated funds assets acquired
    
    
    
    
    
    
    11,20434,309
    
    
    
    48,219Actuarial liabilities and other policy liabilities acquired
    
    
    24,835
    
    
    
    16,849Amounts on deposit acquired
    
    
    1,277
    
    
    
    1,235Contract holder deposits acquired
    
    
    
    
    
    
    10,235Other liabilities acquired
    
    
    5,059
    
    
    
    5,353Segregated funds liabilities acquired
    
    
    
    
    
    
    11,19331,171
    
    
    
    44,865Net balance sheet assets acquired
    
    $
    3,138
    
    
    $
    3,354Considerations given:Common shares issued or exchanged
    
    $
    6,284
    
    
    $
    6,284Carrying value of investments in acquirees shares
    
    
    540
    
    
    
    540Fair value of outstanding Clarica stock options
    
    
    48
    
    
    
    48Transaction and other related costs
    
    
    57
    
    
    
    57$
    6,929
    
    
    $
    6,929Goodwill on acquisition
    
    $
    3,791
    
    
    $
    3,575
  (1)Other assets acquired included value of business acquired of $2,368 under U.S.
GAAP. 48
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  23.
    Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd) ix) Earnings per share: Details of the calculation of the net income and the weighted average number of shares used in the
earnings per share computations are as follows: 2004
    
    
    2003
    
    
    2002Cdn.
    
    
    U.S.
    
    
    Cdn.
    
    
    U.S.
    
    
    Cdn.
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    GAAP
    
    
    GAAP
    
    
    GAAP
    
    
    GAAPShareholders net income from continuing operations
before cumulative effect of accounting changes
    
    $
    1,681
    
    
    $
    1,665
    
    
    $
    1,309
    
    
    $
    1,145
    
    
    $
    1,034
    
    
    $
    413Income (loss) from discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    (36
    )Cumulative effect of accounting changes, net of income taxes
    
    
    
    
    
    
    (179
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    1,681
    
    
    $
    1,486
    
    
    $
    1,309
    
    
    $
    1,145
    
    
    $
    998
    
    
    $
    377Less: Effect of stock options of subsidiaries
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3Shareholders
net income on a diluted basis
    
    $
    1,679
    
    
    $
    1,484
    
    
    $
    1,309
    
    
    $
    1,145
    
    
    $
    995
    
    
    $
    374Weighted average number of shares outstanding (in millions)
    
    
    599
    
    
    
    599
    
    
    
    608
    
    
    
    608
    
    
    
    543
    
    
    
    543Add: Adjustments relating to the dilutive impact of stock options
    
    
    3
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average number of shares outstanding
on a diluted basis (in millions)
    
    
    602
    
    
    
    602
    
    
    
    608
    
    
    
    608
    
    
    
    543
    
    
    
    543
 x) Statements of cash flows:Under Cdn. GAAP, deposits, maturities and withdrawals related to
investment-type contracts and universal life contracts are included in operating activities. Under
U.S. GAAP, deposits, maturities and withdrawals are reflected as financing activities; these cash
flow items are as follows: 2004
    
    
    2003
    
    
    2002Deposits and withdrawals reclassified to financing activities:Deposits to policyholders accounts
    
    $
    5,656
    
    
    $
    6,102
    
    
    $
    13,327Withdrawals from policyholders accounts
    
    $
    5,986
    
    
    $
    6,363
    
    
    $
    6,680
 xi) Guarantees:No material guarantees were identified that required recognition in these consolidated financial statements. D) U.S. generally accepted accounting standards adopted by the Company in 2004: i) Variable Interest Entities:On January 1, 2004, the Company adopted FASB Financial
Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN 46R). FIN 46R clarifies
the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, for
those entities defined as VIEs. VIEs are entities in which equity investors do not have a
controlling financial interest and include entities where the equity invested is considered
insufficient to finance the entitys activities without additional subordinated financial support.
Under FIN 46R, the Company will be required to consolidate the VIE if the investments that the
Company holds in these entities and/or the relationships the Company has with these entities result
in the Company being exposed to a majority of their expected losses, being able to benefit from a
majority of their expected residual returns, or both. The following is a summary of the impact of VIEs that the Company has consolidated or in which the
Company has a significant variable interest: SLEECS:
As described in Note 15, the Trust has issued SLEECS of $1,150 to third-party investors. The
Company has issued a debenture of $1,200 to the Trust and holds an investment of $2 in Special
Trust Securities in the Trust. The Company did not consolidate the Trust as it was determined to
be a VIE in which the Company did not have a controlling financial interest. As a result, the
Company deconsolidated $1,150 of non-controlling interest in
subsidiaries and recorded the $1,200
debenture payable in other liabilities and increased equity by $7 and other assets by $57 on the
consolidated balance sheets as at January 1, 2004. Other Variable Interest
Entities:The Company was involved with two trust structures that invest in corporate bonds and total return
swaps. On evaluation of these trust structures, the Company was identified as having the
controlling financial interest and therefore consolidated these trusts on the adoption of FIN 46R.
As a result, the Company consolidated additional general fund assets of $71, general fund
liabilities of $81, and recorded an after-tax loss of $10 (net of taxes of $5). On June 30, 2004, the Company sold its interest in one of its consolidated VIEs and recognized a
gain of $13. The Company received net cash proceeds of $54 and reduced consolidated assets and
liabilities by $70 and $29, respectively. The Company has a greater
than 20% involvement in 23 VIEs. The Company is a creditor in 14
trusts, four limited partnerships, two limited liability companies and three special purpose
entities that were used to finance commercial mortgages, franchise receivables, auto receivables,
retail stores and equipment used in utility generation. The Companys maximum exposure to loss
related to all of these investments is $222, which is the carrying amount of these assets. The
notes in these VIEs mature between March 2005 and December 2035. 49
Sun Life Financial Inc.




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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  23.
    Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd) ii) Statement of Position 03-1 - Accounting and Reporting by Insurance Enterprises for certain
Nontraditional Long-duration Contracts and for Separate Accounts (SOP 03-1):On January 1, 2004,
the Company adopted American Institute of Certified Public Accountants (AICPA) SOP 03-1. The major
provisions of the SOP that affect the Company require: 
    establishment of reserves primarily related to death benefit and income benefit
guarantees provided under variable annuity and unit linked pension
contracts,
    deferral of sales inducements that meet certain criteria, and amortization using the
same method used for deferred acquisition costs (DAC), and
    reporting and measuring the Companys interest in its
separate accounts as investments. Effects of Adoption:
The cumulative effect, reported after tax and net of related effects on DAC, upon adoption of SOP
03-1 at January 1, 2004, decreased net income and
shareholders equity by $161 and reduced accumulated other comprehensive income by $5. The decrease in net income was
comprised of an increase in benefit reserves (primarily for variable annuity contracts) of $247,
pre-tax, an increase in DAC of $36, pre-tax, and the recognition of the unrealized gain on
investments in separate accounts of $4, pre-tax. Liabilities for Contract Guarantees:
The Company offers various guarantees to certain policyholders including a return of no less than
(a) total deposits made on the contract less any customer withdrawals, (b) total deposits made on
the contract less any customer withdrawals plus a minimum return, or (c) the highest contract value
on a specified anniversary date minus any customer withdrawals following the contract anniversary.
These guarantees include benefits that are payable in the event of death, upon annuitization, or at
specified dates during the accumulation period of an annuity. For policies with a
guaranteed minimum death benefit, the net amount at risk represents
the excess of the value of the guaranteed minimum death benefit over
the account value. This is a hypothetical amount that would only have been payable on
December 31, 2004, had all the policyholders died on that date. For
policies with a guaranteed minimum income benefit, the net amount at
risk represents the excess of the cost of an annuity to meet the
minimum income guarantee over the account value. For the most part,
these guarantees may not yet be exercised and there are limitations on
when these guarantees may be exercised. The table below represents
information regarding the Companys variable annuity and unit-linked
pension contracts with guarantees at December 31, 2004: Weighted average attainedBenefit type
    
    Account balance
    
    
    Net amount at risk
    
    
    age of contract holdersMinimum death
    
    
    $  33,091
    
    
    
    $  4,107
    
    
    
    60Minimum income
    
    
    $    3,135
    
    
    
    $     611
    
    
    
    51Minimum
accumulation or withdrawal
    
    
    $    1,220
    
    
    
    $       
    
    
    
    60
 The following summarizes the
additional reserve for the minimum guaranteed death benefit and income benefit
at December 31, 2004: Minimum
    
    
    GuaranteedGuaranteed Death
    
    
    Minimum IncomeBenefit
    
    
    Benefit
    
    TotalBalance at January 1, 2004
    
    
    
    
    $     64
    
    
    
    
    $     183
    
    
    $     247Incurred guaranteed benefits
    
    
    
    
    30
    
    
    
    
    1
    
    
    31Paid guaranteed benefits
    
    
    
    
    (57
    )
    
    
    
    (13
    )
    
    (70
    )Interest
    
    
    
    
    1
    
    
    
    
    21
    
    
    22Effect of
changes in currency exchange rates
    
    
    
    
    (1
    )
    
    
    
    1
    
    
    Balance at December 31, 2004
    
    
    
    
    $     37
    
    
    
    
    $     193
    
    
    $     230
 The liability for death and income benefit guarantees is established equal to a benefit ratio
multiplied by the cumulative contract charges earned, plus accrued interest less contract benefit
payments. The benefit ratio is calculated as the estimated present value of all expected contract
benefits divided by the present value of all expected contract charges. The benefit ratio may be in
excess of 100%. For guarantees in the event of death, benefits represent the current guaranteed
minimum death payments in excess of the current account balance. For guarantees at annuitization,
benefits represent the present value of the minimum guaranteed annuity benefits in excess of the
current account balance. Projected benefits and assessments used in determining the liability for guarantees are developed
using models and stochastic scenarios that are also used in the development of estimated expected
future gross profits. Underlying assumptions for the liability related to income benefits include
assumed future annuitization elections based upon factors such as eligibility conditions and the
annuitants attained age. The liability for guarantees will be re-evaluated periodically, and
adjustments will be made to the liability balance through a charge or credit to policyowner
benefits. Guaranteed minimum accumulation benefits or withdrawal benefits are considered to be derivatives
under SFAS No. 133, and are recognized at fair value through earnings. The guaranteed minimum
accumulation or withdrawal benefit was a liability of $180 and $194
as at January 1, 2004, and December 31, 2004, respectively. 50
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  23.
    Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd) Interest in Separate Accounts:
At December 31, 2003, the Company had $411 representing unconsolidated interests in its own separate
accounts. These interests were recorded as separate account assets, with changes in fair value
recorded through other comprehensive income. On January 1, 2004, the Company reclassified these
interests to investments as a component of other invested assets. Sales Inducements:
The Company currently offers enhanced or bonus crediting rates to policyholders on certain of its
annuity products. Through December 31, 2003, the expenses associated with certain of these bonuses
were deferred and amortized. Others were expensed as incurred. Effective January 1, 2004, upon
adoption of SOP 03-1, the expenses associated with offering a bonus are deferred and amortized over
the life of the related contract in a pattern consistent with the amortization of DAC. iii) FASB Derivative Implementation Group SFAS No. 133 Implementation Issue No. 36 - Embedded
Derivatives: Bifurcation of a Debt Instrument that Incorporates Both Interest Rate Risk and Credit
Rate Risk Exposures that are Unrelated or Only Partially Related to the Creditworthiness of the
Issuer of that Instrument (DIG B36):On January 1, 2004, the Company adopted FASBs DIG B36, which
addresses whether SFAS 133 requires bifurcation of a debt instrument into a debt host contract and
an embedded derivative if the debt instrument incorporates both interest rate risk and credit risk
exposures that are unrelated or only partially related to the creditworthiness of the issuer of
that instrument. Under DIG B36, embedded derivatives contained in certain reinsurance agreements,
such as modified co-insurance and co-insurance with funds withheld reinsurance agreements, as well
as other types of receivables and payables where interest is determined with reference to a pool of
fixed maturity assets, or a total return debt index, are required to be bifurcated from the host
contract. The Company identified certain reinsurance agreements and experience rating refund payables that
contained embedded derivatives that required bifurcation in 2004. The cumulative effect of this
accounting change recorded as of the effective date of January 1, 2004, resulted in a decrease in
net income of $8 (net of taxes of $4). Changes in the fair value of these embedded derivatives
subsequent to January 1, 2004, resulted in an after-tax reduction in net income of $4 (net of taxes
of $2). iv) Cumulative Effect of Accounting Changes:The cumulative effect of the accounting changes
described above, and included in the consolidated statements of operations for 2004, is summarized
as follows: i) Variable Interest Entities
    
    $
    (10
    )ii) SOP 03-1
    
    
    (161
    )iii) DIG B36
    
    
    (8
    )Total cumulative effect of accounting changes, net of taxes
    
    $
    (179
    )
 E) U.S. generally accepted accounting standards not yet adopted by the Company: FASB Statement
No. 123R - Share-Based Payment (SFAS 123R):On December 16, 2004, the FASB issued
SFAS 123R which replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and
eliminates the ability to account for share-based payment
transactions using APB Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS 123R covers the accounting requirements for a wide
range of share-based compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase plans. The Company
will be required to apply SFAS 123R as of the first interim or annual reporting period that begins
after June 15, 2005. The Company is assessing the impact that
SFAS 123R will have on its 2006 consolidated financial statements. EITF 03-6 - Participating Securities and the Two-Class Method Under FASB
Statement No. 128, Earnings Per Share: On March 21, 2004, the FASB ratified the
consensus reached by the Emerging Issues Task Force (EITF) on EITF 03-6. This EITF requires the
calculation of earnings per share to be changed to measure the impact of certain securities or
other instruments or contracts that entitle their holders to participate in undistributed earnings
of the reporting entity, provided such entitlement is nondiscretionary and objectively
determinable. EITF 03-6 is effective for the first interim or annual reporting period that begins
after March 31, 2004, and requires retroactive adjustment to earnings per share presented for prior
periods. The Company is assessing the impact that EITF 03-6 will have on its 2005 consolidated
financial statements.  24.
    Subsequent Event On February 8, 2005, the Board of Sun Life Financial Inc. announced a domestic public offering
of $300 of Class A Non-Cumulative Preferred Shares,
Series 1 (the Preferred Shares), with an option to issue up to an
additional $100 of Preferred Shares. The Preferred Shares will be priced at $25 dollars per share and will pay non-cumulative quarterly dividends of
$0.297 per share, yielding 4.75% annually. Subject to regulatory approval, on or after March 2010,
Sun Life Financial Inc. may redeem the Preferred Shares in whole or
in part at a declining premium.  25.
    Comparative Figures Certain comparative figures have been restated to conform with the presentation adopted in
2004. 51
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APPOINTED ACTUARYS REPORT/AUDITORS REPORT 
 Appointed Actuarys Report THE SHAREHOLDERS AND DIRECTORS
OF SUN LIFE FINANCIAL INC. I have valued the policy liabilities of Sun Life Financial Inc. for its consolidated balance
sheets at December 31, 2004 and 2003 and their change in the consolidated statements of
operations for the years then ended in accordance with accepted actuarial practice, including
selection of appropriate assumptions and methods. In my opinion, the amount of policy liabilities makes appropriate provision for all
policyholder obligations and the consolidated financial statements fairly present the results
of the valuation.  (-s- Robert W. Wilson) Robert W. Wilson
 Toronto, Canada
February 14, 2005   Auditors Report  THE SHAREHOLDERS
OF SUN LIFE FINANCIAL INC. We have audited the consolidated balance sheets of Sun Life Financial Inc. and the separate
consolidated statements of segregated funds net assets as at December 31, 2004 and 2003, and
the consolidated statements of operations, equity, cash flows and changes in segregated funds
net assets for each of the years in the three-year period ended December 31, 2004. These
financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable assurance
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. In our opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of the Company and its segregated funds as at December 31,
2004 and 2003 and the results of the Companys operations, its cash flows and the changes in
its segregated funds net assets for each of the years in the three-year period ended December
31, 2004 in accordance with Canadian generally accepted accounting principles.  (-s- Deloitte & Touche LLP) Deloitte & Touche LLP
 Toronto, Canada
February 14, 2005 52
www.sunlife.com Annual Report 2004